Question

A 2014 article in the Wall Street Journal described the Chinese automobile industry as a “hodgepodge of companies”, most of which produce fewer than 100,000 cars per year. Ford Chief Executive at the time, Alan Mulally commented on the situation by saying “If you do not have scale, you just won’t be able to be competitive”

What did Mulally mean?

Answer 1

The reference of scale in the statement of Alan Mulally refers to economies of scale that occurs when average cost of production of the firm falls. A firm is able to earn profits if it lies on the downward sloping portion of the average cost curve and thus is experiencing economies of scale. This increases profits of the firm as cost of production declines and make the firm more competitive in the industry. If a firm is experiencing diseconomies of scale, then total cost increases with the increase in output and this makes the firm less profitable and less competitive in the market. Thus, the statement states that if a firm does not have scale in production or reduction in average cost of production, then it is not competitive in the industry and profits will ultimately fall leading to fall in the level of production of the firm.