Business Economics MGT – 405

EPGDM – Term II
Sameer Ghoshal
Q1: What type of market structure is Toyota Australia operating? What are the
features of this market? What challenges does this market structure pose for
the company?

Answer:
Toyota Australia was operating as Oligopoly Market Structure. Which usually lies between the
pure monopoly and monopolistic competition, and few sellers dominate the market and have
control over the price of the product.

Features of Oligopoly Market Structure:

a) Interdependence, all the firms under oligopoly are interdependent and it means that action
of one firm affect the action of the other firm.
b) Competition, all the firms follow the policy of price rigidity, which results in a circumstance
where price tends to stay fixed irrespective of changes in demand and supply.
c) Nature of the Product, if the oligopoly firms produce homogeneous product like cement or
steel, the industry is called a pure or perfect oligopoly and if the oligopoly firms produce
differentiated product, like automobiles, the industry is called differentiated or imperfect
oligopoly.
d) Group Behavior, the firms tend to behave as if they were a single firm even though
individually, they retain their independence.
e) Lack of Uniformity, it is an asymmetrical situation where the size of the firms is not uniform,
some firms are very large while other firms are very small.
f) Advertising and Selling Cost, Due to heavy competition and interdependence of the firms,
various sales promotion techniques are used to promote sales of the product. Selling costs are
more important under oligopoly market than under monopolistic competition.

Challenges of Oligopoly Market Structure:

The major challenges 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, like new firms cannot enter the market easily
due to various barriers of 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.
Firms cannot take independent decisions, they always have to consider the views of other
dominant opponents in the 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.

Q2: 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:
1. Industry and Business Risks: Factors affecting competition include product quality and
features, safety, consistency, mileage, the time required for research and development,
pricing of products, superior customer service and financing terms. Increased competition
may cause lower vehicle sales, which might result in a further pressure on prices and
adversely affect Toyota’s financial health and outcomes of processes. Toyota’s capability to
sufficiently respond to the recent rapid changes in the automotive market and to maintain
its competitiveness will be fundamental to its future success in existing and new markets
and to maintain its market share.
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. Toyota dependability on suppliers for parts, components and raw materials: Toyota’s
ability to continue to obtain supplies from its suppliers in a timely and cost-effective manner
is subject to some of factors, which are not within Toyota’s control. These factors include
the ability of Toyota’s suppliers to maintain continuity of supply, and company’s ability to
successfully compete and obtain reasonable prices from suppliers. Toyota purchases parts,
components and raw materials from a number of external suppliers located worldwide. For
some supplies, Toyota is dependent on a single supplier or a restricted number of sellers,
whose replacement with another vendor may be difficult.
4. 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.
5. High prices of raw materials and strong pricing pressure on Toyota’s suppliers: Increases in
prices for raw materials that Toyota and its suppliers use to manufacture their products or
parts and components such as steel, precious metals, non-ferrous alloys including
aluminum, and plastic parts, may increase production costs for spare parts and
components. This could, in turn, negatively impact business’s future profitability because
Toyota may not be able to pass on all these costs to its customers or call for its suppliers to
absorb such costs.
6. Highly competitive vehicle financing services: The financial services industry is highly
competitive nowadays. Increased competition in vehicle financing may lead to decreased
margins. A drop in Toyota’s vehicle sales, an increase in residual value risk due to lower
used vehicle’s price, an increase in the ratio of credit losses and increased funding costs are
important factors which may impress upon Toyota’s financial services operations. If Toyota
is unable to amply respond to the changes and competition in vehicle financing, Toyota’s
financial services operations may adversely affect its financial condition.
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 has faced by various factors like heavy taxation, hyper
competition, lawsuit actions, high maintaining costs, higher recall losses which has made
business almost unsustainable.
8. 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.

Company Control Factors to improve profitability:

1. Toyota’s ability to market and distribute successfully is an integral part of Toyota’s
successful sales.
2. Toyota’s success is significantly depending on maintaining and developing its brand image.
3. Offer new innovative competitively priced products that meet customer demand on a
timely basis.

Strategies to improve profitability:

1. Toyota should continue to undertake concerted efforts to strengthen its management
platform and raise corporate/brand value.
2. Toyota has outperformed the industry over the past 11+ years and gained market share. A
shift toward smaller, more fuel-efficient vehicles, which Toyota can manufacture at a
relatively low price, will support growth in the Australia.
3. Toyota Australia should practice the philosophy of steady improvement in productivity and
continuous reduction in cost, as envisioned in the Toyota Production System.
4. Toyota should also cut out layers of middle management so that engineers get more
authority answered in the design and development of a new cars to meet specific customer.
5. 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.
6. Toyota must accelerate its export business expansion into rapidly growing emerging
countries viz China, India and Brazil by thoroughly and precisely monitoring market
conditions in respective regions and presenting products suited to the characteristics and
needs of each market. Company should also endeavor to establish production and supply
structures to realize optimum product pricing and delivery. It must enrich the value chain to
provide a wide range of customer services in each country and region.

Q3: Is Toyota Australia operating at the optimum scale of operation? Should

Toyota expand or contract its scale of operation? What are the associated
implications?

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.
2006 2007 2008 2009 2010 2011 2012
Total Market 962,521 1,049,982 1,012,164 937,328 1,035,574 1,008,437 1,112,032
Market

Locally Made 21% 19% 17% 16% 14% 14% 13%

Share of Total
Market
Toyota Sales 213,839 236,647 245,653 206,827 214,718 181,624 218,176
(incl. Lexus)
Locally Made 33,000 48,372 42,629 34,756 36,778 28,084 36,304
Toyota

Domestic Sales
Exports 80,000 97,688 101,668 63,345 82,670 59,949 74,335
Production 111,610 148,931 141,467 96,817 119,455 93,618 101,424
 Toyota, the largest Australian manufacturer, with an annual installed capacity of 150,000 units
produced just more than 100,000 vehicles in 2012 which is huge capacity under-utilization.
Toyota has to keep on producing cars in order to retain its operational efficiency as car
manufacturing plants represent a huge investment in terms of expensive fixed costs, and the
high costs of training and retaining labor. In the same year, the small scale of production kept
the average cost of production of vehicles in Australia at a higher level and led to an adverse
impact on the scale at which the component manufacturers operated in Australia and the cost
at which they could supply the components. Toyota have an adverse impact on scale at which
component manufacturers operated in Australia.

Q4: What should Toyota do? Should it wait for demand and cost conditions to
improve, or should it exit the market? Give reasons.

Answer:
Australia is a very small player in the global automobile production sphere. It produced just
more than 200,000 units of passenger and commercial vehicles, which translates into
approximately 0.25 per cent of global production. Together, the three Australian auto
manufacturers produced well below the global optimal scale of operation, which was estimated
to be 200,000 to 300,000 units of vehicle per year.

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.
I. Follow Ford and Holden, and exit the market
II. Wait for the situation to become favorable
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.

✔ If Toyota follows Ford and Holden, and exit the market, it 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.
Its closure would result in job losses not only for its employees in the manufacturing unit but
also for the subsidiaries supported by Toyota manufacturing vehicle through supply chain
linkages. Suppliers that depend on Toyota as their major customer would be further
constrained by low demand. They may even require shutting down their manufacturing units.
The resulting unemployment would greatly affect the employment situation in Victoria region.

If Toyota wait for the situation to become favorable, with both of 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.
In the short-term, the company will continue to face the existing issues. It would build the scale
of plant and operate it at a point where the average cost is at its minimum.