Market Analysis: Economic Perspectives
The economic framework, in the global scenario, has been constantly changing and undergoing huge dynamics in many aspects. One such aspect is the ever increasing competition present in the economic framework, among different industries and the economy as a whole, both in the domestic as well as international framework. The increases in the competitive environment in the global scenario have been facilitated by events like that of Globalization and other economic phenomena (Baumol & Blinder, 2015).
Thus, given the prevalence of immensely competitive environment in the global industrial and commercial environment, it has been becoming immensely important for the companies operating in the contemporary economic scenarios, to invest in improving their efficiencies and competitiveness and to increase their long term sustainability as well as profitability in the market (Nicholson & Snyder, 2014). One of the most important ways in which the companies can gain a competitive edge in such a competitive framework is investing in innovations and technological progress. Higher technological framework and innovative methods of production not only helps the companies to produce better quality products and services but also helps them to produce the same in a more cost effective way.
Innovation, in general, is one of the primary needs of any industry in the contemporary global scenario. However, in some industries innovation is specifically required to stay ahead in the competition and earn long run profits and sustainability, the automobile industry being specifically one such industry (Antonelli, 2014). The essay takes into account this aspect of the automobile industry, specifically emphasizing on the needs for such innovations in the same industry from an economic perspective, taking into account the relevant economic concepts regarding the need for innovation in the concerned industry. Special emphasize has been given to the same industry present in one of the leading economies in the contemporary scenario, that is the Australian economy.
In the global automobile industry, especially in the contemporary framework, the leading companies all around the world have been constantly observed to introduce new models with more and more features. Car being a luxury commodity, the demand for the same is elastic and the same increases with the increase in the income and standard of living of people across the world. This increased global demand of cars have led to the entrance of new supply side players in the automobile market, which has increased competition in the scenario. The firms, therefore have been increasingly investing in the innovation aspect of production to stay ahead in the competition (Wells & Nieuwenhuis, 2012).
Automobile Industry: Global Overview
The needs and methods of innovation in different industries in the global framework differ according to the nature and structure of markets under the domain of which these companies operate, which are explained in the following section, taking into account the different types of markets present in the economy:
The perfectly competitive market, in general, is characterized by the attributes like the presence of a large number of supply and demand side players in the market and the presence of homogenous commodity as the center of all types of transaction in the market. Thus, due to the presence of many supply side players, each player faces huge competition and has to invest hugely to attract more and more buyers. This in turn, leads to the encouragement on part of the firms to invest in innovative production such that they can stay ahead of their competitors, both in terms of higher quality product and also in terms of price and cost efficiency (Kolmar, 2017). However, one of the significant attributes of perfectly competitive firm is the presence of normal profit in the long run, which in turn leads to low profit for each firm, thereby restricting their capability of investing in innovation in the production process.
The diametrically opposite structure of market, of that of perfectly competitive one is the monopoly market structure. In this type of market, there are a lot of buyers and a single seller which thereby gives the seller the whole of the market and price decisive power. Therefore, the monopolists do not feel the urge to invest in innovation as they do not need the competitive edge (Chen & Schwartz, 2013). However, the main attribute which helps a seller becomes a monopolist is the cost and productive efficiency which the sellers enjoy over their competitors. The monopolists earn supernormal profit even in the long run, which if invested to improve the technological efficiency and innovations can contribute to their long term sustainability and can help them keep their competitors away:
One of the forms of market, having the attributes of both monopoly as well as perfect competition is the monopolistically competitive market, which is characterized by the presence of many buyers and sellers, whereas the products are differentiated in the market. Due to the presence of differentiated products, each of the companies attract different portions of clientele, which gives rise to intense competition in the market (Rios, McConnell & Brue, 2013). This thereby gives incentives to the monopolistically competitive firms to invest in innovation to produce more efficiently and stay ahead in the competitive environment and capture a bigger clientele. In short run equilibrium condition, as a monopolistically competitive firm can earn profit, normal profit or loss, there remains scope for innovation for the firms.
In the long run, however, the monopolistically competitive firms enjoy normal profit only, which can be seen from the above diagram. In this type of market, there exist a break even point for the firms, where the price of the product is equal to the average cost of production, thereby giving the firms the scope of earning normal profit only.
Given the breakeven point in monopolistically competitive market is not the same as that of the point of minimum ATC, there remains the presence of excess capacity in the market. This is often the situation in the automobile industries in different parts of the world, when the industry ends up with the presence of many supply side players but not optimum level production. In the long run however, the demand curve becomes elastic with the entry of new firms, which reduces the difference between the price and the marginal cost of production of the firms:
One of the most realistic forms of market in the real life scenario is the oligopolistic market which is characterized by the presence of many buyers and few sellers, thereby giving each of the sellers considerable market power in the economy. This type of market is often prevalent in the automobile industry in the contemporary period. With fewer number of supply side player in the automobile industry having the capability to innovate and increase their clientele and profitability, many of the firms have to leave the competition, thereby giving the market an oligopolistic structure.
In the contemporary global scenario, with the demand for cars consistently increasing in response to the dynamics in the global income structure and lifestyle in general, the automobile industry has been constantly expanding with continuous addition to the supply as well as demand side players. The patterns of demand has also been continuously changing, which has led the players in the supply side of the industry to evolve and change themselves, according to the need of the customers. Many of the players in this industry has been continuously innovating and introducing newer models in the market, which are often based on the expectations of the clientele, which in turn can be divided into arenas like safety, utility, reliability and quality dimensions (Schroeder & Traber, 2012).
The production in this industry having an initial high cost of production unit set up, the number of providers is not as high as the number of players in the demand side, thereby roughly giving the market an oligopolistic structure. However, the consumers in this industry enjoy a range of choice and substitution powers due to the presence of many suppliers and many models of cars. This in turn increases the level of competition in the global automobile industry, which induces the firms to take competitive strategies, which includes price wars and innovations. Price war often leads all the players to worse off positions decreasing the profit levels of all of them, which poses the strategy of investing in innovation as a better competitive strategy with long term benefits for the firms.
One of the most robust economic rationales behind the need for investing in innovation, especially for the automobile companies is the argument of cost efficiency. To achieve cost efficiency, which in turn helps any firm to ensure its long term sustainability and increased profitability; it is of utmost importance on part of the firms, to keep on emphasizing and investing in technological innovations. This is especially true in the automobile industry in the recent periods as the models launched by the companies lose clienteles and become obsolete or less desired very easily under the threat of introduction of newer and more convenient models (Nas, 2016).
The taste and preference of the clientele continuously changing, they constantly need newer and more cost effective models, which keeps the firm in constant need to produce different varieties of models. This in turn indicates towards the needs for continuous innovations on part of the car manufacturers all over the world.
Innovation in the automobile manufacturing industry has positive implications not only the producers but also the buyers as they are capable of enjoying more efficient models at more efficient and affordable prices (Law, 2017). The presence of competition and high expectations of the customers requires the firms to reduce costs which in turn is only possible if the firms invest in innovation in the manufacturing new and more cost effective models, which increases the profit of the firms, as can be explained with the help of the following diagram:
As is evident from the above diagram, if the venture in innovation, on part of the automobile manufacturing companies is successful, then the average cost of production decreases, which in turn increases the scope of the firms to increase the profitability and stay ahead in the competition.
Apart from the cost efficiency and benefit arguments in favor of the requirement of innovation, in the automobile industry in the global framework, there remains another aspect of immense importance, which induces the need of innovation in the automobile companies across the world. This is the issue of increasing pollution and threat to the global environment, which has been constantly aggravating in the recent period, with the manufacturing and industrial activities increasing across the world. Keeping this in mind the demand for eco-friendly vehicles have been increasing with the change in preference of the global consumers. This in turn leads to the need for innovation on part of the automobile industry to maintain their existence and profitability in the long run (Sierzchula et al. 2012).
The above discussed perspective of innovation can be seen in real case scenario, taking reference of the automobile industry of Australia. The presence of high competition in the global automobile industry has contributed to considerable amount of difficulties and challenges faced by the car manufacturers operating in the country. Many of the eminent companies including Ford and Holden have been forced to close down production in the country. The models of these companies have lost severely to the new age more efficient and affordable models introduced by Toyota and Hyundai, including Mazda by Toyota and Tucson by Hyundai. Toyota has also introduced other models like Corolla and 86 sports cars. Other models like Prius, HiLux and similar ones have captured the market immensely (Drive.com.au. 2017).
Toyota has been observed to focus on lean manufacturing and pro-customer productive and marketing strategies, under which they have been seen to bring those models and those specifications which are highly desired by the customers, thereby earning considerable market share as well as profit in the recent times.
Conclusion
The above discussion indicates towards the fact that in the Australian automobile industry, like that of the industry in general, innovation is of immense importance for the companies to sustain in the highly competitive and dynamic environment and to gain competitive edge over the rival manufacturers, which can help them to earn long term profitability and sustainability. The fact that the companies in the Australian automobile industry which have invested in innovation, like Toyota and Hyundai, are earning greater market share, asserts the need for emphasizing on innovation in the automobile industry in the global framework as a whole.
References
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Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.
Chen, Y., & Schwartz, M. (2013). Product innovation incentives: Monopoly vs. competition. Journal of Economics & Management Strategy, 22(3), 513-528.
Kolmar, M. (2017). Introduction. In Principles of Microeconomics (pp. 45-53). Springer, Cham.
Law, C. M. (2017). Restructuring the global automobile industry (Vol. 4). Taylor & Francis.
Mahanty, A. K. (2014). Intermediate microeconomics with applications. Academic Press.
Nas, T. F. (2016). Cost-benefit analysis: Theory and application. Lexington Books.
New Toyota Cars For Sale | Drive.com.au. (2017). Drive. Retrieved 23 December 2017, from https://www.drive.com.au/new-car-showroom/toyota
Nicholson, W., & Snyder, C. M. (2014). Intermediate microeconomics and its application. Cengage Learning.
Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.
Schroeder, A., & Traber, T. (2012). The economics of fast charging infrastructure for electric vehicles. Energy Policy, 43, 136-144.
Sierzchula, W., Bakker, S., Maat, K., & Van Wee, B. (2012). Technological diversity of emerging eco-innovations: a case study of the automobile industry. Journal of Cleaner Production, 37, 211-220.
Wells, P., & Nieuwenhuis, P. (2012). Transition failure: Understanding continuity in the automotive industry. Technological Forecasting and Social Change, 79(9), 1681-1692.
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