Why the Australian Car Industry Needs Government Subsidies to Exist - Essay Example

Name: Instructor: Course: Date Protection Versus Free Trade Reasons Why the Australian Car Industry Needs Government Subsidies to Exist The main problem of Australia today is the insufficient level of consumption witnessed in the country. As a result of the lacking in consumption, the government of Australia needs to bring up good policies aimed at stimulating consumption. The major reason that causes the Australians to be reluctant in conducting purchases rests with the growing speed of revenue which is lower than that of GDP. The manufacturing industry in Australia was comparatively started much later than other countries in North American and Europe for example America, German, and England. Manufacturing industry in these developed countries is also well protected; this makes it difficult for Australia automobile to enter into foreign or even global markets. Therefore, in order to have a competitive car manufacturing industry, the industry should be supported and be allowed subsidies by the government. There has also been an increase in the appreciation of the Australian dollar in the foreign exchange market, making the Australian products very expensive than they were previously. This has created price wars reducing the amount of sales of the Australian automobile products. Therefore, the government needs to give subsidies and support to the car industry in order to protect it from price wars (Gareth 4-9). Lastly, the cost of manufacturing cars has increased gradually over the years. This has been contributed by the increased cost of labor and that of materials. This calls for government support through subsidies in order to develop the industry. The subsidies will cut on the costs that will be incurred hence generating profits to the industry (Gareth). Reasons Why Australia Does Not Have Comparative Advantage in Car Manufacturing The country does not have comparative advantage in car manufacturing. This is because there are no famous brands like Honda, Ford or Volkswagen. The costs of production are also high given the soaring prices of rubber and aluminum raw materials. This makes the overall production cost of cars very expensive (Gareth). Economic arguments that would support a decrease in subsidies to the Australian car industry include; Government subsidies are likely to lead to price competition. They can also easily lead to substitution effect or resource allocation that is not balanced. This then means that in the event that the Australian Government gives subsidies to the car manufacturing industry, then the industry will use that to improve the wages and salaries of the employees and other ordinary workers. This might result to price competition within the industry among different manufacturers of cars. It is also possible that car manufacturers might invest the subsidies in areas with fewer turnovers. This means that the subsidies are not likely to result to the intended purpose. As a result, the government ends up wasting the resources that would otherwise have been used more profitably. It is also worth to note that the government subsidies can only help some of car manufacturing firms due to budget constraints. This will result to an unfair competition among different car companies. Finally, an opportunity cost will result in the long run, that of helping the industry find a better way of operating rather than issuing money subsidies (Gareth 14). Economic arguments that would support an increase or a continuation of the current subsidies include the following; It is estimated that the total vehicle sales in Australia will soar to 33.448 million units over the n ext one year. This demand will be stimulated by the potential second and third tier cities, continued macro economic growth and the increased affordability by the households. Therefore, there is need that the Australian government supports the car manufacturing industry in order to manufacture cars that will meet the increased demand (Gareth 12). The new automotive industry trend is the manufacturing of environmentally friendly vehicles. In order to achieve this, the Australian government needs to continue supporting the industry in order to encourage the manufacture and purchase of such eco friendly cars whose manufacture is still in its early stages. There is also a development of an electric car prototype that is currently on going in Australia. It is anticipated that Australia will win the competitive advantage in car competition if the automobile companies in the country will catch this market trend. Therefore the government should support this through increased subsidies (Gareth 10). The government of Australia has also massively invested in infrastructure construction. This has increased the demand for vehicles in the country. The consumers’ affordability has also been enhanced by the emergence auto finance offers. With the popularity of the auto credit, it is anticipated that the sales of vehicles will increase immensely. Therefore the government should encourage the industry through increased subsidies (Gareth 12-14). Finally, the forecasted automotive industry growth globally is estimated to be at 6.9% annually up to the year 2015. This is expected to drive the industry up to a value of $1,653.7 billion by end of the year 2015. Despite the decreased existing market sales revenue of the automotive companies of Australia in the year 2012, the recovery is expected in the last quarter of the year 2013. It is therefore good time that the government through subsidies helps the companies to expand their market overseas. The Winners and Losers from Continued Subsidies to the Australian Car Industry As Australia gets into the largest and fast growing market, every manufacturing company is looking forward for a more market share. Owing to the products that are not differentiated, the competitiveness is highly intense in low-end markets mostly where the manufactures of cars specialized in. Price competition most often causes shrinking of profit margin. This makes the car manufacturers to lose (Gareth 13-16). The soaring manufacturing costs can be attributed to the prices of raw materials that are highly volatile and increased labor costs. The human resource cost in Australia maintained a two-digit growth annually over the period 2000 to 2012. This worrying trend is likely to continue as a result of the potential decline in the number of working age people and the shortage of skilled man power. It is also worth noting that aluminum, steel and rubber prices fluctuation have a negative impact on all vehicle manufacturing companies in the industry. Therefore all firms in the industry get affected as a result of reduced profitability. It is however worth noting that those companies that will be cushioned from the rising costs and price fluctuation through government subsidies will benefit (Gareth 12). The domestic brand dealers will benefit from the increasing appreciation of the Australian dollar. This is because; the imported brands will be more expensive hence giving advantage to the domestically produced cars which will be relatively cheap as a result of reduced manufacturing costs. The manufacturing costs will be less due to government subsidies (Gareth 17-20). The local car manufacturers will lose when the government gives them subsidies to manufacture low cost cars that most middle and low household income earners plan to own cars. The loss will be due to reduced sales when the individual households cancel their purchase plans if the rising gasoline prices will increase the auto usage costs. This means that as a result of the increased gasoline prices, there will be less demand of cars despite their low cost as a result of government subsidies. Therefore the car manufacturers will lose (Gareth 20). Most government subsidies that include subsidies to rural citizens on purchasing a car and a 2.5% rebate on tax for cars that have less than 1.6 liter engine size were abolished in the year 2012. This means that rational consumers who are Price-sensitive may delay their purchase plan or even cancel it. This means that the consumers will lose (Gareth 20). The subsidies by the government might be used to increase the wages and salaries of the employees of the auto mobile manufacturers. This will benefit them. Reasons Why Australia Should Increase Protection for Its Car Industry In conclusion, I agree that Australia should increase protection for its car industry. Therefore, it is safe to conclude that there is need for the Australian government to give subsidies to the car manufactures. This is likely to benefit the entire society. Keeping the government out of automobile car industry in Australian will only keep the consumers and tax payers better in a short run; this will not benefit the entire industry and will not improve the quality of the products. Government protection will ensure that the consumer purchase cars at affordable prices and that the quality of the cars manufactured is maintained (Gareth 22). 　　Secondly, it will seem thoroughly ridiculous if the government fails to support car manufactures, this is because most companies will not be able survive without these subsidies. Therefore, the local brand will fail to develop well without any help from the government. The government of Australia needs to offer large sums of money to the car manufacturing industry to aid the industry to grow. This will as well benefit the tax payers by having their resources allocated efficiently. In a nutshell, this will be a win-win situation by giving government subsidies to car manufacturing business, which will in turn lead to better car quality and affordable manufacturing and a more rational allocation of taxpayers' money (Gareth 23). Works cited Gareth, H. Australia's ailing car industry in desperate need of a savior. 2013. Retrieved from http://www.smh.com.au/business/australias-ailing-car-industry-in-desperate-need-of-a-saviour-20130412-2hrlb.html Read More