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Blaming the strong currency and small local market General Motors will shutter its production facilities in Australia, raising fears of the end of the country’s struggling and depleted car industry.

The closing of its manufacturing operations, which GM plans to complete by the end of 2017, will result in 2,900 jobs being axed at Holden, its Australian business unit. The company will maintain a sales and parts distribution network in the country.

“The decision to end manufacturing in Australia reflects the perfect storm of negative influences the automotive industry faces in the country, including the sustained strength of the Australian dollar, high cost of production, small domestic market and arguably the most competitive and fragmented auto market in the world,” said Dan Akerson, GM’s outgoing chief executive.

In May this year, Ford announced it would halt production in the country because of the high costs and small market. Toyota, the last remaining car manufacturer in Australia, on Wednesday said it would review its operations as a result of GM’s decision, but had no current plans to cease production.

“This will place unprecedented pressure on the local supplier network and our ability to build cars in Australia. We will now . . . determine our next steps and whether we can continue operating as the sole vehicle manufacturer in Australia,” the Japanese company said.

The strong Australian dollar has been a thorn in the side of the domestic economy for a number of years. For domestic carmakers, it makes imported models cheaper and restricts their ability to supplement local demand with exports.

“You cannot sustain a supply chain if your manufacturing is purely for local demand,” said Anil Valsan, lead automotive analyst at consultancy EY. “If you can import cars from overseas cheaper, then why not?”

Demand for raw materials, and for Australian debt, has driven the local currency up from under A$0.70 per US dollar in 2009 to as much as A$1.08 in 2012. In spite of efforts from the Reserve Bank of Australia to weaken the currency, which it regularly describes as “uncomfortably high”, the Aussie still trades at about A$0.91 per US dollar. Meanwhile, the weakening of the yen over the past year has made imports of Japanese cars and trucks cheaper.

“The appreciation of the currency alone means that at the Australian dollar’s peak, making things in Australia was 65 per cent more expensive compared with just a decade earlier,” GM said. The company expects its exit costs to reach $400m-$600m before tax, which will be included in its fourth-quarter earnings report.

GM’s announcement is the latest twist in an increasingly heated political row over whether the Australian car sector should continue to receive government support, or be allowed to wind down.

The industry has relied on billions of dollars of financial help from successive Australian governments, part of a broader attempt to pivot the economy away from its reliance on mineral exports. Car and vehicle part production employs more than 40,000 people in Australia, although exports from the sector have dropped from A$5.8bn in 2008 to A$3.7bn in 2012.

The previous government pledged A$5.4bn (US$4.9bn) in assistance for the sector until 2020, while Holden revealed earlier this year that it had received more than A$2bn in support from the state over the past dozen years.

Warren Truss, Australia’s acting prime minister, said he “regretted the fact that GM is to phase down its operations”, adding that the government “wanted Holden to continue manufacturing cars in Australia”.

Additional reporting by Nobuko Juji in Tokyo and Henry Foy in London

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