Western European Car Industries & Economies of Scale

Essay #1 - Western European Car Industries & Economies of Scale

There are a lot of factors that determines whether or not a company will be successful. These factors are usually derived from economics. One factor that I plan to focus on is scale economies or better known as economies of scale. Firms that have expanded their scale of operations to obtain economies of mass production have survived and flourished. Whereas smaller firms who have not been able to expand have usually ended up as high-cost producers. The topic discussed will be the Italian automotive industry and how it is affected by economies of scale.

As the economic integration of Europe continues, it is likely that increasing international competition will affect firms in European industries. As other countries expand and have more trade worldwide, the more the European economy will be affected. The economy will tend to buy from outside of Europe due to taste and lower prices. There would be more firms to choose from decreasing Economies of scale are significant because motor vehicle manufacturing is an industry based on growth. Since the automotive industry being discussed is in Italy, it is based primarily around one company, Fiat. The majority of sales of automobiles in Italy are acquired by Fiat. The automotive industry constitutes a substantial part in the European economy because this industry makes up 10 percent of total manufacturing output.

An economy of scale is an important factor within the Italian automobile industry. This is due to continuing European integration and that the Italian automobile industry is dominated by a company known as Fiat. Fiat was founded in July 1899. Fiat started with a plant in New York that manufactured then established relationships with other countries leading to exports to France, Austria, Great Britain and Australia. Since Fiat was called on for a lot of equipment during WWI, Fiat became well known throughout Europe. As years passed Fiat began to also acquire other automobile companies such as Lancia, Autobianchi, Abarth, Alfa Romeo, Maserati and Ferrari. In 1988, 59.9% of the vehicles sold and approximately 99.2% of the automobiles produced in Italy were made by Fiat. The company continued to enter numerous international agreements for the manufacturer of Fiat products and to expand its investments. This also lead to new factories that were built outside of Italy, which were South Africa, Yugoslavia, Argentina, Turkey and Mexico. The Fiat Group expanded internationally by making a major capital increase, huge investments in innovation, applying cost cutting measures and a restructuring program.

Economies of scale are reductions made in the average total cost of producing a product as the firm expands the size of its output in the long run. An economy of scale is based on mass production. For example, Fiat knew that the company’s future was largely influenced by the development of mass production in Italy. As plant size increases, a number of factors will reduce average costs of production. Factors such as managerial specialization, labor specialization, and efficient capital define economies of scale.

Managerial specialization is used when large-scale production, such as an automobile industry, needs better and efficient use of management. For example, let’s say Fiat had a supervisor at a plant that supervised thirty employees but the same supervisor was highly skilled in managerial procedures. If he/she could supervise fifty employees, then Fiat should have that supervisor manage fifty employees instead of thirty or fewer employees. This way Fiat would save money on additional supervisor costs. Managerial specialization