Name: Naveen Raina

Reg No: EPG35-132

PRN No: 1801016190246

Business Economics
1. What factors are affecting the profitability of Toyota Australia? Which of these factors can the company
control to improve profitability? What strategy would you suggest to improve the profitability? (10
Marks)
ANSWER:
The various cost and demand side factors affect the profitability of Toyota Australia:

Competitive and Fragmented Market: While Toyota, Holden and Ford were seen to be the major players, the
Australian market, with its low-tariff barriers and highly open trading environment, also provided easy access to
imported cars, making the market one of the most competitive, while also highly fragmented.
 Small Scale of Operations: With Australia being a very small player in global automotive production, average
cost of production of vehicles was high, due to the consequent smaller scale of operations of the manufacturers
of components, which led to them supplying components to the company at a higher cost.
Currency: With the Australian dollar strengthening over USD, and Australia’s primary exports being to GCC
countries, and being committed in USD, the overall profitability of its exports, also declined.

The ways to improve the profitability can be accounted for Possible Courses of Action, and their consequences:

Australia’s low tariff barriers and highly open trading environment made the automotive market both highly
competitive and fragmented.
The global financial crises had reduced the demand for cars in developed economies owing to their slow recovery.
Small scale production and increasing average cost of production.
According to the study, Toyota can look for more open and trade friendly economies and focus on their exports
to increase their scale of production. It should look to target developing economies as its new
export’s market.
With demand and cost conditions in Australia being unfavorable to Toyota, at present, it can make one of two decisions,
each carrying their own consequences.
 Follow Ford and Holden, and exit the Market:
 Advantages: Might be monetarily profitable to the company to shift its manufacturing unit out of Australia –
in terms especially of avoiding the high export tariffs as per existing FTAs, being freer to export – possibly also
simultaneously shifting production to the currently in-demand smaller, fuel-efficient cars.
 Disadvantages: This would result in massive job loss – not only of direct employees of Toyota, but also along
the supply chain.
 Wait for the Situation to Become Favorable:
 Advantages: With both its main competitors having exited the market, Toyota’s market share is likely to
increase further over time, if particularly, it is able to scale up its production to meet this demand.
 Disadvantages: In the short-term, the company will continue to face the existing issues
Suggestions:
 If a shift can be made, to increase production, so as to increase economy of scale profitably, beginning possibly by
meeting at least the installed capacity of 150,000 cars per annum; along with possible negotiations with the
worker’s union, to help reduce total costs; and possible negotiations with the government to further reduce overall
cost of manufacturing, for instance, to reduce import duties on imported components, or, pushing for more
conducive FTAs etc., Toyota may make an attempt to continue in the Australian market.

2. What is the type of market structure Toyota Australia operates? What challenges does this market
structure pose for the company? ( 10 Marks)
ANSWER:
In the Asia Pacific Region, Toyota on realizing that if they do not increase their Asia Pacific Network now, they likely will
be left behind soon. One of the most important phenomena of last three decades has been the expansion of Japanese
business in China and the Pacific region including Australia. Today virtually all major Japanese multinationals have a
significant share in business in the Australian market. Several factors have contributed to this expansion. Improvement
of infrastructure, rapid economic development in Australia, industrial and investment policy, trade friction between
Japan and US in 1980s, the high value of Japanese Yen, high domestic labour cost, stagnation of the Japanese economy,
and rapid globalization of business are the main factors that have directly contributed to this expansion.
Toyota is mainly focused on continual improvement in environmental performance, which includes the activities that
minimize resource consumption, with effort in the areas of water and energy use. Toyota also aims to contribute to
society through its corporate activities based on understanding and Sharing of its Guiding Principles and the Global
Earth Charter. Toyota Australia is also trying to create a safe and energetic work environment, based on the
fundamental policy that lacing safety first is everyone’s responsibility, from senior executives to every employee at the
workplace.
After 1980, Japanese direct investment in Australia developed firmly, centering on consumer Electric appliances and
electronics and automobiles. This was related to the fact that the economic de-elopement and the GDP growth in
Australia in the 1980s were largely dependent on the growth in the manufacturing and value-added industries. Due to
this fact, Toyota’s direct investment not only contributed to the economic growth of Australia, but also to the growth
of manufacturing industry in different states of the country.. At this stage, Toyota promoted their direct investment in
Australia with a clear intention to form strongholds for the production and supply which would meet the fast expansion
of the domestic market, and further, to make them the bases for the re-export to the assembly manufacturing
industries in Asia. This also meant that they would serve as the key holds for the final product export to other foreign
markets. The latter roles were significant in the strategies of division of labour between different products in response
to the globalization market, beyond the concept of local market-oriented strategy.

Market trends Major recent developments in the Australian automotive industry operating environment include:·
 The depreciation of the Australian dollar against the US dollar and the Japanese Yen. This has also seen European
currencies improve their relative position against the Australian dollar.
 High exposure to currency movements is an unacceptable risk factor for automotive companies which source
significant components from Japan and the USA.
The depreciation of the Australian dollar is supporting a major push to increase local content levels in Australian
produced vehicles. The need to boost local content levels means that now, more than ever before, a strong domestic
component and materials supply base is crucial to the success of the four vehicle manufacturers. This depreciation is
providing an opportunity to locate new investment in Australia. It does not, however, provide a sustainable advantage
to manufacturers. This can only be achieved through operating at world class levels. A strong domestic market base is
essential to the industry ability to exploit scale and scope economies and to justify further investment in capacity and
capabilities.
A significant and stable domestic market is essential for a viable automotive manufacturing base in Australia. Toyota
Australia considers exporting 50% of production to be maximum sustainable level, and the maximum level at which a
case can be made to locate new manufacturing investment in Australia. Overseas markets are more unstable and carry
more risks. Without a large and stable domestic base, Australian operations cannot readily absorb fluctuations in
export sales. Offsetting the falling domestic market sales have been increasing levels of export sales. In 1996, only
39,000 completely built up vehicles were exported from Australia, representing only 12% of vehicle production of
325,000 units27. In 2001, exports reached 109,000 units, representing 30% of vehicle production for the year. Growing
export sales have allowed domestic production to remain above 350,000 vehicles in 2001. The growing export
orientation of the vehicle manufacturers in recent years has been followed by the component sector. Many of these
companies could not justify the investment required to export without a sizeable domestic market base.

Challenges:

Several government policy changes over the past five years have had a significant impact upon the Australian
automotive operating environment. The most significant of these policy changes have been:
 The reduction of tariffs from 25% in 1996 to 15% in 2000 on passenger motor vehicles.
 Scheduled fall in tariff to 10% on 1 January 2005.
 The removal of the 22% motor vehicle wholesale sales tax and the introduction of the GST at 10%.

The reduction of tariff rates has seen import competition intensify further, and a continuation of the long-term decline
in domestic passenger vehicle market share of the four Australian vehicle manufacturers. Australia has one of the
most open market access regimes in the world and is substantially more open than other countries in the Asian region.
The introduction of ACIS has had a range of positive impacts upon the automotive industry. These include as dicusssed
below:
 Underpinning volumes (and hence jobs, and exports) in the industry pending greater overseas market access
being achieved. This is particularly important for companies such as Toyota Australia that make truly global
products and requires volume to justify investment in technology and capabilities to compete in an
increasingly open market.
 Supporting efforts by component producers to dramatically increase their innovation capabilities.

Overall the industry has responded well to the replacement of the EFS by ACIS. Although ACIS was a significant fall in
support levels compared to ACIS, particularly for an exporter such as Toyota, exports have continued to rise, as has
investment and R&D. The removal of the 22% motor vehicle wholesale sales tax and the introduction of the GST at
10% has further boosted vehicle affordability in Australia. Improvements in the general economic environment saw a
step change increase in the size of the domestic vehicle market.

3. Is Toyota Australia operating at the optimum scale of operation? Should Toyota expand or contract its
scale of operation? What are the associated implications? What should Toyota do? Should it wait for
demand and cost conditions to improve, or should it exit the market? (10 Marks)
ANSWER:
Recognition of the powerful knowledge and innovation spillovers associated with the automotive industry have
seen it long treated as a special case in many developed and developing economy countries. Although automotive
industry policy varies between countries and have evolved over time, internationally policy settings are still
aggressively geared to attract and retain automotive investment. The policy settings currently in place in Australia,
and the ACIS program, allow Toyota Australia to continue to compete for new investment. However, the lack of
progress being made in relation to improved access to major export markets (including Australia’s exclusion from
AFTA) and the planned reduction in tariffs will constrain its ability to successfully compete for investment. The
continued erosion of the domestic market sales base for locally produced vehicles, which is in part due to the highly
open nature of the Australian vehicle market relative to many of our overseas competitors, also poses a major
threat to future investment. Given these disadvantages relative to alternative investment locations, it is vital that
an equivalent program to ACIS be introduced once it expires.
Toyota Australia’s aspiration is to establish a sustainable position as one of Toyota’s global manufacturing, product
development and export centers in Australia. Toyota Australia aims to be number one in everything it does. Toyota
Australia believes that the improvements in performance achieved in recent years, coupled with the increasingly
globally integrated nature of the automotive industry present the company with a window of opportunity to
achieve significant growth.
To reach this position within the global Toyota network, it is important that Toyota Australia offers sound prospects
for profitable future growth both in domestic and export markets. Such growth will underpin investment to build
the greater production capacity required to service market growth. Toyota Australia is also looking to take on new
functions within the global Toyota network. Toyota Australia must also now be pro-active in approaching Toyota
head office with new ideas for the roles that the company can take on. To do so, it is important that not only does
Toyota Australia meet, or exceed, Toyota global quality and efficiency standards, but also that the policy
environment in place in Australia is competitive with that in other competing production centers.

CONCLUSION:
The major investment in the Altona plant in 1995, and subsequent investments to prepare to produce the Avalon
in 2000 and the launch of the new model Camry in the third quarter of 2002, demonstrates Toyota’s long-term
commitment to car manufacturing in Australia. Toyota Australia is now positioned to make a considerable ongoing
contribution to Toyota’s global production and export activities. To fulfil its aspiration to establish a sustainable
position as one of Toyota’s global manufacturing, product development and export centers, Toyota Australia has
ambitious production and sales goals for the remainder of this decade.