After half a century of operation, the leading vehicles maker

Added on - 23 Sep 2019

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After half a century 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 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 factorsof Australia, economies of scale also seems to be one of the most influential factors in thecompanies’ decision(Griffiths, 2014).This essay will critically analyze the application ofeconomies of scale in car manufacturing industry, besides analyzing the factors that influencecompanies 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). Focusing on producing theoptimal level of output to reduce the cost by car production companies is substantial to becompetitive enough to sustain in the market. Producing in low volumes can be viable only incase the company decided to focus on niche vehicles, which its unit costs can observed by thehigh 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 orderto 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 with Toyota Australia making90000 cars in 2015(Dowling, 2015). As the companies are operating below the MES they willincur higher AC than optimal.The graphbellow canshow how fartotalproduction ofcars inAustralia isfrom this targetlevel. It alsoshows a reduction of the production volume over the period, which signals that there are someobstacles, faced car producers in Australia.2 0 1 02 0 1 12 0 1 22 0 1 32 0 1 42 0 1 5050,000100,000150,000200,000250,000300,000P 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
Figure 1a: Source: (FCAI, 2016)Figure 1b: Source: (FCAI,2016)Production 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 byGereral 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.Ford, Toyota, Holden and many other automotive component manufacturers have enterpriseagreements in place and some have different agreements for different groups of employees(Australian Government Productivity Commission, 2014). The comparison of wages in themanufacturing sector in Australia and Thailand is as below:Production Volume of AustralianAutomotive Industry2010239,4432011219,3762012221,2242013210,5382014174,9862015167,538
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