The Government’s job destruction spiral: Gottliebsen

Whether you operate in government or business, decision making is tougher during a recession.

 If you make even a small mistake, the adverse consequences can spiral out of control. Industry Minister Kim Carr is in danger of learning this lesson the hard way.

I documented the Carr mistake last week. In essence the Federal Government could have helped Melba Industries become a viable high technology operation by outlaying $4 million (I believe that $3 million would have done it). Instead, Carr decided it was much better to outlay almost $5 million of Government money and retrench the workers.

That commentary received a lot of interest from overseas. The reason for the global amazement is that Kevin Rudd and his Industry Minister are unique in the world. No other government is effectively outlaying cash to destroy jobs during the recession.

In fairness, I don’t believe Rudd knew what Carr was doing, but the Prime Minister must take responsibility for his Minister’s actions.

Accordingly, the recession-driven downward spiral from the Carr mistake is starting to develop. The message I am getting is that global investors in Australia were so stunned by the Rudd/Carr stance that they are wondering if they should revise strategies set in better economic times.

For example, while I don’t believe there will be any change in Toyota’s policy, there are mumblings from the lower levels of Toyota about whether Australia was now the right place to build a hybrid car plant. In a recession you can never be sure where such mumblings will end.

In my earlier article I pointed out that the Carr plan would send other companies to the wall and the Government will have to outlay further large sums to pay around half the retrenchment benefits for those companies that collapse in the wake of Melba.

I now realise that the repercussions from the Carr mistake go further. Apart from its high technology material, Melba supplies cloth to Futuris which uses that cloth as an essential component for interior car roofing fittings which it supplies to Toyota and others. Thanks to Carr, Futuris will now have to source that cloth overseas.

It may be better for Futuris to shut down its plant and retrench a lot more workers. As with the Toyota example, it probably will not happen, but if the Government’s “cash to cut jobs” employment plan gathers momentum, a lot more components will be sourced overseas.

That’s turning out to be costly for auto makers because while the actual component might be cheaper to source overseas, transport is costly and unreliable so additional stocks must be held in Australia, which takes up capital. And given that we have a Government outlaying money to destroy jobs, why not make the vehicles overseas where there are component companies and assembly lines in need of extra work?

There is another twist to the tale. When General Motors went to a single shift operation in Elizabeth last month, it would normally have retrenched a big slab of its workforce. However, in this instance it didn’t.

Instead it is paying workers 50% of their old base salary when they are NOT working, which means General Motors will be chalking up big losses. Why make a decision that seems so silly?

First, General Motors workers are entitled to about four weeks retrenchment pay for each year of service and many have been there 20, 30 or 40 years. Large scale retrenchment would have created a huge bill at a bad time, given that the US parent is in trouble.

Second, General Motors is planning to make a four cylinder car in Australia so that by the end of 2010 they will need the additional workers – they did not want to lose their skills.

General Motors in Australia is still going full steam ahead with that four cylinder plan, but no one knows what will happen to its parent in the US, or where the recession driven spiral from Kim Carr’s mistake will end.

This article first appeared on Business Spectator