After half a century of operation, the leading vehicles maker
Added on - 18 Oct 2019
After halfacentury of operation, the leading vehicles maker Toyota decided to stop carmanufacturing in Australia by the end of 2017. In like manner, General Motor and Ford madethe same decision previously, which put an endforto thecar manufacturing industry inAustralia. This seems to be a steep step for companies that large, but there are certainly somereasonable motives behind this withdrawal. Including the exchange rate, high wages, andeconomic factors of Australia, economies of scale also seems to be one of the most influentialfactors in the companies’ decision(Griffiths, 2014).This essay will critically analyze theapplication of economies of scale in car manufacturing industry, besides analyzing the factorsthat influence companies in Australia and Toyota particularly in achieving economies of scale.The concept of EOS is when the average cost –cost per unit of output- of a company’sproduction starts to reduce with increased production(Baye, 2010).Economists around theworld consider this as a necessary condition to be able to run a successful business in anysector(Blanchard, 2012).Focusing on producing the optimal level of output to reduce the costby car production companies is substantial to be competitive enough to sustain in the market.Producing in low volumes can be viable only in case the company decided to focus on nichevehicles, which its unit costs can observed by the high profit margins.In Australia, carmakers should produce a minimum of 250,000 vehiclesinper year in order togain sufficient EOS. This was the best practice identified for car manufacturers in Australia(Dowling, 2014). However, all automakers in Australia are producing below that level, eventheir combined production are significantly lower than 250,000. The graph bellow can showhow far total production of cars in Australia is from this target level. It also shows a reduction of
the production volume over the period, which signals that there are some obstacles, faced carproducers in Australia.Source: Data from FederalChamber of AutomotiveIndustryProduction costs, causes a major issue in achieving EOS. Relative with other countries in theworld, the costs of vehicle production in Australia are significantly higher. Another factor thatadded to the problem is the high wage rate in Australia that raised the operating cost for thecompany and made the production even more unfavorable. Holden mentioned that it cost near$2000 more in input to produce a car in Australia comparing with other plants owned byProduction Volume of AustralianAutomotive Industry2010239,4432011219,3762012221,2242013210,5382014174,9862015167,538201020112012201320142015050,000100,000150,000200,000250,000300,000Producti on Volume of Australian Automoti ve IndustryCarsperYear
Gereral Motors, which 80% derived by wages(Griffiths, 2014).Today vehicle manufacturers areshifting their operations to regions with low wages and growing demand such as India andChina, so it will be unviable for the three car producers in Australia to continue their costlyproduction while other competitors can benefit from low costs.Apart from this, the global competition in the automobile industry is certainly fierce, and theeconomic conditions in Australia have not been supportive enough for car producers to affordthe competition. The unaffordable exchange rate of Australia makes exports of goods andservices certainly unviable(Maggo, 2015). The appreciation in its exchange rate causes areduction in aggregate demand for cars. When dollar increases, exports become expensive topurchase by foreigners. Therefore, local car manufacturers were unable to make profits fromexports, especially that they have to compete against their global parents’ affiliates. In additionto that, they have also loosed their local sales due to the fragmentation of the Australianmarket. It is one of the most open markets with low barriers for imports resulted from freetrade agreements. This market structure alongside with the strong exchange rate limited thesales of the three car producers in Australia, although they have the highest selling cars(Amiti,2016). Many local customers in Australia are now buying from the low priced imported cars,which are subject low or zero tariff by the government. This shift in the market limited the salesof Australian- based cars, and that can be note from the following graph.