In Australia, the domestic market condition has become untenable due to appreciation of Australian dollars. The competition between local and imported cars intensified leading to downfall of local automobile industries since the price of the domestic cars became more expensive owing to high manufacturing costs. As a result, Australia was not able to export cars or do sales locally up to the minimum required level.
Australia signed the Bilateral Trade Agreement with Thailand in 2005 which was the second key contributing factor for the automotive industries to cease. There was zero tariff rates for cars imported from Thailand, so customers preferred to buy foreign vehicles because imported cars in the domestic market were relatively cheap when compared to Australian cars. On the other hand, the cars exported from Australia to other countries imposed five percent tariff which led to reduction of car sales.
From the chart it can be inferred that the demand for international market increased gradually over the years, on contrary there was a decline in domestic market. It is evident that the production and selling of domestic vehicles diminished in car industries.
It is extremely difficult for Australian motor industry to compete when labour cost in some Asian countries like China and Thailand are one fourth of that of Australia. Most of the cars imported to Australia come from countries that have low wages for labour as a result the production and selling cost is lowered. This indicates that foreign cars are not only coming in, but also comes from countries that is much cheaper to produce.
All these factors depict that the automobile factories in Australia faced problem related to production and cost.
Cost and production are usually linked by a concept called economies of scale. It states that the average cost per unit should decrease as the production increases.
Since the car plant cannot be installed in small units, high fixed cost is required inorder to build the infrastructure, plant and machineries. So car manufactures would need huge initial investment. As the fixed costs are indivisible, it should be spread over more output inorder to reduce the average cost for producing cars. By using the factory to full capacity, average cost will be reduced to optimal level. For instance, the initial investment for construction of Toyota plant in Altona (Melbourne) was approximately 300 million dollars which proves that enamours fixed costs are required at the initial stage of construction of the plant.