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1- Comparison between the wages in Australia Manufacturing and Thailand or another country that Toyota operates a plant
Solution
Introduction
After half a century of operation, the leading vehicle maker Toyota decided to stop car manufacturing in Australia by the end of 2017. In like manner, General Motor and Ford made the 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 reasonable motives behind this withdrawal. Including the exchange rate, high wages, and economic factors of Australia, economies of scale also seems to be one of the most influential factors in the companies’ decision (Griffiths, 2014). This essay will critically analyze the application of economies of scale in car manufacturing industry, besides analyzing the factors that influence companies 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’s production starts to reduce with increased production (Baye, 2010). Focusing on producing the optimal level of output to reduce the cost by car production companies is substantial to be competitive enough to sustain in the market. Producing in low volumes can be viable only in case the company decided to focus on niche vehicles, which its unit costs can observe by the high-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 minimized. In Australia, carmakers should produce minimum 250,000 vehicles per year which is the MES value in order to 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 making 90000 cars in 2015 (Dowling, 2015). As the companies are operating below the MES they will incur higher AC than optimal.
The graph bellow can show how far total production of cars in Australia is from this target level. It also shows a reduction of the production volume over the period, which signals that there are some obstacles, faced car producers in Australia.
Figure 1a: Source: (FCAI, 2016)
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Figure 1b: Source: (FCAI, 2016)
Production costs, causes a major issue in achieving EOS. Relative with other countries in the world, the costs of vehicle production in Australia are significantly higher. Another factor that added to the problem is the high wage rate in Australia that raised the operating cost for the company 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 by Gereral Motors, which 80% derived by wages (Griffiths, 2014). Today vehicle manufacturers are shifting their operations to regions with low wages and growing demand such as India and China, so it will be unviable for the three car producers in Australia to continue their costly production while other competitors can benefit from low costs.
Ford, Toyota, Holden and many other automotive component manufacturers have enterprise agreements in place and some have different agreements for different groups of employees (Australian Government Productivity Commission, 2014). The comparison of wages in the manufacturing sector in Australia and Thailand is as below:
Figure 2: Source: (TradingEconomics, 2016a, 2016b)
Apart from this, the global competition in the automobile industry is certainly fierce, and the economic conditions in Australia have not been supportive enough for car producers to afford the competition. The unaffordable exchange rate of Australia makes exports of goods and services certainly unviable (Maggo, 2015). The appreciation in its exchange rate causes a reduction in aggregate demand for cars. When dollar increases, exports become expensive to purchase by foreigners. Therefore, local car manufacturers were unable to make profits from exports, especially that they have to compete against their global parents’ affiliates. In addition to that, they have also loosed their local sales due to the fragmentation of the Australian market. It is one of the most open markets with low barriers for imports resulted from free trade agreements. This market structure alongside with the strong exchange rate limited the sales of the three car producers in Australia, although they have the highest selling cars (Amiti, 2016). Many local customers in Australia are now buying from the low priced imported cars, which are subject low or zero tariff by the government. This shift in the market limited the sales of Australian- based cars, and that can be note from the following graph.
Figure 3: Source: Data from Performance Drive and FCAI
Since 2008, the biggest profit that Toyota has made in Australian automobile industry after tax is $194 million, and in the last six years, the company has only been able to make a profit twice and faced a loss in all other years (Dowling, 2015). This really shows that after trying its best, Toyota could only make profit twice and mainly had to bear the high manufacturing costs and losses associated with these costs as they did not have government subsidization anymore and this may have been a factor in the decision to exit. Although the production level of Toyota has been impressive and the company made 90,000 cars in 2015 that was five times more than Ford, the cost of production was high that did not allow it to achieve EOS (Kewk, 2014).
There are a variety of reasons caused the regression of Toyota and other automotive producers to in Australia and lead them to decide to shut down their production. These reasons included increased wages in the country, high exchange rate, an unfavorable rate of the Australian dollar and other economic factors. The most dominant reason behind this decision is the inability of the companies to achieve the EOS. EOS enables a company to reduce its average cost with increased production. However, this did not happen in the case of Australian- based producers who faced excessive pressure from their competitors in the global market. As a result, they were unable to gain a competitive advantage. In conclusion, it expected those car producers would move after Australia to low-cost countries that have a favorable exchange rate and cheap labor costs as well (Griffiths, 2014). This will allow a better condition for Toyota and other companies to adjust their production in order to attain EOS and be able to sustain in the competition.
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Amiti, M. (2016) What impact do exchange rates have on domestic prices? [online]. Available from https://www.weforum.org/agenda/2016/04/what-impact-do-exchange-rates-have-on-domestic-prices
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Australian Government Productivity Commission. (2014) Australia's Automotive Manufacturing Industry – Inquiry [online] Available from: http://www.pc.gov.au/inquiries/completed/automotive/report
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Baye, M. (2010) Managerial Economics and Business Strategy 7th ed. Singapore: McGraw-Hill
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Dowling, J. (2015) Toyota Australia posts $194 million profit after announcing factory shutdown in 2017 [online]. Available from http://www.news.com.au/finance/business/manufacturing/toyota-australia-posts-194-million-profit-after-announcing-factory-shutdown-in-2017/news-story/ddd8db2bedfa83c6af0c935ea8bdb372
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Griffiths, E. (2014) Toyota to close: Thousands of jobs to go as carmaker closes Australian plants by 2017 [online]. Available from http://www.abc.net.au/news/2013-12-11/holden-to-cease-manufacturing-operations-in-australia-by-2017/5150034 [5th Oct 2016]
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Husan, R. (1997) ‘The continuing importance of economies of scale in the automotive industry’. European Business Review 65 (4), 721-753
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Kwek, G. (2014) Don’t blame the dollar: Toyota exit was inevitable, say economists [online]. Available from http://www.smh.com.au/business/dont-blame-the-dollar-toyota-exit-was-inevitable-say-economists-20140210-32cym.html
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Maggo, V. (2015) ‘Toyota is leaving Australia’. Indian journal of applied research 5 (9), 362-364
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TradingEconomics. (2016a) Australia Average Weekly Wages In Manufacturing [online]. Available from: http://www.tradingeconomics.com/australia/wages-in-manufacturing
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Tradin Economics. (2016b) Thailand Average Monthly Wages in Manufacturing[online]. Available from: http://www.tradingeconomics.com/thailand/wages-in-manufacturing
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