Automobile Industry: Micro Economics Essay

Question:

Choose any industry and discuss the reforms done or needed in that industry.

Answer:

Introduction

In most of the industries and in case of most of the products the price and quantity of a good is decided based on interaction between the buyer of the good and the seller. But, scenario of automobile industry is much different. This sector is neither a monopoly as there are many players in the market nor it is competitive market as all firms do not produce identical product. In this industry, in short run the goods are imperfect substitutes but entry and exit barriers are on the basis of opportunities perceived in long run. The product is differentiated on the basis of quality of service, price, car segment, etc. (Cooper and John, no date)

The long term factors which are shaping this industry are stiff competition among companies, stiff regulations, and competition among countries to attract production houses. Also, because of high capital expenditure involved in terms of R&D, advertisement and factories exit opportunities are also very few and so are entry opportunities as bigger players dominate the market. The network of dealers, suppliers and vendors takes years of time to develop.

The demand factor is coming from emerging nations where demand is high as incomes are improving. Understanding demand factor, the mindset is transforming from personal ownership of vehicle to personal mobility which has brought in the concept of Uber, Ola, etc. This will decrease growth in vehicle ownership but the demand will not stop. Also, stricter regulations from governments in terms of safety, disposal of car, requirements related to emissions, labor related laws are impacting the future outlook of the industry. Big manufacturers are already moving towards Electric vehicles, FIA Formula E is an example. (Welcome to Marrakesh – formula E, 2013). There is already work being done on handling of scrap from vehicles in European nations and plans have been laid out in India too. Another impact is being experienced in the form of average fuel economy (CAFE) regulation which is being phased in by U.S. government to come at par with European and Japanese automobile leaders in terms of CO2 regulations.(Re-inventing the wheel Scenarios for the transformation of the automotive industry, no date)

Governments of various nations have taken a step in this direction of bringing reforms by coming up with stricter safety norms in cars which mandates few technologies related to safety in cars. The OEMs are already working towards it by aggressively developing this technology and trying to win this competition league. (Steinmetz, 2016). This will bring in competitive edge to these OEMs and hence benefits from government and more acceptance by the manufacturer which incorporated these safety technologies soon.

Trade, regulations in terms of finances, currency valuations, tax regulations and many other policies affect flow of automobiles to markets from factories. Governments have supported this industry in time of financial crisis by giving taxpayers credit for buying new car in return for old one. But, exporting bulky goods which comes with many kinds of import duties, taxes, regulatory scrutiny, etc and trade barriers has shifted the supply chain from import/export of finished goods to development of production facilities in demand locations that is close to sales destination. (Birr and St?cker, 2016).

Looking at automobile industry in Australia, government has always been supportive. It introduced first tariffs to encourage local producers of components. In 1950s government also came up with initiatives like import licences, concessional loans and local content arrangements. In 1970s and 80s it faced competition from Japan. So government extended support by mechanisms of import restrictions and market sharing mechanisms as part of vehicle manufacturing plans. In 1992 rationalisation took place when Nissan had stopped producing. Also, PMV manufacturers number decreased by large number which added to efficiency because of concentration and supply demand balance. New arrangements were introduced in form of Button Car Plan. 80-20 market sharing replaced with tariff quotas and there was penalty duty of 100% for imports which were out-of-quota. Local content scheme &entitlement of importing 15% of the production value duty free were retained and access to export was increased. The government desired to see industry structure soon with not more than 3 manufacturing entities which could produce only 6 models. (Commission, no date)

But, in 2000 and beyond, things reversed and now the Australian automobile sector is on verge of collapse. Because of low demand in the country things did not work for the MNCs. They are looking for cheaper production line options outside and pulling out of Australia. They are not able to exploit economies of scale. The government has lowered the import duties and have signed Free Trade Agreements which have made situation more competitive for them. The wages in Australia are high and work conditions demands too. Also, Australian dollar has appreciated. It is also expected to impact dependent jobs on this industry for Australia. It is high time government should intervene to retain these international players or government should set up budget for R&D and set up of manufacturing facility in Australia which has origins in Australia.
(Valadkhani, 2012).

The government of Australia is at cross roads where it needs to decide if it should invest more in the already dying industry even after billions of dollars it has spent in past many decades or it should let the industry die. The microeconomics of Australia is not able to support this industry and provide the needs of the three multinationals. On the other hand at global level with changing regulatory environment in terms of safety, emissions, disposal of scrap and coming up of electricity vehicles which are already being promoted by government of countries of Europe and India in form of subsidies and tax benefits is changing the way this industry will evolve. Also, the work being done by Google, Apple and automobile firms in self –driven cars is interesting to wait and watch which will define the next bar for the level of this industry in terms of regulations as well as expectations from the manufacturers and bring many reforms on the table and can also lead to collaboration between these electronic firms with automobile sector.

Article Selected:

  • - Global perspective of Automobile industry
  • - Australia’s automobile industry

References

Cooper, R. and John, A. (no date) Microeconomics: Theory Through Applications. Saylor Foundation.

Welcome to Marrakesh – formula E (2013) Available at: (Accessed: 17 December 2016).

Steinmetz, K. (2016) Government moves forward on technology to make cars safer. Available at: (Accessed: 17 December 2016).

Birr, T. and St?cker, C. (2016) The economic forces reshaping the auto industry. Available at: (Accessed: 17 December 2016).

Commission, P. (no date) ‘Microeconomic reforms and Australian productivity: Exploring the links’, SSRN Electronic Journal, . doi: 10.2139/ssrn.324623.

PwC (no date) Re-inventing the wheel Scenarios for the transformation of the automotive industry. Available at:

Valadkhani, A. (2012) Collapse of Australian car manufacturing industry. Available at: (Accessed: 17 December 2016).

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