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High costs, currency push Ford out of Australia car manufacturing

By Rob Taylor and Lincoln Feast

CANBERRA (Reuters) - Ford Motor Co will shut its two Australian auto plants in October 2016, blaming a strong currency and costs that are hitting manufacturers just as the country looks for other sectors of its economy to cushion the end of a mining boom.

Ford Australia will close its engine plant in Geelong and its vehicle assembly plant in Broadmeadows, both in Victoria state, with the loss of 1,200 jobs, Ford Australia Chief Executive Bob Graziano said on Thursday, the latest election-year blow to the struggling Labor government.

Ford, which built 37,000 vehicles in Australia last year, has been in the country since 1925 and employs more than 3,000 people. But it has been battling sliding sales, high costs and an Australian dollar trading above the U.S. currency.

"Our costs are double that of Europe and nearly four times Ford in Asia," Graziano said. "The business case simply did not stack up. Manufacturing is not viable for Ford in Australia."

Ford's decision to close its local production highlights the challenges the country faces as a near decade-long mining boom begins to fade. Policymakers hope other sectors of the economy such as manufacturing, construction and retail will start to pick up the slack, but evidence has been scant so far.

The Australian dollar has traded above parity with the U.S. dollar for most of the past two years - it fell to about 97 cents only this week - making it more difficult for local manufacturers to compete globally.

Graziano said Ford had lost A$600 million ($581 million) in the last five years in Australia, and A$141 million in the last fiscal year, as customers turned to smaller imported vehicles built by Japan's Mazda <7261.T> and South Korea's Hyundai <005380.KS>.

The country's Performance of Manufacturing index fell to a four-year low in April, indicating continuing contraction in the sector despite record low interest rates of 2.75 percent.

"Australia's manufacturing sector continues to under-perform other parts of the globe," CommSec Economist Savanth Sebastian said in a research note this month.

"The main difference is the strength of the Aussie dollar, which clearly is causing businesses to markedly re-assess the viability of ongoing operations as well as strategic direction," Sebastian said.

General Motors Holden, the local unit of General Motors Co , said last month it was cutting 500 jobs, or 18 percent of its workforce. It also cited the damage to its competitiveness from the strength of the Australian dollar.

POLITICAL IMPLICATIONS

Ford's decision is likely to trigger a row over state assistance to the auto industry ahead of elections in September. Polls suggest the minority Labor government is heading for a bruising defeat, due largely to its perceived mismanagement of the economy.

Labor has earmarked around A$5.4 billion for car industry assistance to 2020, pointing to the sector's importance in maintaining heavy-industry skills and employment.

The Australian automotive industry employs about 55,000 people and supports 200,000 other manufacturing jobs. Ford's closure is likely to affect the economies of scale at other local builders, General Motors and Toyota Motor Corp <7203.T>.

Prime Minister Julia Gillard said the government's immediate priority would be to support workers affected by the closures, likely to include parts makers already hurt by Mitsubishi Motors Corp's <7211.T> closure of its Australian plants in 2008.

"The economy that we have today has many sources of strength, but the high Australian dollar is putting a lot of pressure on some industries, particularly manufacturing," Gillard told reporters.

Australia's Reserve Bank expects the A$1.5 trillion economy to grow slightly below trend at 2.5 percent this year, returning to average or trend rates 2014. Unemployment is expected to rise slightly to 5.75 percent.

Australia has annual sales of approximately 1.1 million new vehicles, with deliveries up 7.6 percent to 85,117 in April. But sales of locally manufactured vehicles have fallen to around 221,000 in recent years, from almost 389,000 in 2005.

At home in North America, Ford is faring better and announced on Wednesday it was adding a week of production at most of its factories to build an extra 40,000 vehicles.

(Additional reporting by James Grubel; Editing by Stephen Coates)

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