Discuss about the Costs of Production in Manufacturing Industry in Australia.
The article is discussing challenges car manufacturing companies such as Mitsubishi, Ford, Holden, and Toyota are facing in Australia. These companies want to move their assembly line to other countries due to the high cost of production in Australia. The stakeholders in this issue are of course car manufacturing companies, suppliers, tens of thousands of Australians who will lose their jobs as well as the Research and Development (R&D) sector that is greatly influenced by the motor vehicle industry.
The higher cost of production in Australia’s car manufacturing industry is due to several things (Valadkhani, 2016). These car manufacturing companies are looking to move into cheaper production inputs overseas including both labor and parts because the country’s market is not sufficiently large which makes it impossible for the manufacturing industry to exploit the economies of scale fully. Australia’s domestic market is weak due import tariffs that are too low as well as Free Trade Agreements; unions asking for higher wages and better working conditions; the appreciation of the Australian dollar. The cost of production in the car manufacturing industry in Australia cannot be compared to that of countries in Asia especially when it comes to labor costs.
The article is very simple and focused which makes it easy to understand the different issues it is discussing, issues that are often difficult to identify in other articles because they are too focused on painting the car manufacturers as the evil ones for wanting to exit the Australian market. The whole point of the article is, car manufacturers such as Mitsubishi, Ford, Holden, and Toyota want to exit the Australian market because the opportunity cost of operating in the country is way too high. If this happens, a lot of people will lose their jobs which will significantly affect the unemployment rate regarding supply and demand as workers will be available but employers will be limited (Sherk, 2013).
The Australian government is too focused preventing monopolies and unfair practices that it has developed unnecessary regulations and quotas that have interfered with the natural process of equilibrium that is supposed to exist in a perfectly free market and has resulted in inefficiency that could have easily been avoided. Further, the Australian government seems to be taking the comparative advantage approach with too low import tariffs and too much free trade agreements which greatly put car manufacturers at a disadvantage. Another problem involves the companies’ variable costs most especially when it comes to labor. Labor unions are asking for unreasonably high wages and conditions that do not correspond with the companies’ level of output. This situation resembles that of a monopoly because labor unions are selling labor to these companies at a very high price, prompting them to hire less labor than they would in equilibrium which affects their production capabilities (Library of Economics and Liberty, n.d.). The appreciation of the Australian dollar is another problem that is making exporting parts more expensive and imports way cheaper due to lower inflation.
The appreciated Australian dollar has also caused a fall in the domestic Aggregate Demand (AD) due to lower demand in exports and greater spending on imports. As a result, it has slowed the market growth in the country which has prevented car companies from fully exploiting economies of scale.
There are various things that the car manufacturing companies could do to reduce the cost of production without withdrawing from the Australian market. The cost of production can be reduced by decreasing the number of platforms (critical structures in forming the base of various automobile models) that are used in producing vehicles. Producing a greater number of models using a common platform will considerably reduce the high number of expenditures that designing and developing multiple platforms would require (Sedgwick, 2014). Further, producing on a larger scale will reduce the manufacturing cost per vehicle. Car manufacturing companies could also develop strategies that will increase the commodities of parts and components used in their vehicle models including decreasing model variations as well as the number of parts that are used in their models. Further, adopting the design approach where associated parts are treated integrated systems could also comprehensively reduce production costs.
The government needs to intervene and support the car manufacturing industry which will give car manufacturer additional power in order to get rid of the unsustainable wages and conditions set by the unions through negotiations or by taking the matter to the Federal Court. Another way the government could intervene is by backing these companies in the creation of their union and increase subsidies which will secure the future of the car manufacturing industry as it is too important to let go. Another way the government could support the can manufacturing industry is offering tax incentives such as tax deductions on Research and Development (R&D) and exports (Davison, 2013).
This article is very useful; it is opening people’s eyes on what is happening with country’s economy. It would be disastrous if these companies were to go through with their decision of leaving the Australian car manufacturing industry. A lot of people’s livelihoods in Australia depend on manufacturing companies like Mitsubishi, Ford, Holden and Toyota’s capabilities to stay in operation. That would not be possible if domestic market conditions in Australia remain unsustainable. The car manufacturing industry is Australia does not have productivity problem, it has an immeasurable cost barrier that the government seems to be contributing to by setting import tariffs that are too low and signing too many Free Trade Agreements that do not make a lot of difference to exports because of internal tax exercises (Kohler, 2013).
The appreciation of the Australian dollar does not help things either especially when it comes to imports and exports; exporting parts will be too costly for these companies which will make their products too expensive for consumers; as a result, they are turning to imported products that are cheaper. Australia is simply too expensive to operate in so it makes sense for these companies to look elsewhere for better conditions. However, this event would not be good not only for the employment rate but for other sectors such as the Research and Development sector that work hand in hand with the car manufacturing industry.
Davison, R. (2013). Fact Check: do other countries subsidize their car industry more than we do?. Retrieved from https://theconversation.com/factcheck-do-other-countries-subsidise-their-car-industry-more-than-we-do-16308
Kohler. A. (2013). Subsidizing the car industry to death. Retrieved from https://www.abc.net.au/news/2013-10-16/kohler-car-industry/5025360
Library of Economics and Liberty. (n.d.). The 51 Key Economics Concepts. Retrieved from https://www.econlib.org/library/Topics/HighSchool/KeyConcepts.html
Sedgwick, D. (2014). Carmakers bet on big global platforms to cut costs. Retrieved from https://www.autonews.com/article/20140804/OEM10/308049988/carmakers-bet-on-big-global-platforms-to-cut-costs
Sherk, J. (2013). Supply and Demand: Why Job Growth Remains Sluggish. Retrieved from https://www.heritage.org/jobs-and-labor/report/supply-and-demand-why-job-growth-remains-sluggish
Valadkhani, A. (2016). Collapse of Australian car manufacturing will harm R&D in other sectors: study. Retrieved from https://theconversation.com/collapse-of-australian-car-manufacturing-will-harm-randd-in-other-sectors-study-66984