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

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Added on  2019-09-23

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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 Production in Australia

   Added on 2019-09-23

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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 to the car manufacturing industry in Australia. This seems to be a steep step for companies that large, but there are certainly some reasonablemotives 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). 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. The main sources of EOS in car manufacturing are the learning effects, specialization, research and development, purchasing economies and invisibilities (Husan, 1997). The Toyota plant is estimated to produce 90,000 cars in 2015 (Dowling, 2015). The MES is the lowest production point at which the LRATC as minimised. In Australia, carmakers should produce minimum 250,000 vehicles per year which is the MES value 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
Economies of Scale in Car Manufacturing Industry: A Critical Analysis of Toyota's Decision to Stop Production in Australia_1
their combined production are significantly lower than 250,000 with Toyota Australia making 90000 cars in 2015 (Dowling, 2015). As the companies are operating below the MES they will incur higher AC than optimal. The graph bellow can show how far total production of cars in Australia is from this targetlevel. It also shows a reduction of the production volume over the period, which signals that there are some obstacles, faced car producers in Australia.2 0 1 02 0 1 12 0 1 22 0 1 32 0 1 42 0 1 50 50,000 100,000 150,000 200,000 250,000 300,000 P r o d u c ti o n Vo l u m e o f A u st r a l i a n A u t o m o ti v e I n d u st r yCarsperYear
Economies of Scale in Car Manufacturing Industry: A Critical Analysis of Toyota's Decision to Stop Production in Australia_2
Figure 1a: Source: (FCAI, 2016)Figure 1b: Source: (FCAI,2016)Production 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 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.Ford, Toyota, Holden and many other automotive component manufacturers have enterprise agreements in place and some have different agreements for different groups of employees (Australian Government Productivity Commission, 2014). The comparison of wages in the manufacturing sector in Australia and Thailand is as below:Production Volume of AustralianAutomotive Industry2010239,4432011219,3762012221,2242013210,5382014174,9862015167,538
Economies of Scale in Car Manufacturing Industry: A Critical Analysis of Toyota's Decision to Stop Production in Australia_3

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