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Carmaker triumph or GM hypocrisy?

Oliver Marc Hartwich | Business Spectator | 29 March 2012

The past week brought different news to General Motors’ workers around the world. In Europe, rumours reared once again that at least two of GM’s factories at its German brand Opel and its British sibling Vauxhall may soon close their gates to limit losses.

Meanwhile, sighs of relief were heard around Holden’s factories in Australia following the government’s decision to shower the company with another $275 million of subsidies, sorry, ‘co-investment’.

How do these two stories go together?

Put simply, they demonstrate how GM’s top management in Detroit makes its decisions. Both Opel/Vauxhall and Holden are a drag on the mother company, for different reasons. But only in Australia can GM extract taxpayers’ money to keep its operation alive.

Incidentally this invalidates the claim, repeated ad nauseam by Australian car lobbyists, that every country in the world subsidises its car industry. This is simply not true. Neither the German nor the British government has given in to GM’s pressure.

As a matter of fact, the Swedish government did not give its local GM operation, Saab, a bailout either. As one Swedish minister commented at the peak of Saab’s crisis: “Voters elected me because they wanted nursery schools, police and nurses, and not to buy loss-making car factories.” So much for the Australian car industry’s ridiculous PR campaign about every government supporting its car own industry.

GM’s European operations are suffering from two decades of ruthless cost-cutting measures and strategic neglect. Until the 1980s, Opel did not produce cutting-edge cars but solid, reliable vehicles. Following an onslaught of short-sighted measures to increase efficiency, Opel’s quality dropped noticeably, and once loyal customers rather switched to other brands. The beneficiaries were not only Japanese and South Korean manufacturers but also Opel’s arch-rival Volkswagen, with its sprawling empire of brands ranging from Skoda and Seat to Audi and indeed VW itself.

The second mistake in GM’s handling of its main European brands was to deny them access to Asian export markets. Given that carmakers around the world are suffering from overcapacities, they should have catered to the rapidly rising demand in emerging markets such as India and China. Instead, GM served these regions with other brands and left Opel with the unenviable task of focusing on the domestic market. In any case, the company was more in the business of cutting costs than making cars.

It took GM almost 20 years to notice that Opel wasn’t going anywhere. It recent attempts to turn the company around have resulted in some eye-catching new cars like the Insignia. Opel was also allowed to expand into some overseas markets, including Australia. But if rumours about imminent factory closures are true, it may all be too little, too late.

The uncertainty over the continuing viability of Opel overshadows its expected entry into the Australian market later this year. So far details about Opel’s Australian launch have been sparse, even on its website. The only sure thing is Opel will compete in the segments commanded by Holden.

This raises further questions about the government’s latest largesse for Holden. Did anyone in government ask GM to explain Opel’s European-made cars entering Australia as a separate brand? What does this mean for the future of Holden? What does this say about the GM’s long-term strategy for Holden in Australia?

GM’s double act in Australia could end up in brand cannibalisation, particularly if, at a time of rising fuel prices, Australian consumers prefer the Insignia, with its smaller and more fuel efficient engine, over the Holden Commodore. The Insignia’s fuel use, starting from 4.4 litres of diesel or 5.6 litres of petrol per 100 kms, is in a different league from the Commodore’s minimum of 8.9 litres of petrol. Besides, though the two cars are almost identical in size, the Insignia’s futuristic design makes the Commodore look rather dated.

In the long term, Opel may give Holden a run for its money. The company has traditionally focused on smaller cars, which remains the best performing segment of the market. As long as the Australian dollar is strong, Opel can compete vigorously on price. Plus Opel can still advertise itself with the prestige of a European brand, and may use its slogan ‘Wir leben Autos’ in Australia – never mind that ‘We Live Cars’ makes no sense even in German.

From an industrial policy point of view, it will be interesting to watch how GM’s different strategies work out in the long run. Will ongoing government support eventually help Holden stand on its own two feet? Or will its limited output be simply not large enough to generate the economies of scale needed in today’s car industry? Will Opel use its newly gained ability to serve overseas markets to turn itself around after decades in the doldrums? Or will both companies eventually face the same fate as Saab and be expelled from the GM empire altogether?

The question marks hanging over the future of Holden and Opel are substantial. It is courageous, in the ‘Yes, Minister’ sense at least, of any government to subsidise carmakers in these circumstances.

Oliver Marc Hartwich is a Research Fellow at The Centre for Independent Studies.