Cost Production Case of Car Manufacturing Industry

Question: Discuss about the Cost Productionfor Case of Car Manufacturing Industry. Answer: Introduction The report discusses the cost of production in the manufacturing industry of Australia. As there are different segments in manufacturing industry, this report focuses on the car manufacturing industry of Australia. The article, which is focused in this study, highlights the issue of closing car-manufacturing industry of Australia. The main reason of closing this industry is increasing cost of production. The article written by Dowling (2017) mentioned that three major car manufacturing company of Australia such as Toyota, Holden and Ford are about to shut down their production by the end of 2017. The report tries to find out the reason of shut down and the reasons for rising cost of production in this industry. Economic Analysis The main reason of closing car-manufacturing business in Australia of three companies is non decreasing cost of production. All three companies hold significant share in the car manufacturing industry of Australia. As explained by Valadkhani (2016), primary reason of closure of car production is high resource cost both in terms of labour and parts of car. Wage rate in Australia is predominantly high compared to most of the countries. A car manufacturing company needs to recruit a large number of workers in this company from production unit to supply chain units. In order to recruit this large number of employees, these companies must incur huge cost of production. As wage rate is also high in Australia due to increase in minimum wage by Australian government, it has become difficult for the loss making firms to continue operation in this economy (Hawthorne 2017). Moreover, cost of automobile parts and raw materials are high to increase total cost of production significantly. Therefor e, all these three firms have decided to shift their production unit to the overseas, where cost of production is lower. Figure 1: A high cost firm (Source: created by author) As depicted by figure 1, when firms enter into the market, market share of individual firm decreases. Therefore, as supply increases in the competitive market, price tends to decrease to P2. However if a firm fails to reduce cost in long run, it is difficult to run operation in long run. In figure 1, firm makes loss in long run as its cost structure is LAC1 whereas equilibrium is achieved at a lower price and lower cost, which is unattainable by high cost firm. Therefore, firm makes loss in the long run as LAC AR = MR = P (Shepherd 2015). Same picture is applicable for these three loss making car manufacturer. These firms have failed to compete with low cost car manufacturer in the Australian market. Holden, Toyota and Ford now try to recover the variable costs until shut down through selling car parts in the international market. Demand is another factor that drove for the shut down by three companies. Due to high costs, demand pattern in this industry is also changing (Clibborn, Lansbury and Wright 2016). Demand for car manufactured in overseas is also increasing due to technologically improved product, low cost and low price. Moreover, appreciation of Australian dollar and reduction in import tariff has made import cheaper. Therefore, demand for car manufactured in overseas is increasing. If demand is low, there is little scope of increasing revenue from domestic demand. It becomes harder for the firm to recover cost. Holden, Toyota and Ford have high cost structure that they failed to recover total cost in the face of decreasing demand (Baqaee 2015). They need government assistance to survive in the long run, which is not feasible as it increases government expenditure. As au tomobile industry has significant share in the Australian GDP, shut down of production plan might create a huge joblessness. Moreover, other sectors, which have linkages with car manufacturing industry, are also likely to have damage in their company. Recommendation There are some possible ways through which a loss making company can be saved. Adoption of low cost model in manufacturing process can be a policy. As labour is costlier as a factor of production, capital augmented production function can be adopted by the loss making companies. Capital can be used more intensively in the production process (Ofreneo 2016). However, there is a risk of increasing unemployment and labour force participation rate. It can be suggested to the Australian government to reduce the margin of minimum wage rate so that firms can recruit labour at a cheaper rate. Change in business model, which would be more consumer centric may be useful. Conclusion The report has analysed the increasing cost burden and the consequence of increasing cost in the Australian market. The article discusses the incidence of shutting down of car manufacturing industry in Australian market due to higher cost. High labour and capital cost increases total cost of production. This report has analysed causes of shutting down in details. This report has highlighted that decreasing domestic demand reduction in import tariff are another reasons for closure of auto mobile manufacturing in Australia. Recommendations have been suggested to transform loss making companied into profit making. References Baqaee, D.R., 2015. Cascading failures in production networks.See https://scholar. harvard. edu/files/baqaee/files/bailout_paper. pdf. 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. Dowling, J. 2017.Toyota confirms shutdown of its Camry factory in Altona, ending its 54 years of local car making. Available at: https://www.news.com.au/finance/business/manufacturing/holden-last-to-turn-out-the-lights-on-australian-car-manufacturing-after-toyota-announces-october-3-shutdown/news-story/0f2e2b73bdb63064b7545a23ea037dbb [Accessed 13 Apr. 2017]. Hawthorne, J. 2017.Australia's car industry one year from closing its doors. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/australias-car-industry-one-year-from-closing-its-doors-20151012-gk7ip0.html [Accessed 13 Apr. 2017]. Ofreneo, R.E., 2016. Auto and car parts production: can the Philippines catch up with Asia?.Asia Pacific Business Review,22(1), pp.48-64. Shepherd, R.W., 2015.Theory of cost and production functions. Princeton University Press. Valadkhani, A. 2016.Collapse of Australian car manufacturing industry | Swinburne news. Available at: https://www.swinburne.edu.au/news/latest-news/2016/10/collapse-of-australian-car-manufacturing-industry-.php [Accessed 13 Apr. 2017].