Aussie Car Industry: Diseconomies of Scale.

You will no doubt have covered economies and diseconomies of scale in a some form in economics courses. A recent example of the latter is the car manufacturing industry in Australia with Mitsubishi, Ford, Holden, and Toyota all closing, or in the process of closing, manufacturing operations.

At the turn of the century Australia produced over 400,000 cars a year but this was soon halved to 200,000 by the end of 2013. The global market has become ever smaller and Australian car manufacturers have struggled especially as consumers now want less of the gas guzzling V8’s to middle of the range, fuel efficient cars. Holden and Ford haven’t focused on these models. Some of the key points responsible for their demise:

1. In order to achieve economies of scale car plants need to be producing at least 200,000 cars a year – most plants in Australia produce 100,000.
2. Car plant employees in Australia earn very high wages and only German workers earn more.
3. Manufacturing costs in Australia are 4 times greater than Asian manufacturers and 2 times that of European plants.
4. The resource boom has meant the AUS$ has appreciated which has made Australian exports more expensive. With a lot of spare capacity in the global market for cars prices are very competitive.
5. For a long time generous state handouts have kept the industry solvent. That has now dried up.

Below are graphs explaining economies and diseconomies of scale.

Economies Diseconomies

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