Activity 10i: The demise of car manufacturing in Australia
- With a small population size of approximately 27 million people, means that the size of the domestic market is relatively small by international standards. This results in it being relatively difficult to achieve economies of large-scale production. As a consequence, the per unit costs to produce motor vehicles in Australia were relatively high which made it very difficult for Australian motor vehicle manufacturers to compete against the ever decreasing price of imported vehicles.
- The morning boom and the accompanying rise in commodity prices and the terms of trade resulted in a relatively large appreciation of the Australian exchange rate. This further reduced the ability of Australian manufacturers to compete against imported motor vehicles given that the higher dollar reduced the prices of all imports, including motor vehicles.
- While protectionist policies are designed to protect local industries and employment, they ultimately backfire to the extent that they lead to an increase in the cost structure of the economy, which raises prices and serves to reduce international competitiveness, negatively impact on employment growth, and reduce both income and living standards. This is largely because protected industries, such as the motor vehicle industry, become relatively less efficient over time given that they are protected from global competitive pressures. This is compounded by the fact that protection encourages retaliation and ultimately results in higher cost of imported inputs, adding to production costs and prices in the economy.
- Dynamic efficiency can be defined as the rate at which businesses or institutions can move the resources from one activity to another in response to a change in market conditions. Businesses are said to be dynamically efficient if they can easily move resources in production from one activity to another. For example, during the COVID-19 pandemic, some businesses, such as alcohol producers and producers of cleaning products, were able to quickly move resources into the production of hand sanitizer.
- In response to changes in tastes and preferences of consumers, motor vehicle manufacturers were slow to adjust production away from larger cars towards the production of smaller cars that were in relatively higher demand. Other factors also provided evidence of a lack of dynamic efficiency, including an inward looking industry as well as the general effects of lower protection over time.