Ask a question from expert

Ask now

Economies of Scale in Car Manufacturing Industry: A Critical Analysis of Toyota's Decision to Stop Manufacturing in Australia

6 Pages1286 Words314 Views
   

Added on  2019-10-18

About This Document

This essay critically analyzes the application of economies of scale in car manufacturing industry, besides analyzing the factors that influence companies in Australia and Toyota particularly in achieving economies of scale.

Economies of Scale in Car Manufacturing Industry: A Critical Analysis of Toyota's Decision to Stop Manufacturing in Australia

   Added on 2019-10-18

BookmarkShareRelated Documents
After half a century of operation, the leading vehicles maker Toyota decided to stop car manufacturing in Australia by the end of 2017. In like manner, General Motor and Ford made the same decision previously, which put an end for to the car manufacturing industry in Australia. This seems to be a steep step for companies that large, but there are certainly some reasonable motives behind this withdrawal. Including the exchange rate, high wages, and economic factors of Australia, economies of scale also seems to be one of the most influential factors in the companies’ decision (Griffiths, 2014).This essay will critically analyze the application of economies of scale in car manufacturing industry, besides analyzing the factors that 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’s production starts to reduce with increased production (Baye, 2010). Economists around the world consider this as a necessary condition to be able to run a successful business in any sector (Blanchard, 2012). Focusing on producing the optimal level of output to reduce the cost by 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 niche vehicles, which its unit costs can observed by the high profit margins.In Australia, carmakers should produce a minimum of 250,000 vehicles in per year in order to gain 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, even their combined production are significantly lower than 250,000. The graph bellow can show how far total production of cars in Australia is from this target level. It also shows a reduction of
Economies of Scale in Car Manufacturing Industry: A Critical Analysis of Toyota's Decision to Stop Manufacturing in Australia_1
the production volume over the period, which signals that there are some obstacles, faced car producers in Australia.Source: Data from FederalChamber of AutomotiveIndustryProduction costs, causes a major issue in achieving EOS. Relative with other countries in the world, the costs of vehicle production in Australia are significantly higher. Another factor that added to the problem is the high wage rate in Australia that raised the operating cost for the company 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 by Production Volume of AustralianAutomotive Industry2010239,4432011219,3762012221,2242013210,5382014174,9862015167,5382010201120122013201420150 50,000 100,000 150,000 200,000 250,000 300,000 Producti on Volume of Australian Automoti ve IndustryCarsperYear
Economies of Scale in Car Manufacturing Industry: A Critical Analysis of Toyota's Decision to Stop Manufacturing in Australia_2
Gereral Motors, which 80% derived by wages (Griffiths, 2014). Today vehicle manufacturers are shifting their operations to regions with low wages and growing demand such as India and China, so it will be unviable for the three car producers in Australia to continue their costly production while other competitors can benefit from low costs.Apart from this, the global competition in the automobile industry is certainly fierce, and the economic conditions in Australia have not been supportive enough for car producers to afford the competition. The unaffordable exchange rate of Australia makes exports of goods and services certainly unviable (Maggo, 2015). The appreciation in its exchange rate causes a reduction in aggregate demand for cars. When dollar increases, exports become expensive to purchase by foreigners. Therefore, local car manufacturers were unable to make profits from exports, especially that they have to compete against their global parents’ affiliates. In addition to that, they have also loosed their local sales due to the fragmentation of the Australian market. It is one of the most open markets with low barriers for imports resulted from free trade agreements. This market structure alongside with the strong exchange rate limited the sales 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.
Economies of Scale in Car Manufacturing Industry: A Critical Analysis of Toyota's Decision to Stop Manufacturing in Australia_3

End of preview

Want to access all the pages? Upload your documents or become a member.

Related Documents
Economies of Scale in Car Manufacturing Industry: A Critical Analysis of Toyota's Decision to Stop Production in Australia
|8
|1530
|223

Essay on Toyota- Economies of Scale
|4
|1209
|272

HI5003 - Economics for Business Toyota
|6
|1299
|36

Impact of Automotive Industry Report
|19
|4575
|45

Impact of Global Retreat on Car Manufacturing Industry in Australia
|10
|2344
|95

The Manufacturing Strategy
|9
|2269
|23