Toyota's Decision to Cease Manufacturing in Australia

Toyota's decision to cease manufacturing in Australia by the end of 2017 was largely influenced by economies of scale, high Australian dollar, and market competition. The company faced difficulties in producing a large number of cars at reduced costs due to open trade agreements, leading to increased costs and decreased competitiveness. As a result, Toyota, along with other major car manufacturers like Ford and Holden, decided to exit the Australian market.

Essay: Decision of Toyota to cease manufacturing in Australia by the end
of 2017
In 2014, Toyota Australia announced that they would cease manufacturing in Australia by the
end of 2017. The purpose of this essay is to discuss the role that “economies of scale” in that
decision and to explain the relevant theoretical concepts and their application to car
manufacturing in general and Toyota Australia in particular.
A few years back, Ford announced that it will stop producing cars in Australia in 2016 and
after that Holden announced it too for the year 2017. Now, only one car maker was remaining
in Australia which was Ford, and it has also announced that it will stop production of cars in
Australia in 2017. According to the company, the Australian dollar is very high, and the
market is fiercely competitive. Thus, they have to take this painful decision as these factors
are likely to impact the total scale of the production of the vehicles in Australia as forecasted
by the company. The cost of doing business in Australia has increased which makes the
exports unviable and increases the cost of manufacturing, and thus the company's profits are
likely to get hit. Therefore, they have taken this decision. Apart from this, there was one more
reason with the company to take this decision which was the low economies of scale for the
production of the vehicles. The company says that the automotive market of Australia is one
of the most open markets, and it is fragmented too. With the rise in the competitiveness in the
market and the free trade agreements, it is not viable for the company to continue production
there (Clibborn, 2016).
All the production companies require having economies of scale if they want to utilize their
production factors in the best possible way and see the best of their times. Only in their worst
times, they may not use the economies of scale as they may just have to compete with the
imported parts or cars of cheap nature. Economies of scale help the companies in producing a
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large number of cars at the reduced prices (Baye, 2006). Since the competition in the market
of Australia is getting fierce due to the open trade agreements, so, the car makers here need to
survive beyond the current models of their operation. For keeping their cost of production
low, the manufacturers have to rely on the foreign parts. So, the parts of the supply chain may
disturb the car manufacturers from manufacturing. Thus, to survive in the competition, and to
keep the costs down, there is only one way i.e. the economies of scale. Only this can help the
car makers in producing in bulk at the reduced costs and remain in the competition. The best
practice that was identified for the car makers in Australia was that they should make
minimum 2,50,000 vehicles in a year at the least possible cost if they wanted to remain in the
completion (Gollan, 2013). But, Toyota was unable to reach this target. Therefore, it took this
decision of exiting the market of Australia in 2017.
In general, the gains from the productivity of the companies help in the economic growth of
the country which can be achieved with the help of economies of scale. With the economies
of scale, the companies are able to produce more at the reduced costs and the workers
specialize in one particular task thus, cost savings happen (Besanko, 2009). With the
expansion of the output, the cost savings occur for the companies, and they are able to
innovate with the increase in the production capacity rather than replacement of the capacity.
When the completion in a particular industry is more, the companies either benefit from
differentiating their products, or they target cost savings so that they are able to compete
successfully. Since Toyota has already differentiated its products in an effective way, so the
only option left with the company was to save its costs to fight in the completion. But, the
rise in the Australian dollar and the costly business activities did not allow the company to
produce more and save costs. Also, there was competition from the foreign players so;
economies of scale could not be used. When the company saw no way to remain in the
competition, then it decided to leave the country in 2017.
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Another reason for this decision was that company was unable to integrate horizontally.
Horizontal integration would have increased the production of the cars at the same part of the
supply chain of the company, and the company could have gained from being a monopoly
(MIRO QUESADA PACHECO, 2014). But, with the increase in the prices of raw material
the company could not do this. Instead, the increased costs made the company expand its
supply chain to the foreign players from where they got the foreign parts. So, the dependence
on the company increased, and it decides to leave the country.
From the above discussion, it can be concluded that when the Australian dollar increase in
value and the country started facing completion from the outside world due to free trade
agreements, then the companies in the automobile manufacturing started realizing that they
can no longer sustain here by utilizing the economies of scale and by integrating horizontally.
Therefore the major companies like Ford, Holden, and Toyota decided to leave the country
Australia. So, in the above arguments, the role that “economies of scale” in the decision of
Toyota has been discussed and the relevant theoretical concepts have been explained.
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References:
Baye, M.R. and Beil, R.O., 2006. Managerial economics and business strategy (Vol. 5). New
York, NY: McGraw-Hill.
Besanko, D., Dranove, D., Shanley, M. and Schaefer, S., 2009. Economics of strategy. John
Wiley & Sons.
Clibborn, S., Lansbury, R.D. and Wright, C.F., 2016. Who Killed the Australian Automotive
Industry: The Employers, Government or Trade Unions?. Economic Papers: A journal of
applied economics and policy.
Gollan, P., Bendemra, H., Ergas, H., Van Acker, E., Economou, N. and Toner, P., 2013.
Holden to cease making cars in Australia by 2017: experts react.
MIRO QUESADA PACHECO, A.L.B.E.R.T.O. and JIMÉNEZ ESCAMILLA, C.C., 2014.
The retreat and relocation of the FDI in the automotive industry in Australia: analysis of the
Toyota case.
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