Essay on Toyota- Economies of Scale


Added on  2019-09-26

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Essay: Decision of Toyota to cease manufacturing in Australia by the endof 2017In 2014, Toyota Australia announced that they would cease manufacturing in Australia by theend of 2017. The purpose of this essay is to discuss the role that “economies of scale” in thatdecision and to explain the relevant theoretical concepts and their application to carmanufacturing in general and Toyota Australia in particular.A few years back, Ford announced that it will stop producing cars in Australia in 2016 andafter that Holden announced it too for the year 2017. Now, only one car maker was remainingin Australia which was Ford, and it has also announced that it will stop production of cars inAustralia in 2017. According to the company, the Australian dollar is very high, and themarket is fiercely competitive. Thus, they have to take this painful decision as these factorsare likely to impact the total scale of the production of the vehicles in Australia as forecastedby the company. The cost of doing business in Australia has increased which makes theexports unviable and increases the cost of manufacturing, and thus the company's profits arelikely to get hit. Therefore, they have taken this decision. Apart from this, there was one morereason with the company to take this decision which was the low economies of scale for theproduction of the vehicles. The company says that the automotive market of Australia is oneof the most open markets, and it is fragmented too. With the rise in the competitiveness in themarket and the free trade agreements, it is not viable for the company to continue productionthere (Clibborn, 2016). All the production companies require having economies of scale if they want to utilize theirproduction factors in the best possible way and see the best of their times. Only in their worsttimes, they may not use the economies of scale as they may just have to compete with theimported parts or cars of cheap nature. Economies of scale help the companies in producing a1

large number of cars at the reduced prices (Baye, 2006). Since the competition in the marketof Australia is getting fierce due to the open trade agreements, so, the car makers here need tosurvive beyond the current models of their operation. For keeping their cost of productionlow, the manufacturers have to rely on the foreign parts. So, the parts of the supply chain maydisturb the car manufacturers from manufacturing. Thus, to survive in the competition, and tokeep the costs down, there is only one way i.e. the economies of scale. Only this can help thecar makers in producing in bulk at the reduced costs and remain in the competition. The bestpractice that was identified for the car makers in Australia was that they should makeminimum 2,50,000 vehicles in a year at the least possible cost if they wanted to remain in thecompletion (Gollan, 2013). But, Toyota was unable to reach this target. Therefore, it took thisdecision of exiting the market of Australia in 2017.In general, the gains from the productivity of the companies help in the economic growth ofthe country which can be achieved with the help of economies of scale. With the economiesof scale, the companies are able to produce more at the reduced costs and the workersspecialize in one particular task thus, cost savings happen (Besanko, 2009). With theexpansion of the output, the cost savings occur for the companies, and they are able toinnovate 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 fromdifferentiating their products, or they target cost savings so that they are able to competesuccessfully. Since Toyota has already differentiated its products in an effective way, so theonly option left with the company was to save its costs to fight in the completion. But, therise in the Australian dollar and the costly business activities did not allow the company toproduce 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 thecompetition, then it decided to leave the country in 2017.2

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