GENERAL MOTORS SUBSIDIARY LEFT TO FEND FOR ITSELF

C O N F I D E N T I A L SECTION 01 OF 02 MELBOURNE 000071

NOFORN
SIPDIS

STATE PLEASE PASS USTR/WEISEL, BISBEE

E.O. 12958: DECL: 06/16/2019
TAGS: EIND ECON ETRD AS
SUBJECT: GENERAL MOTORS SUBSIDIARY LEFT TO FEND FOR ITSELF

REF: A. 08 CANBERRA 1134

B. 08 MELBOURNE 137

C. 08 MELBOURNE 125

MELBOURNE 00000071 001.2 OF 002


Classified By: Justin L. Kolbeck, Pol/Econ Officer for Reasons 1.4(b),
(d)

Summary
--------------


1. (C/NF) General Motors' (GM) Australian subsidiary and one
of the country's largest manufacturers, Holden is scraping by
in the competitive Australian automotive market even though
financing from its parent company has all but dried up.
While Holden is looking forward to opportunities such as the
launch of its small car and soon to be announced exports to
U.S. police forces, Holden is expecting another tough year.
End summary.

Finance Woes and a Tough Year Ahead
--------------


2. (C/NF) GM Holden's Chairman and Managing Director Mark
Reuss told Consul General on June 12 that Holden has been
operating largely on its own since GM accepted U.S. Treasury
assistance. While Holden will remain a part of the new GM,
the Australian subsidiary was "fenced off" from the parent in
an attempt to prevent U.S. tax dollars from flowing out of
the United States. This forced Holden to dramatically scale
back production at its South Australian factory and to seek
short-term (most paid back within 24 hours) operating capital
from GM finance facilities in Mexico and the European Union
among others. Characterizing the GOA as "extremely
cooperative," Reuss said the GOA also assisted Holden in
raising money through commercial banks such as the Australia
New Zealand Bank (ANZ). The Australian banks, though, have
been averse to lending to GM Holden as a standalone facility.


3. (C/NF) According to Reuss, the next 10-12 months will be
"very tough" for Holden. The company's export volume to the
six Gulf Cooperation Council (GCC) states - Holden's primary
export market - is down 50 percent. Holden will continue to
"scrape by" until production starts for the GOA-sponsored
small car initiative in October 2010. In addition, Reuss
confided on a close hold basis that Holden will soon begin to
export vehicles rebadged as Chevrolet police cruisers to U.S.
police forces. Reuss calculates that Holden's future U.S.
police car business (as many as 80,000 units) will exceed its
traditional GCC and former U.S. Pontiac exports combined, at
least for the short term.

Holden's Future
--------------


4. (C/NF) Reuss remains very sensitive to GOA concerns about
job losses because Holden received A$179 million (US$143
million) from the GOA to produce a 4-cylinder car, the Cruze,
starting in October 2010. In addition, he hinted that
maintaining a good relationship with the GOA will be critical
should Holden be required to ask for further support.
Although Reuss anticipates very low levels of production over
the next year, he intends to retain much of Holden's
workforce until volumes pick up with the launch of the Cruze
and the police car exports.


5. (C/NF) Looking to the long-term, however, Holden's
workforce has approximately 1,000 too many employees given
projected demand. Fewer hours and difficult shift work have
led many employees to accept voluntary separation packages
and Reuss believes this will eventually lead to a
right-sizing of Holden's workforce over the next 24 months.


6. (C/NF) Holden is considering a co-investment with Ford
Australia to create a locally produced 8-speed hybrid
transmission. He went on to say that this could be the first
of other collaborative efforts between the two Australian
subsidiaries. Reuss is also looking to expand Holden's
export program by becoming a regional production center for
small right-hand drive vehicles to countries such as
Thailand, South Africa and others. He acknowledged low
consumer satisfaction ratings as a long-term challenge for
Holden, but argued that Australia suffers from a lack of
publicly available quality data, such as that provided by JD
Power and Associates, on automobiles.

Supply Base Threatened
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7. (C/NF) According to Reuss, Australia's automotive
components market is the industry's "Achilles heel." Recent
GOA assistance to automotive parts manufacturers has helped
keep these businesses afloat, but has not led to badly needed
reforms in the fragmented and inefficient sector. Given that
many of these vendors have been unable to secure the
financing necessary to consolidate, Reuss believes that it is
only a matter of time until some of them implode.


8. (C/NF) On June 15, Trident Plastics, a South Australia
based automotive parts supplier announced that it will go on
sale this week to ensure that it continues to operate. If
this trend continues, Holden is considering purchasing the
assets of key suppliers to maintain its supply base. Holden
is also looking to Korean parts manufacturers as a backup to
the troubled Australian market. (Note: The GOA mandates that
30 percent of components come from local suppliers as a
condition for receiving government assistance (reftels). End
note.)

Comment
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9. (C/NF) Reuss appeared frustrated that GM had effectively
left Holden in the financial wilderness once it accepted U.S.
Treasury money. He described the period of December to
February as "very dark" and said that he intends to keep at
least some of Holden's future profit in Australia for
reinvestment rather than returning it to GM. Although Reuss
and his team were optimistic about the introduction of the
Cruze, Australia's automotive market is already saturated
with small, fuel efficient cars dominated principally by
Mazda and Toyota. End comment.
THURSTON