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General Motors (NYSE: GM ) is getting some love from the Australian government, as the country plans to pay a $288-million assistance package to the company in an effort to prevent it from winding up its operations there. GM reciprocated by investing a significant $1 billion in its Australian car manufacturing operations.
So what's with this sudden show of mutual love? Let's find out.
The government figures reveal that the country's annual car production has been steadily declining for almost eight years now. Needless to say, this has had a significant effect on the country's economy. What has not helped, either, is the fact that manufacturing and exports have also taken a hit from the rising Australian dollar. As a result of such conditions, automobile makers such as General Motors, Ford, and Toyota have been cutting jobs and slowly cruising down the exit path.
Clearly this hasn't gone down too well with a country whose car manufacturing industry supports nearly 255,000 jobs. With the financial package ensuring GM's continuing operations in Australia for at least the next 10 years, the government should be relieved to some extent.
A cost effective idea
So, what's in it for General Motors?
Holden, GM's design and manufacturing subsidiary in Australia, ranks as one of its seven fully integrated plants on a worldwide basis. This means that the plant designs, builds, and sells cars for both Australian as well as international markets. Holden now plans to utilize the government package to roll out two new car models for the global market that will be launched after 2015.
With GM going through a really rough patch in Europe, the company is aiming to shift its operations significantly to low-cost manufacturing areas such as China, Mexico and South Korea as a part of its "Global Assembly Footprint" plan. In fact, by 2016, the company may import nearly 300,000 cars to Europe from such countries.
GM's sales shot to a staggering 9 million vehicles in 2011. It's not surprising, then, that the company perceives huge global demand in the coming years, but one that needs to be catered to carefully, keeping in mind the cost effectiveness. The Australian government's package seems to be a move in that direction.
The Foolish bottom line
With the increasing cost pressures, mismanagement, and general economic problems faced by GM in its European operations, a welcoming Australia looks like a good alternative to me. What remains to be seen is how effectively the company turns this offer to its own advantage.
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