Car trouble: Handouts not the answer

As the song goes, sometimes you've go to be cruel to be kind

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published November 1, 2012 2:15 pm AEDT

The billions of dollars in handouts to the car industry might be throwing good money after bad. In fact, they may negatively impact on other industries, according to the Productivity Commission.

The Commission has warned the government to get out of the way of inevitable structural change by scrapping handouts to struggling industries and removing regulatory roadblocks, in its annual report, released yesterday.

It has suggested that handouts are unlikely to succeed, and may make it harder for expanding industries to attract skilled workers, adding that global experience has shown that handouts are not effective in preserving jobs in the beneficiary firms. The news comes amid increasing criticism of the Federal government for billion dollar handouts to the car industry – and its legal action to keep the details secret.

Struggling car parts manufacturer, Autodom Limited's (ASX: AIE) shutdown of plants in Melbourne and Adelaide today, with the potential loss of 400 jobs, shows that the government's strategy isn't working. It may also lead to production halts at Ford and General Motors Holden assembly plants.

Autodom issued a statement today, stating that high fixed costs and local car makers cutting production volumes by 50% over the past four years, meant the company was always going to struggle. A recent report by Ferrier Hodgson showed that sales of locally manufactured vehicles fell 16% in August 2012, compared to the previous year, with Ford selling just over 1,000 Falcons per month.

BlueScope Steel Limited (ASX: BSL) and Arrium Limited (ASX: ARI) ex OneSteel, have also received government handouts to prop up the companies and keep thousands employed. At the same time, miners like Hancock Prospecting and BHP Billiton (ASX: BHP) have more job vacancies in Western Australia and Queensland than they can fill.

The Foolish bottom line

Rather than spending billions on handouts, the Productivity Commission suggests the government could better spend its money by focusing on removing barriers so companies can improve productivity and boosting labour mobility. Sounds like a much better idea to me.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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