The manufacturing sector’s contribution to GDP is significant and thus an important sector to the economy (Langcake, 2017). The number of people employed in the sector are many; considering even those employed in related industries. The output produced are sold both in the domestic and international markets. It is therefore crucial to ensure that there is much development in this sector. The current contribution of manufacturing industry to GDP and employment has fallen compared to some years back (Onselen, 2014). In this research, we shall determine how increased production costs impact the economy and other macroeconomic indicators. The negative impacts of high manufacturing cost will raise the need for policy implements by the government. The article “More than 2,500 jobs to go as Toyota announces end to Altona production” obtained from the ABC News, is clearly exhibiting a situation where manufacturing firms in Australia are not able to stand the high production costs (Castro, 2017). This paper will show the various actions taken by the manufacturing firm in order to lower the production costs or rather to avoid it. Comparison of manufacturing costs in Australia and other economies will be done and determine the actions the government should take to ensure that these firms are able to continue producing the goods rather than transferring their operations abroad. The government may find this research useful for promoting economic growth.
The cost of production determines the investment level and thus the employment level. When the cost is lower, a higher number of employees get a job but when the cost is high, employment falls as some people are laid off. The cost of production has a significant influence on the inflation rate. The high manufacturing costs forces the producers to raise the price of the goods produced. This is also because at high cost the manufacturers cuts their demand level thus creating a shortage and consequently the price is increased so as to bring equilibrium between demand and supply.
Fig: Australian Labor costs
Source: Tradingeconomics.com (2017)
The initial labor costs in Australia was lower but have gone up on a rising trend from 2007 to 2016. Labor is an important input to production and thus if it’s more costly, the more costly production becomes and thus the manufacturers are forced to cut their production. The demand for labor falls when the company makes a decision to lower the output production.
In the article, the production cost has been a challenge for the Toyota Company for over three years (Castro, 2017). The company announced its decision to close its plant in Melbourne in 2017; it said there was no intension of producing beyond this year (2017). There are three factors that Toyota Company claimed to influence its decision. One is that the Australian dollar has been unfavorable; second is high manufacturing costs and lastly is low economies of scale.
The most direct impact of high manufacturing costs is experienced in terms of high output price and on the unemployment level. The article has a notion that the Toyota Company had projected to lower its employees from 4000 to 1300 after the closure of the Melbourne plant. The closure is expected to take place on 3rd October 2017. This Company that has been in operation for over 50 years is now coming to an end. Workers of this Company had been working under uncertainty as the actual date was not stated earlier. Now that the actual closure date has been specified, workers have felt some relieve since they know when they are actually going to leave the firm. The closure has one direct impact, the laid off workers in this sector and from related sectors will add up to the labor force; this raises the unemployment rate. For the whole total number of cars produced by Toyota, the highest proportion is produced for exportation whereas the rest is sold in the domestic markets. Some of the laid off workers will remain unemployed for long (structural unemployment); getting a new job may be hard for some of the low skilled workers. One of the greatest challenge that have faced this manufacturing firm is the presence of zero import tariffs. This has led to increased importation of vehicles at a lower price that the price offered in Australia (Langcake, 2017). The Australian is struggling for market both in the international and domestic markets (Robbins, Bergman, Stagg & Coulter, 2014).
According to Dowling (2017), this has reduced the demand for Australian vehicles. Initially, the exportation of cars from Australia to Thailand was on high levels but have fallen significantly. The production cost overseas are lower in comparison to Australia; for this reason the Toyota Company has moved its operation to Thailand where it has started a Camry factory. According to Elaine (2014), the Australian cost structure for the manufacturing industry is 30% higher than in US.
The closure of car manufacturing Companies in Australia is creating a shortage in the market and the cars are sold at a high price. Given the zero import tariff, the expensive Australian cars have become less desirable. Thus, these companies cannot survive by selling lower units. In order for the government to save the life of these car manufacturing companies, it should restrict importation of cars. Otherwise, the government can directly lower the costs for this firms by lowering their tax obligations.
Conclusion
The Australian manufacturing costs are very high and are discouraging production. Firms are closing down whereas others are moving to other countries where costs are lower. The zero import tariff on cars is lowering the possibility for these firm to operate in future since Australian cars are not on demand as the Australians demand cheaper imported cars. Government intervention should assist in saving the life of these firms. This is because after the closure, it may become difficult to re-establish these companies.
Castro, J. (2017). More than 2,500 jobs to go as Toyota announces end to Altona production. ABC News. Retrieved 6 September 2017, from https://www.abc.net.au/news/2017-01-31/toyota-set-to-close-in-melbourne-in-october/8227698.
Dowling, J. (2017). Why Australia’s car industry died — and what it means for our motoring future. Heraldsun.com.au. Retrieved 6 September 2017, from https://www.heraldsun.com.au/technology/why-australian-car-manufacturing-died-and-what-it-means-for-our-motoring-future/news-story/0428dc235d1b44639459959f5a3bbf9b.
Elaine. (2014). Australia has the highest manufacturing-cost structure among largest goods-exporting countries: study. Australianmanufacturing.com.au. Retrieved 6 September 2017, from https://www.australianmanufacturing.com.au/15915/australia-has-the-highest-manufacturing-cost-structure-among-largest-goods-exporting-countries-study.
Langcake, S. (2017). Conditions in the Manufacturing Sector. Rba.gov.au. Retrieved 6 September 2017, from https://www.rba.gov.au/publications/bulletin/2016/jun/pdf/bu-0616-4.pdf.
Onselen, L. (2014). Australia’s huge manufacturing labor costs. Macrobusiness.com.au. Retrieved 6 September 2017, from https://www.macrobusiness.com.au/2014/01/australias-huge-manufacturing-labour-costs/.
Robbins, S., Bergman, R., Stagg, I., & Coulter, M. (2014). Management VS. Sydney: Pearson Education Australia.
Scutt, D. (2017). Australia’s manufacturing sector is looking strong, but there are growing concerns over energy costs. Business Insider Australia. Retrieved 6 September 2017, from https://www.businessinsider.com.au/australias-manufacturing-sector-is-looking-strong-but-there-are-growing-concerns-over-energy-costs-2017-7.
Tradingeconomics.com. (2017). Australia Labor Costs. Tradingeconomics.com. Retrieved 6 September 2017, from https://tradingeconomics.com/australia/labour-costs.
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