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Essay: Decision of Toyota to cease manufacturing in Australia by the end of 2017
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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.
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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 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.
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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Baye, M.R. and Beil, R.O., 2006. Managerial economics and business strategy (Vol. 5). New York, NY: McGraw-Hill.
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Besanko, D., Dranove, D., Shanley, M. and Schaefer, S., 2009. Economics of strategy. John Wiley & Sons.
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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.
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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.
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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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