Question

Driving the Green Car Market in Australia

High fuel costs and concerns over climate change are just two factors that have caused Australia’s once-booming automotive Industry to stall in recent years. Although car exports stood at a respectable $5.2 billion in 2008, making it one of the country’s top ten export earners ahead of more traditional exports such as wine, wheat, and wool, there has been a significant change in consumer preferences. While the market was once dominated by demand for large passenger cars, consumers both domestically and abroad now want smaller cars with lower fuel consumption. As well as demands for change from car buyers, the industry has also been facing the double whammy of pressures on costs from within. Longstanding plans to cut trade tariffs and quotas that had protected the industry since 1985 have been causing alarm about what the future might hold because there is now even less incentive to build cars locally. Although the automotive industry around the world has been suffering in the deep financial downturn of the time, any further pressure on Australian car manufacturing would undoubtedly have a devastating effect. Australian carmakers build about 320,000 vehicles a year and employ about 65,000 people. Many others are also engaged in associated industries that benefit from the large market. When Mitsubishi closed the last of its manufacturing plants in 2008, leaving just three automakers operating in the country (local subsidiaries of Ford, Toyota, and General Motors), the government could see it was time to act. To add a sense of urgency, Ford Australia announced plans to cut 450 jobs, as industry figures showed car sales down 11 percent from the year before. The solution was a proposal to spend $3.4 billion between 2011 and 2020 on a fund to transform the Australian automotive industry into the green car market. The intention is to use the fund to help the manufacturers still involved in that country with thecosts of developing new technologies for alternative energy vehicles and encourage them to make any existing environmentally friendly models in Australia. The initiative caught the attention of Japanese car giant Toyota, which is one of the many international automakers racing to offer more fuel-efficient models in the wake of fuel prices hitting record highs around the world as well as increased environmental concerns. Toyota’s business plan is to reach a target of selling 1 million hybrid cars by the early part of the next decade, and to accomplish this goal, it needs to more than double production of the vehicles. The Japanese company was already buildingm its Camry hybrid in Japan, as well as in Kentucky in the United States and in a joint venture factory in China. In 2008, thanks in part to the strength of the Australian dollar, it had been weighing an alternative plan to import engines to Australia from its Kamigo plant in Japan.

In September 2010, after months of discussion, Toyota announced a $300 million upgrade of its plant in western Melbourne. Under the investment, which has been partly funded by taxpayers through a $63 million payment from the Green Car Innovation Fund, as well as an injection of cash from the local Victorian administration, the Altona engine plant was aiming to produce 100,000 hybrid engines and four-cylinder new generation engines each year from the second half of 2012. The plan was that the Australian-made engines would be exported into other countries that manufacture Toyota’s Camry and Hybrid Camry.

Toyota’s more environmentally sustainable engines will consume 4.5 percent less fuel and produce 5 percent fewer greenhouse gas emissions than the current equivalent. The Australian government claimed that the initiative would secure as many as 3,300 jobs, including existing direct and indirect jobs, and would anchor Toyota’s operations in the country for years to come. According to Toyota executives, the support provided by the Green Car Innovation Fund was the major factor in the project going ahead when they weighed it against other alternatives, including transferring production to the home market in Japan.

Thinking Globally

7-19. What do you think were the chief factors involved in Toyota’s decision to undertake FDI in Australia rather than build its hybrids in Japan?

7-20. Why do you think Toyota decided to adapt the existing plant in Melbourne rather than build one from the ground up elsewhere in Australia? List as many reasons as you can, and explain your answer.

7-21. What do you think the decision to manufacture in Australia rather than in its domestic factories will do to the company’s reputation at home? How much attention do international customers pay to the location where their automotive are assembled?

7-22. What do you see as the pros and cons of Toyota’s approach to managing FDI?

Answer 1

7-19

Toyota’s decision to undertake FDI in Australia rather than in Japan was triggered off from the Australian policy to encourage ‘eco-friendly’ automobile technology as well as important aspects like funding ( Green car innovation fund) for ‘alternative energy vehicles’, a move aimed at protecting the environment . Since Toyota was already building similar plants in Japan and USA , it felt the appropriateness of reinventing itself in the Australian market segments since the requirements of the market suited its existing business operation plans of focussing on eco-friendly cars.

7-20

Toyota’s decision to commence its operations for an environmentally friendly car model from its existing plant in Melbourne rather than constructing a newer plant elsewhere was chiefly guided by the fact that the investment was partly by tax payers from a green fund as well as cash transfer to the plant from the local administration, it was a major relief on the cost side since the Australian car industry was heavily saddled by high costs which stood as major road blocks for the declining industry. The idea rested on exporting Toyota engines to other countries producing Toyota cars and there by lead to collaborative production. Also the fact that Australian dollar was going strong as well as the public authorities weighing on reducing tariff and trade quotas and thereby expose car industry to competition and governmental funding .

7-21

Toyota’s decision to produce locally rather than import form its home plant has been taken chiefly in view partial funding of the project by the authorities , a move to be considered and supported since the Australian car industry was already saddled by high costs and a financial downswing. In such a scenario Toyota weighed the opportunity cost of producing the engines in its existing plant rather than importing from Japan, which    was also one of the options . Although the ‘international buyers’ give their weightage to the ‘place of manufacture’, especially in cases of cars and other goods involving sophisticated technology as well as updated manufacturing process.

Moreover , had they imported the parts from Japan , it could only add to the costs which is not the objective since the Australian consumer market is seeking small cars with lower fuel usage .

7-22

Toyota’s move to revamp its automotive industry in Australia has been chiefly influenced by the ‘funding’ factor. The authorities’ decision lend financial support to the sagging automobile industry will cause tremendous impact on the existing car manufacturers. These firms will boost the levels of income and employment thereby increasing the aggregate demand. It will also lead to improvement in productivity and technology. The decision to produce in its Australian plant rather than import from other countries like Japan, will have a positive effect on costs as Toyota may benefit from T various economies of scale like financial, technical, localisation and so on. The proposal to liberalise the automobile industry by reducing quotas and tariffs will definitely lead to expansion of productive activities and will ensure Toyota’s continued presence in the Australian market.

However, the disadvantages could be that Toyota may face certain external diseconomies like high fuel costs, exchange rate violations and so on which may affect its operations in Australia. The funding offered may not be sufficient for Toyota to continue its operations. It is also vulnerable to various governmental policies and climatic factors that may cause higher damage to the already slowing down industry.