Impact of High Production Costs: Australian Car Manufacturing Industry

This report examines the critical issue of high production costs within the Australian car manufacturing industry. The analysis, referencing an article from The Conversation, delves into the economic consequences of these costs, including cost-push inflation, structural unemployment, and the impact on the labor market. The report highlights factors such as labor costs, market size, import competition, and exchange rate fluctuations as contributors to the industry's struggles. It presents graphical data illustrating labor costs and new vehicle sales trends. The recommendations section proposes potential policy interventions, such as tax cuts or subsidies, to mitigate the challenges faced by car manufacturers. The report emphasizes the need for government action to prevent further economic decline and job losses, advocating for investment in research and development to improve production efficiency. The overall conclusion stresses the urgency of addressing high production costs to safeguard the industry and maintain economic stability. References are provided for further reading.

Running Head: Production Costs in Australia
Costs of Production in the Australian Car Manufacturing Industry
By (Name)
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Production Costs in Australia 2
Costs of Production in the Australian Car Manufacturing Industry
Introduction
The newspaper article “Collapse of Australian car manufacturing will harm R&D in
other sectors: study” was written on The Conversation by Abbas Valadkhani in October 2016.
The article is concerned with the high production costs that is experienced in Australia. The costs
have gone up such that businesses are operating at losses and are not even able to break even.
Compared to some other economies, the Australian costs are very high. Specifically, this article
notes that car manufacturing industry is becoming unsustainable due to high costs. This is an
important industry in Australia and thus its fall will result in great losses.
The suppliers are hurt by the high costs and thus may view this paper to be of utmost
importance to them. The other group that is mainly affected by the fall of the Australian car
manufacturing industry are the employees employed directly on this industry or those employed
on value addition sectors. This article notes that more than million people are employed in this
sector; they need to be aware of what the future of this industry holds for them. This paper will
tell them whether to look for a new job or to have hopes that this industry won’t fall. Policy
makers need to determine the possible losses that will occur if this industry fails to operate in the
near future.
Economic Analysis
Cost of production determines the level of economic growth in an economy. When the
production cost rises, it results in cost push inflation where the final output is sold at higher
prices.
Fig: Impacts of high production costs
Price level AS1
AS0
Pi
P*
Aggregate Demand
Qi Q* Real GDP

Production Costs in Australia 3
The high costs of production makes it difficult for the Australian car manufactures to
produce the equilibrium level of output Q* and sell it at price P*. As these producers cut their
level of production, they shift their Aggregate supply curve to the left lowering real GDP from
Q* to Qi (Agarwal, 2017). The new Aggregate supply curve is a higher level and thus the price
also shift from equilibrium P* to Pi. This rise in price is what is referred to as cost-push inflation
(Pettinger, 2016). According to this newspaper, this economy is about to change structurally
which will result in an increase in structural unemployment. This is a type of unemployment
resulting from an industry shifting its operations to overseas where there are low production
costs (Pijl, 2015). When operations are shifted to overseas economies, the shifting company does
not shift with its initial employees as this would create an additional costs. Furthermore, labor
costs in Australia are higher than for other nations and thus would be cheaper to employ labor
from the host economy.
Fig: Australian labor costs
Source: Tradingeconomics.com (2018)
The labor costs in Australia has been high for the last 5 years, the costs fell in the first
quarter of 2017 but went up as the year came to an end. Creation of jobs is an important role for
the government. According to this article, 256 vacuums will be created after the downfall of the
car manufacturing companies. There are more than million persons employed in this industry
which makes approximately 8.5% of the total workforce. Creation of jobs is not an easy task as
currently Australia is at a high unemployment rate. Thus, the closure of these companies will

Production Costs in Australia 4
lower this economy’s level of economic growth. It would require the employment of policy
instruments. The government will be forced to raise its spending or to lower the national tax rate
for the households and also for commercial businesses.
The following factors are responsible for the projected closure of the car manufacturing
companies. The industry suffers from inability of exploiting economies of scale fully because of
the small size of the Australian market (Sivabalan et al., 2016). This is where the long-run
average costs are expected to fall as the companies raise their output level. The market is small
and thus insufficient demand. On the other hand, the easiness of importation which has been
contributed by signing of trade agreements and reduction of import tariffs has created a cheaper
alternative other than production. For this reason, the producers are not able to charge higher
prices due to external competition. Exchange rate has also contributed to worsening of this
situation, the appreciation of Australian dollar has made imports cheaper (Onselen, 2014).
Fig: The sale of new vehicles in Australia
Source: Tradingeconomics.com (2018)
For the past 5 years, the sale of new vehicles in Australia has not been sufficient to
generate enough revenue for the producing companies. The car sale especially in 2017 and 2018
has been too low. The number that has been sold in 2018 is the lowest. There is deficiency of
demand for new vehicles in Australia.

Production Costs in Australia 5
Recommendations
The key players should consider the downfall of these car manufacturing companies to be
a great threat to the national economy. Thus, they should consider employing policies that would
help these companies to continue operating in Australia. These policies may include a tax cut
which would directly lower the production costs. Otherwise, the government may decide to give
subsidy to these companies if they agree to continue their operation in Australia. This again will
help them to generate some revenue.
There are many people in Australia who are seeking to be employed. The situation may
worsen if an additional one million people were added into the labor force; the chances of one
getting a job will fall and some will end up becoming discouraged workers. Most industries are
important to the economy since they contribute to its growth. The policy makers may thus
consider an increment in investment of research and development to come up with cost effective
ways of production.
Conclusion
The cost of manufacturing cars in Australia is very high and the companies are not able to
operate at the high costs as it is resulting in great losses. Cost of production may cause firms to
shift their operations to areas where the costs are lower. This results in an increase in structural
unemployment and the general unemployment level. The government policies may cause an
increase in production costs. High corporate tax is one of the factors increasing production costs.
By saving these companies from falling, the policy makers will achieve other objectives such as
maintain the level of economic growth, lowering unemployment rate, etc.

Production Costs in Australia 6
References
Agarwal, P. (2017). Cost-Push Inflation. [Online] Intelligent Economist. Available at:
https://www.intelligenteconomist.com/cost-push-inflation/ [Accessed 8 May 2018].
Onselen, L. (2014). Australia's huge manufacturing labour costs. [Online]
Macrobusiness.com.au. Available at: https://www.macrobusiness.com.au/2014/01/australias-
huge-manufacturing-labour-costs/ [Accessed 8 May 2018].
Pettinger, T. (2016). Cost-Push Inflation. [Online] Economicshelp.org. Available at:
https://www.economicshelp.org/blog/2006/economics/cost-push-inflation-2/ [Accessed 8 May
2018].
Pijl, K. (2015). Handbook of the international political economy of production.
Sapsford, D. (2013). Labour Market Economics (Routledge Revivals). Routledge.
Sivabalan, P., Sawyers, R., Jackson, S. and Jenkins, J. (2016). ACCT2 managerial. 2nd ed. South
Melbourne, Vic.: Cengage Learning.
Tradingeconomics.com. (2018). Australia New Vehicles Sale. [Online] Available at:
https://tradingeconomics.com/australia/labour-costs [Accessed 8 May 2018].
Valadkhani, A. (2016). Collapse of Australian car manufacturing will harm R&D in other
sectors: study. [Online] The Conversation. Available at: https://theconversation.com/collapse-of-
australian-car-manufacturing-will-harm-randd-in-other-sectors-study-66984 [Accessed 8 May
2018].