C.Y.

Saravana Kumar

Registration No. - 1801016190149

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?

Answer:
Factors affecting the profitability of Toyota Australia were

1. 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.

2. Changes in Demand: Due to the economic crisis, and the slow recovery process,

automobile demand, in developed countries decreased. The demand in the Australian

Market itself, was rather thin – accounting for only about 1.3% total global sales (2013).

Additionally, there was a shift seen to the emerging markets, such that a shift was seen

not only geographically, but also in terms of composition of demand – a preference for

small, fuel efficient cars (an anti-thesis to the types of cars Toyota manufactured) was on

the rise.

3. 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.

4. Added Costs: High cost of labour, and the additional taxes imposed, including carbon tax

and luxury tax, further added to the cost of manufacturing in Australia.

5. Policies: With government policies adding stipulations to assistance provided, linking the

receipt of the same to investment and expenditure in research and development, more

funds were seen to be redirected to exports – competitive arena – rather than the

manufacturing, increasing the emphasis on exports.

6. Free Trade Agreements and Trade Environments: While FTA’s signed by Australia were

with the intention of improvement of trade and capital flows, assuming a win-win

situation for all, the FTAs signed with countries including Thailand, Japan and South Korea,
 proved to be highly detrimental to the Australian car industry, as partner countries used

various means to keep imported cars out of their domestic markets – including retaining

high tariffs, introducing high engine-tax duty (Thailand), imposing technical specifications

on cars entering their market, and clumsy registration processes (South Korea). This,

deterred exporting – an otherwise key component of Toyota’s sales.

7. 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.

Toyota is faced by various factors like heavy taxation, hyper competition, lawsuit

actions, high maintaining costs, higher recall losses which has made business almost

unsustainable.

Strategy to improve profitability:

The company must foremost control its brand imagery by offering higher quality

benchmarks and induce trust factors amongst customers and maintain competitive pricing and

retailer tie-ups for higher volume.

Toyota must strongly position itself as highest quality made car as per customer review.

This will generate positive word of mouth and higher revenue. Moreover, must work on

economies of scale and global standardisation strategy to cut costs drastically and improve

profitability.

Toyota Australia should practice the philosophy of steady improvement in

productivity and continuous reduction in cost, as envisioned in the Toyota Production System
 They should start producing small segment cars targeting all 2-wheeler customers to

have more market share and to avoid dependency on export. Right now, focus of Toyota is only

on high end vehicle which must be changed.

2. What is the type of market structure Toyota Australia operates? What challenges does
this market structure pose for the company?

Answer:
The market structure for Toyota is an oligopoly.

What is Oligopoly Market:

Oligopoly is a market structure with a small number of firms, none of which can keep the others

from having significant influence. A monopoly is one firm, duopoly is two firms and oligopoly is

two or more firms.

Characteristics of Oligopoly Market:

1. An industry dominated by a small number of large firms

2. Firms sell either identical or differentiated products

3. The industry has significant barriers to entry

Since the market consists of few firms that control the market; with homogeneous

products. Due to high startup costs very, few firms can enter the market.

Challenges of Oligopoly Market:

The major challenge of the market is the cartel like behavior which reduce competition

and thus reduce output. Competition from firms like Ford, and other car companies poses a

great challenge for Toyota. There are barriers to entry. Few firms dominate the market
the products are either similar or differentiated. Competition is the main challenge in this

market.

In an oligopoly may collude to set a price or output level for a market in order to

maximize industry profits. At an extreme, the colluding firms can act as a monopoly.

Oligopolists pursuing their individual self-interest would produce a greater quantity than a

monopolist and charge a lower price.

How to maximize profit in Oligopoly Market:

If Toyota in an oligopoly can successfully collude to fix prices, then they can be certain of

each other's output, which will allow to maximize their profits by producing that quantity of

output where marginal revenue = marginal cost, just as it would be for a monopoly.

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?

Answer:
From exhibit chart 4, its clearly noted that Toyota Australia is not operating at the

optimum scale of operation. They have only 13% market share in Australia in the year 2012

which can be improve to minimum of 20 – 25% with their brand loyalty. Toyota should expand

their scale of operation to increase the market share to survive.

Possible Courses of Action, and their consequences:

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. If not, in the best

interests of the company, it might be better for them to exit Australia.