Term – II

MGT 405 – BUSINESS ECONOMICS

CASE STUDY – TOYOTA AUSTRALIA IN PERIL
1. What type of market structure is Toyota Australia operates? What are the
features of this market? What challenges does this market structure pose
for the company?
Ans: Perfect competition, Monopolistic competition, Oligopoly and Monopoly
are the four-basic type of market structure. Oligopolistic type of market
structure is being practiced in automotive industry in Australia. This is a
combination of monopoly and competitive market structure. Globally, Toyota
had occupied the largest market share. From customers Toyota face an inelastic
demand, which in turn reduces prices but there is not much impact on the
market share but there will be a fall in the overall revenue.
Features of Oligopolistic type market
I. Interdependence: This is the foremost characteristic of the various firms
in decision making, which is recognized by all firms of oligopolistic
industry. In case of small number of sizeable firms form an industry, and
if those firms constitute an industry and one of these firms starts
advertising campaign on a big scale or design a new model of product
which immediately works out in market, it will provoke countermoves on
the part of rival firms in the industry. So, different firms are closely
interdependent on each other.

II. Advertising: Rather than other firms in the industry under oligopoly a
major policy change on the part of a firm id likely to have immediate
effects. If there is any new initiative or new policy changes the rival firms
will be all time vigilant. So, in oligopoly advertising is a powerful
instrument.

III. Group Behavior: Behavior from the group is very important in this type of
market structure. Under perfect competition there are many firms where
each firm will try to maximize their profits.
 IV. Competition: Presence of competition is another feature of oligopolistic
type of market. Rivals are affected as few sellers move by one seller
immediately. So all seller will always be on high alert and in order to give
a counter move the competitors will have a close eye on rivals.

V. Barriers to Entry of Firms: There is no barrier to entry or exit from

oligopolistic industry for the sellers. But on long term there are some
constrains which tend to restrain new firms from entering the industry.

VI. Lack of Uniformity: Firms differ considerably in size. Some very small and
few vice versa. This is asymmetrical. It is very common in American
economy.

VII. Existence of Price Rigidity: Each firm will stick to its price. If any firm tries
to reduce price, due to competition, the rival firms will go on higher
reduction in their prices, which will lead to the price war in the market.
On the other case if a firm increases its price to increase their profit, the
rival firms will not increase their cost. The price rigidity will take place.

VIII. No unique pattern of pricing behavior: Since each firm wants to be

independent and to have more profits the ideas will lead to different
conflict motives. Uncertainly, they act and react on the price output
movements of one another. This leads to monopoly within oligopoly.
Having conflict, it is impossible to predict any unique pattern of pricing
behavior in this type of market

IX. Indeterminateness of demand curve: Other than oligopoly, demand curve

faced by a firm will be determine in other type of market structures. It is
impossible to draw a demand curve except for such sellers in the situation
where the form of interdependence is well defined.
Challenges faced by Oligopoly type market structure
Lack of scale opportunity is one of the biggest challenges that Toyota and other
companies face in the market structure. Cost of production will get lowered with
respect to increase in production. In other words, if there are more output
demands there will be more inputs. This requires mainly improved technical
skills, innovations etc. Thus, product quality will be improved. Until then
companies should bear the input costs.
Large concentration decreases market variety. Cartel-like activity decreases
rivalry which can lead to higher prices which decreases the productivity.
Oligopolists may be free to participate in the exploitation of consumer decision-
making, given the lack of competition.
Customers fall back on methodologies and rule of thumb processes by making
decisions more difficult, such as financial decisions regarding mortgages, which
may contribute to decision-making bias and irrational conduct, including making
transactions that do not add much utility or even harm the individual customer.
Because of intentional barriers to entry, businesses may be discouraged from
entering a market.

2. What factors are affecting the probability of Toyota Australia? Which of

these factors can the company control to improve profitability? What
strategy would you suggest improving the profitability?
Ans:
Factors affecting the profitability of Toyota Australia
I. Australia’s low traffic on imported vehicles: This allows clients quick access
to other imported vehicles that influence Toyota 's sales.

II. Other emerging markets: The demand in Australia did not improve due to
the global financial crisis and the emphasis moved to other emerging
markets such as China, India & Brazil.
 III. Change in the demand: The pattern shifted to small & lightweight fuel-
efficient vehicles, which differed from the development of the Toyota.

IV. Low production scale: The limited production size kept production costs
high. As it remained high because of low supply, it also had an impact on the
prices of local components needed to produce vehicles.

V. Policies by importing countries: Importing countries such as Thailand and

South Korea, which held Toyota goods away from those markets, imposed
high tariffs.

VI. High cost of production: The high production costs are compensated for by
high labor costs and other taxes.

VII. Currency: High labor costs and other taxes account for the high production
costs.

Factors that control to improve the profitability:

➢ Exiting the market can be a step-in improving Toyota 's profitability as
moving the manufacturing plant from Australia would help escape export
tariffs in compliance with the new FTAs.
➢ Another alternative may be to wait for the situation to become normal.
Toyota's market share is likely to grow more over time, particularly if it can
scale up its production to satisfy this demand.
➢ It can increase sales and thereby make it more profitable by adjusting
production to trend and demand for small and compact fuel-efficient cars.
➢ Increase the production size by improving the performance and use of
modern technical developments that can further increase the number of
production units.
➢ Reducing manufacturing costs by reducing the extra cost of labor and taxes.
Strategy that can be used to improve the profitability:
➢ A change can be made to increase demand, which ultimately increases
Toyota 's revenue, thus increasing efficiency. This could be achieved by
increasing the capability of cars built.
➢ Negotiating with the employee union will help to reduce the overall
expenses
➢ If talks with the government will somehow take place in order to reduce the
overall costs and import duties on imported components and press for better
FTAs.
➢ It could be safer for Toyota to abandon Toyota if nothing happens.

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?
Ans: Toyota Australia did not run on the optimal scale because of the losses they
suffered. For many factors, such as FTAs, government policies, tariff rates, etc., in
order to be profitable, it became a requirement to increase the production size. In
order to extract income, Toyota began exporting the produced vehicles to other
countries such as the Middle East, South Korea, Thailand, etc. to increase its
revenue.
But, because of government policies and export duties, things did not work too well
after a while. The only way out was to lift the price of the lower supply.
Increasing the output scale was a key to profitability that they were unable to meet
at the optimum stage. Their solution to the economic crisis was to raise the size of
operations and decrease the cost of production per unit. The work could have been
achieved by raising the production size to 15,000 cars a year and reducing the
production cost by $3800 a vehicle.
In order to thrive in Australia and to prevent losses, Toyota should certainly
increase the size of operations and minimize production costs. Otherwise, it is safer
to exit the Australian market and turn production to new fuel-efficient vehicles with
more flexible policies in another region.
Increasing the production size means using modern, efficient technologies to
improve productivity in order to produce more vehicles. Growing the supply often
means reducing the cost of local components purchased as the costs decline as the
supply rises.
The limited production volume kept Australia's average vehicle production cost at
a higher level and had a negative effect on the volume at which component
manufacturers worked in Australia and the cost at which they were able to supply
components.
The reduction of manufacturing costs requires the reduction of wages and
additional taxes. High labor and other tax costs are due to high production costs.
Improving performance, reducing the cost of producing cars, improving
organizational and producing efficiencies and optimizing the sales of the vehicles
produced are important.
The limited production volume kept the average cost of vehicle production in
Australia at a higher level and had a negative effect on the volume at which the
component manufacturers were working in Australia and the cost at which they
were able to produce the components.
If a change can be made to increase production in order to increase profitability in
the economy of scale, likely starting by reaching at least the installed capacity of
150,000 cars per year; along with potential negotiations with the government to
further reduce overall production costs, pressing for more conducive FTAs
et./Toyota will attempt to continue on the Australian market. If not, it would be
safer for them to leave Australia in the company's best interests.
4. What should Toyota do? Should it wait for demand and cost conditions to
improve, or should it exit the market? Give reasons.
Ans: Toyota can increase the size of operations and minimize production costs in
order to survive in Australia and to avoid losses. Otherwise, leaving the Australian
market and shifting production to new fuel-efficient vehicles in another region with
more flexible policies is better.
Increasing the size of production means using new , efficient technology to increase
efficiency so that more vehicles can be made. Growing the supply also means
reducing the cost of the imported local components as the cost declines as the
supply increases.
The restricted production volume kept the overall production cost of Australia 's
vehicles at a higher level and had a negative impact on the volume at which
component manufacturers operated in Australia and the cost at which parts could
be supplied.
Reducing the cost of production requires a decrease in salaries and additional
taxes. High labor and other tax costs are caused by high manufacturing costs.
It is necessary to improve performance, reduce the cost of manufacturing cars,
improve organizational and efficient efficiencies, and maximize the sales of the
vehicles generated.
The restricted production volume kept Australia's average vehicle production cost
at a higher level and had a negative impact on the volume at which the component
manufacturers worked in Australia and the cost at which the components could be
produced.
If a move to increase production can be made in order to increase profitability in
the economy of scale, potentially beginning with at least 150,000 cars per year of
installed capacity; along with possible agreements with the government to further
reduce overall production costs, pressing for more conducive FTAs et./Toyota
would try to continue on the Australian market. If not, leaving Australia in the best
interests of the company would be better for them.
In order to increase demand, a shift can be made that eventually improves the sales
of Toyota, thereby increasing performance. By increasing the capacity of cars
produced, this could be done. Negotiating with the employee union would help to
decrease the total costs. If there are negotiations with the government to reduce
total costs and import duties on imported components and push for better FTAs, it
will somehow take place.

When nothing happens, it might be better for Toyota to leave Toyota.