External Analysis of Australias Automotive Industry - Case Study Example

EXTERNAL ANALYSIS OF THE AUSTRALIAN AUTOMOTIVE INDUSTRY By Student’s Name Code + Name of Course Institution City/State Professor Date External Analysis of the Australia’s Automotive Industry The automobile industry in Australia is among the major driving forces in the economy with high profitability and high employment level comprising of 3 per cent of the total workforce. This paper is the analysis of the external forces affecting the Australian automobile industry using the PESTEL analysis. The major factors that have been looked into in detail are the political factors, economic, social cultural, technological, environmental and legal factors affecting the automotive industry. Political The domestic automobile market in the country is relatively small. Reliance on the international market is therefore indispensable. In the early 90s the government introduced a policy that ensured a balance in the economy. It advocated for protection of the natural resources, agriculture and manufacturing sectors through subsidies, tax breaks, import tariffs and duty exemptions to encourage exportation (Darby 2009, p. 461). This move however is bound to have its economic downside. Firstly, the government interference distorts the operations of the free market. Secondly, the loss of the consumer welfare and finally, a substantial amount of the resources and effort is directed into lobbying activates other than economic development. The industry transformed from protectionism trade policy to liberalization in the 80s. This has enabled to exploit the niche market and be competitive on a global level (Bracks 2008, p. 43). This opened the avenue for setting up of foreign firms into the country such as a U.S. based Ford plant. Following this, between 1997- 2007, the production and exportation of the vehicles and their components increased significantly up to $ 5.1 billion. The quality of the products also improved as a result of customers’ positive criticisms (DFAT 2008). The effect of this policy is still being felt to date as evidenced by the continuing upward trend of the exports. In 2010, revenue from exports amounted to $ 3.6 billion which was 15.5% increase from the year before (ASA 2012, p. 7). Despite this surmountable statistic, in comparison to the other countries, the industry is still relatively expensive. It has never achieved a competitive advantage. The manufacturing cost of motor vehicles is still very high, leading to high prices hence less demand. The Ford Australian president announced that by 2016, Ford will exit Australia after being in operation for nine decades. This decision was made amid the continual reporting of losses. He attributed these losses to the high cost of manufacturing (Gollan 2013). The automotive tariffs were reduced making the local market fiercely competitive. Although the imports outweigh the exports by far, the industry boasts of exporting more than 40 per cent of the total production to more than 21 markets in the US, Europe, Asia and Middle East (FCAI 2008, p. 11). Bilateral and Regional Trade Agreements Despite the policies to integrate the industry with the global market, the exporters are faced with numerous barriers to access key markets. To counter this challenge the government has established free trade agreements with the US and Thailand. The reduced tariff to zero has resulted in a massive increase of imports from the two countries. The policy makers should also consider non-tariff barriers such as protection of the intellectual property and vehicle design and safety standards. Taxes Some of that taxes which have been introduced include the Fringe Benefit Tax and the Luxury Car Tax. The fringe benefit tax was unveiled purposely to increase the government revenue and to meet expenses in regard to salary packaging. The government raises approximately $4 billion annual revenue from it. The luxury car tax was increased from 25% to 33%. There are concerns to have the tax abolished on grounds that it is imposing too high cost on the so called “luxury cars”. Economical The Australian automotive industry is one of the few which has the capability to manufacture a vehicle from scratch. The contribution of this industry to the economy of the country is by no doubt very significant. According to Auto Skills Australia (2012, p. 6), during the 2010-2011 financial year the industry had employed 386,991 people with the majority of them employed in the repair and maintenance. Annual turnover for the same year was estimated at $209.3 billion. The wholesale sector for the vehicle parts contributes the largest amounts to this figure, followed closely by the retailing sector of the motor vehicles and the fuel retailing. Industry value added is the measure of the contribution of each sector to the economy. The automotive industry contributed approximately 27 per cent to the economy. In regard to exportation, the economy has been performing very well. Particularly for the year 2010-2011, the total imports from the industry were approximated at $3.6 billion which is a remarkable increase of 15.3% from the year 2009. Of this amount the export of the vehicle was $2.1 billion with the remaining balance generated from the export of spare parts. The imports for the year amounted to $29.4 billion (ASA 2012, p. 6). Buying Capacity of the People According to the Australian Bureau of Statistics (2007) the motor vehicle expenditure per capita grew by 2.2% between 1985 and 2006. The average annual growth of the purchase of vehicles within the same period was 3.1%. In 2008 the industry produced a total of 324,684 vehicles. Just over 50% (162728) of this production was sold locally (MSA 2009, p. 1). It is evident that capacity to acquire motor vehicles is high. The high import expenditure also shows the ability of the people to acquire vehicles. Urban sprawl has also played a major role in changing the automobile buying pattern. In major cities such as Melbourne the rate at which suburban neighbourhoods are mushrooming is alarming. As a result people use personal cars to commute to the urban areas on a daily basis. Another factor that analyses the buying capacity of the people is employment. Australia remains one of the countries in Europe with the least unemployment rate. Recent statistics from the Australian Bureau of statistics (2013) show that the unemployment rate has remained steady at July 2013 at 5.7%. The number of the unemployed has also decreased by 5700 to 705,400. The employment rate remains high above the OECD average. The Australian Bureau of statistics (2013) revealed that country’s inflation rate was 2.4 percent in the second quarter of 2013. This consumer price index for 2013 June quarter rose to 2.4 compared to March quarter rise of 2.5. This shows the high purchasing power of the people. These factors enable the consumers to have a relative advantage in the ability to afford motor vehicles. Socio-cultural Factors A recent summit on social mobility conducted by the Sutton Trust (2012) showed that Australia and Canada are more socially mobile than their counterparts in the US and UK. The Australians and Canadians are actually twice as mobile as the Americans and Britons. This is attributed to the lesser gap between the haves and the have-nots. This means that the people are more willing to mingle, communicate and travel for visits. The difference in the social class that may act as a barrier to the social mobility is much lower in Australia. This has a significantly positive impact on the automobile industry due to the relatively high mobility of the people. Being a developed economy with low population density, favourable employment opportunities, the rich and flourish lifestyle is indispensable. Compared to other major cities such as Los Angeles and New York, cities in Australia are less congested and the lifestyle tends to be richer and fashionable. However, the country has a history of having highly priced luxury cars. This has been attributed to the high value of the Australian dollar. This explains the recent drop in the acquisition of luxury cars by 10 per cent in 2012 (Hinchliffe 2012). Despite this, the sellers of the luxury cars such as Mercedes and Rolls Royce boast about the good market in the country. Technological Factors The automotive industry is highly dependent on the technological innovation. The future of the Australian automotive industry will be shaped by the capacity to innovate and adopt the new technologies as they emerge. Since the standard of living in the country is relatively high, the industry does not rely on the low cost of production strategy as the main strategic approach to production. It heavily invests in the technology. In 2006 for instance, $650 million was invested by the industry for research and development if new and advanced technology (ABS 2008, p. 46). The investment in the research and development of the industry accounts for 10 per cent of the entire business spending on R & D. Lowering the scale to the manufacturing sector alone, the figure is approximately 20 percent. The Australian encourages the industry to invest in the research and development by offering financial assistance. For instance, of the total support offered to businesses, the automotive industry gets a 20 per cent government support. Other factors that show the improved technological innovation other than research and development is the ability to attract foreign investors and global projects in research and development. The Australian automotive industry has been able to attract Toyota, GM Holden and Ford. Cooperative societies are also in place to ensure that technology is advancing. A good example is the Cooperative Research Centre for Advanced Automotive Technology (AutoCRC) whose aim is to collaborate with researchers, government and car manufacturers to help in improving the innovation of the automotive sector. It also gets government funding. Another program is Commercialising Emerging Technologies (COMET) which helps companies to commercialize their innovations. It plays an important role in assisting early- stage innovations to give them a competitive edge over the already established entity’s. Policy makers have also assisted the industry improve its research and development projects. They have in place R & D tax concession which is a scheme which offers a tax deduction for any expenditure which has been incurred in the research and development. The rate is 125 percent. This tax deduction, however, is not specific to the automotive industry but is available to all companies in general. The Green Technology The industry is expected to have a high growth potential in 5 years time following the recent trends for the need to have hybrid vehicles that are more fuel efficient as well as electric cars. The plans to produce environmentally friendly cars are already underway for all the three car manufacturers (PWC 2011, p. $). All these initiatives show the dedication of the stakeholders to improve the technology more so in the automotive industry. The industry, though facing stiff competition in the international markets, has all it takes to compete fiercely. As far as the technology is concerned the industry has been well equipped. Environmental The industry is subject to numerous environmental laws and regulations in regard to safety. It is supposed to keep a closer watch over how it affects the environment in terms of the emissions, noise and other pollutants. This provides an extra expense to the car manufactures. Toyota, for instance, has had to hire experts to deal specifically with the issue of the environmental laws. This has helped it in complying with these laws and ensuring that it escapes any legal proceedings that might be instituted against the company for failure to comply. This decision was sought after the numerous suits against it had been filed. Some are still pending and any negative outcome from them can have an adverse effect on the financial position of the company. Another challenge with these laws is that they are subject to changes from time and to time and this threatens to illegalise some of the previous legal activities. The Australian automotive industry volunteered to reduce the consumption rate of the motor vehicles for passenger cars to 6.8 litres/ 100kms from 13.8 litres/ 100kms. This helped motorists in saving on the transport as the expense is substantially cut. Despite the huge success it has had as aforementioned, the industry is facing a few challenges regarding the environmental issue. One of them is ratification of the Kyoto protocol. The industry is therefore obligated to reduce its emissions of the greenhouse gases by 60 percent by the year 2050. This required a lot of spending on the research and development. Secondly, is the rules which have been set by the Australian Design Rules (ADR). This is a body that sets the standards that are supposed to be met by the car manufacturers. In the context of the environment the body has set pollution standards and this has obligated the motor vehicle manufacturers to come up with technologies that will help in meeting these standards. In order to achieve the set standards in regard to the Kyoto protocol, the government has come up with an emissions trading scheme. This is yet another standard that the car manufacturers are supposed to maintain. Although the environmental factors have placed for the common good of the future and for the purposes of sustainability, they are an obstacle providing unnecessary rigidity. The standards have to be adhered to and these also may act as a barrier of entry to new entrants into the automotive industry thereby limiting its expansion. This, however, is the price that we have to pay for the sake of the future. The greenhouse gases that are emitted by the motor vehicles are known to contribute hugely to the global warming. Legal Legal regulations are in place to ensure that the best quality is derived from the industry. These laws and regulations have a significant role to play in ensuring that the industry is able to compete on an international level. In January 2011, a new law was enacted to protect the consumers. The governing body formed under it is the Australian Consumer Law (ACL). The law covers 5 main parts: unfair contracts, unfair practises, statutory warrants, manufacturers’ warranties and product safety. The unfair contract terms cover the consumer from the misleading contracts that they may end up signing in. Car dealers have to ensure that the terms of the contract are not “unfair” according to the new stipulations of the Australian Consumer Law. The unfair practises that have been highlighted include the multiple pricing- motor vehicle sellers are prohibited from displaying two different prices for a single vehicle. In other words the price discriminatory strategy has been declared illegal. Second is the extended warranty. The extended warranty will serve as the statutory terms according to the new law. This law directly affects the manufacturers and in this case car manufacturer. The law has provided nine consumer guarantees for goods and three for services. These have replaced the older provisions of warranties which served as implied conditions at the point of sale. For instance, the definition of “acceptable quality” has been improved to accommodate “durability”. If the product does not meet the durability criteria it can be challenged in court on grounds that it did not meet all the quality standards (HWL EBSworth Lawyers 2011). In regard to manufacturers’ warranty, motor vehicle manufacturers are not under any obligation to present a written warranty. The law has also prescribed a text which must be clearly stated in the warranty cards. The text state seeks to address the quality issue and to offer a guarantee of replacement of the goods if they do not meet the quality standards (HWL EBSworth Lawyers 2011). Finally, the product safety has been enacted to ensure that consumers are adequately protected from any harm or injury that may come with the product. The most outstanding change is the mandatory obligation to report an injury. This means that if a dealer supplies a product and they suspect that it may be injurious, he must report this matter to the Commonwealth Minister. It is the role of the Commonwealth Minister to institute a permanent or an interim ban on a product and make new product safety laws (HWL EBSworth Lawyers 2011). This ACL provision will enforce change in the automobile industry. The car manufacturers will have to be more diligent in their production and supply. On the other hand, this will work to ensure quality of the industry’s products. Reference List Australian Bureau of Statistics 2007, Trends in Household Consumption, Viewed 15 Aug 2013 Read More