Economics for Business: Manufacturing Costs and Industry Analysis

This report delves into the economic challenges faced by the Australian car manufacturing industry, particularly focusing on the impact of high labor costs and government policy changes. It examines the industry's struggles against import competition and the withdrawal of government support, leading to the closure of major manufacturing facilities. The report analyzes the two major global business models for car manufacturing: low-cost production in Asia and high-end manufacturing in Europe, and evaluates their suitability for Australia. It highlights the significance of manufacturing for the Australian economy and suggests the need for government support to address cost issues and facilitate the transition of the workforce to other sectors. The report concludes by emphasizing the need for proactive measures to support the manufacturing sector and mitigate the negative impacts of industry decline, offering valuable insights for students of economics and business.

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Costs of Production
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Manufacturing costs in car manufacturing industry in Australia
Introduction
One of the critical manufacturing industries based in Australia is the car manufacturing which
is currently reeling under pressure as the government announced way back in 2014-2015
about the decision to stop all aid being extended to the industry by 2017. This announcement
has negative impact not only on the car manufacturing industry but the manufacturing sector
on the whole in Australia as the economy is dominated by tertiary and primary sectors, The
withdrawal of support by the government had led to withdrawal of General Motors and Ford
from their Australia based manufacturing facilities. The key issue with the car manufacturing
industry is in the form of high labour cost which makes it difficult for Australian car
manufacturers to compete with other global car manufacturers. As a result, the imported cars
are emerging as lucrative option to Australian customers and this trend has accelerated in the
recent times as the Australian currency has appreciated making imports cheaper (Jericho,
2014). In this background, the objective of the current report is to highlight the woes of the
car manufacturing industry along with role of government and possible options for the
industry in wake of economic theory.
Discussion
With regards to manufacturing industry cost is significant so that competitive edge can be
maintained against other manufacturers. One of the key costs with regards to car
manufacturing is labour cost which despite automation still remains significant. In Australia
on account of limited supply of labour, availability of other avenues and minimum wages, the
labour costs tends to be significantly higher in comparison with the low cost manufacturing
hubs based in South East Asia particularly India and China. These countries have huge
supply of skilled and semi-skilled manpower who are willing to work for a fraction of wages
prevalent in Australia.
In this regards, the Australian car manufacturers tend to lag which is a matter of grave
concern. In the last four to five decades, this situation has not dramatically altered and the
industry along with the government has not taken innovative measures to reform the industry
and make it self-sustaining. Instead, the government policy has been content with following
the managed decline policy where the government has continuous provided state support to
ensure that the industry remains viable and has progressed aimed to lower the state support

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without actually making attempts to make the industry sustainable (Conley, 2014). Even
though the Australian economy may seem to be dominated by services and mining, but
manufacturing also has immense utility to the economy not only in terms of GDP but also
creation of jobs. The manufacturing industry contribution to the economy of Australia is
reflected from the following table (Jericho, 2014).
Further, the contribution of the car manufacturing industry and allied firms to the overall
employment in manufacturing sector is captured by the following graph which reflects the
potential impact of closure of car manufacturing facilities in Australia (Jericho, 2014).

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In the light of the current government policy and the subsequent decision to withdraw the
state support, it is essential to explore if any option is available to this crucial industry so as
to survive without government support. Globally, there are two major business models that
area adopted by the car manufacturers based on their respective core competency. One of
these relates to the low cost based manufacturing model which is opted by countries based in
Asia which have easy access to cheap and skilled labour and thus have a cost advantage
against their western peers. As a result, mass car manufacturing is being practiced in these
countries which are meant not only for satiating the domestic demand but also for exports to
western nations and Africa (KPMG, 2014). Clearly, this is a model which Australia cannot
model based on the factors of production.
Another model worth mentioning is the one which is followed by the Western nations based
mostly out of Europe. These manufacturers also cannot compete with the low labour cost of
the Asian nations and hence have ventured in high end cars where high level of skill,
technology and expertise is desired. These nations tend to be have these factors of production
which provides them edge in this segment as compared to the low cost manufacturing hubs
which lack the technological abilities and high skilled manpower. Further, these
manufacturers also tend to have easy availability of markets in the form of other developed
neighbouring countries and hence this model has served them well which has helped in
development of a niche for these. Even though Australia also has the requisite factors of
production for luxury cars manufacturing but it seems unlikely that the Australian car
manufacturers can pursue this model. This is primarily on account of the geographical
location which is isolated and hence makes exports unviable (KPMG, 2014).
Thus, the above discussion indicates that for Australia neither of the two prevalent models
seems to be suited. Even though the factors of the production present in Australia are similar
to the other western nations but geographical constraints defeats any attempt to move into this
segment. Additionally, the demand in Australia and the only significant neighbour in the
form of New Zealand would be modest at best and hence would not be able to justify the high
capital expenditure required in setting up shop. However, the failure of the car industry does
not imply that the manufacturing sector is not significant or the demand for these goods can
be met with imports with no implications for economy (Toner & Stilwell, 2014).

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Conclusion
It is imperative that the cost issue which remains a problem not only in car manufacturing but
also in other sectors needs to be resolved through government support. While it seems quite
obvious that considering the high labour cost and low demand, economies of scale cannot be
reaped by the Australian manufacturers, but the government shall still continue to provide
support to these industry considering the contribution to employment. Further, before
drawing support from this industry, it makes sense that the government takes proactive
measures so as to adjust those employed in manufacturing sectors currently can be absorbed
by other sectors where Australia has a competitive edge based on the inherent factors of
production (Barbaro, Spoehr & NIEIR. 2014).

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References
Barbaro, B., Spoehr, J. & NIEIR. (2014). Closing the Motor Vehicle Industry: The Impact on
Australia, University of Adelaide, Retrieved on August 23, 2017 from
https://www.adelaide.edu.au/wiser/research/development/automotive%20industry/
Closing_the_Motor_Vehicle_Industry_-_The_impact_in_Australia.pdf
Conley, T.(2014). Managed decline to rapid demise: Abbott’s car industry gamble, The
Conservation, Retrieved on August 23, 2017 from
http://theconversation.com/managed-decline-to-rapid-demise-abbotts-car-industry-
gamble-23124
Jericho, G. (2014). Car industry exit: manufacturing is declining but it is still a vital cog, The
Guardian, Retrieved on August 23, 2017 from
http://www.theguardian.com/business/grogonomics/2014/feb/13/car-industry-exit-
manufacturing-declining-but-still-vital (Accessed on November 22, 2015)
KPMG (2014), The UK Automotive Industry and the EU, KPMG Website, Retrieved on
August 23, 2017 from
https://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/
PDF/Market%20Sector/Automotive/uk-automotive-industry-and-the-eu.pdf
Toner, P. & Stilwell, F. (2014). Why does Australia need manufacturing industry?, Australian
Options, Retrieved on August 23, 2017 from
http://www.australian-options.org.au/2014/02/why-does-australia-need-
manufacturing-industry/