Individual Assigment. Microeconomics in transportation industry.

YINSON Transportation Sdn Bhd is established in 1983 as a transport agency in Johor Bharu. The company has incorporated with YINSON Holdings Berhad in 1984. In 1997, the company expanded its services to container haulage and high-end logistics. The company logistic network has extended to all major cities in Peninsular Malaysia and they have more than 200 vehicles which consist of box van, tipper, cement tanker, mobile crane/crane lorry, low loader, general cargo lorry and pole trailer. The company has branches in Kuantan, Pahang, Port Dickso, Terennganu, Pulau Pinang, Singapore and Negeri Sembilan. Today, the company has over 400 employees and 200 drivers. 

There are over two hundred of transportation companies in Malaysia. International oil price keep on increasing and government has reduced its subsidies for oil. This situation leads to national oil price increased. It affects all industry especially transportation industry where fuel is the main operating cost.

When YINSON increases its transportation price, some customers will seek for other transportation company which can offer them a lower price compared to YINSON. When this situation happens, the quantity demanded for YINSON transport services falls.

As for the income effects, when the price of transportation service increases, consumers who are not willing to pay more, then the consumptions of the services will decrease. Hence, the quantity demanded fall. Both situations have changes in demand curve as the demand move upwards along the demand curve and the quantity demanded decreased which has showed in the graph below.

 

 

There are some determinants of demand which included productivity of manufacture factory and prices of related goods and preferences.

 

 

In a manufacturing factory, if the productivity of the factor increases, the factor will require more transportation services to import and export their goods to their customers. It increases the transportation service demand. Hence, the demand curve will shift rightwards. The quantity supplied increases as it moves upwards along the supply curve. As a result, the equilibrium price raises from P to P1and quantity demanded increases from Q to Q1.

 

 

Besides using transportation services to deliver goods, consumers can use air transportation or sea transportation too. If the price of related services such as air transportation falls, consumers will consume more on air transportations where it costs less and takse lesser time. It decreases the quantity demanded for transportation service. So, the demand curve shifts leftward and there is a movement down along the supply curve as the quantity supplied decreases. According to the graph showed above, the quantity demanded decreases from Q to Q1and the equilibrium price decreases from P to P1.

There are some determinants of supply in transportation industry. First, price of factors of services will affect the quantity supplied. In transportation industry, fuel is the main factor that affects quantity supplied.

 

When government announces national fuel price increases, transportation operating cost will increase too. Transportation companies will increase its price by approximately 10% in order to cover its cost (martin carvalho, 2013). Then, raising of fuel price decreases quantity supplied and the supply curve shifts leftwards. As the graph showed above, quantity demanded decreases from Q to Q1 as the price increases from P to P1. In this stage, the equilibrium price raises but equilibrium quantity decreases.

 

Another determinant of supply is number of suppliers. In Malaysia, there are more than 283 transportation companies. Nowadays, the number of transportation companies has increased compared to before. The higher the number of suppliers, the greater is the quantity supplied. The supply curve will shift rightwards and quantity supplied will increase from Q to Q1while the price will fall. It is due to the market has become more competitive. Suppliers are willing to supply their service at P1 as long as it can cover their cost.

In the market, price elasticity of demand in transportation industry is relatively elastic. It is because of closeness substitute of transportation companies. When the price rises, consumers will find another transportation company which does not change its service price. However, if the price of transportation service charged becomes higher, it does not affect much on the quantity demanded in YINSON. It is because the company has its own loyalty customers. So, when the price of transportation service rises, their customers will not seek for substitutes. Hence, it is relatively inelastic demand in YINSON Transportation.

Economics of scale in YINSON will be discussed at below.

As YINSON growing and expanding, it needs “larger and comprehensive fleet of vehicles to facilitate their transportation service”(YINSON). By getting different heavy transports, YINSON is able to provide more transportation service. It is because different types of lorry or trailer will be used for transporting different goods. For example, a trailer usually will be used to transport a container. 

Lorry is a heavy machinery which requires long term on-going maintenance. It also needs to be inspected by PUSPAKOM for every 6 months to make sure the vehicle is safe to travel on the road and to reduce the risk of accident caused by machinery failure. In order to manage the maintenance of a vehicle, most of the transport companies will purchase the same brand or same line of vehicle such as FUSO, MITSUBISHI, VOLVO and so on. YINSON’s foremans will be familiar with the cause of breakdown of a lorry’s and repair it quickly to be ready to transport goods. Its purchasing department is able to purchase certain spare parts and engine oil such as oil filter, side mirror, fluorescent sticker, bulb, power steering oil and so on in bulk where it is able to get a lower price.

As YINSON Transport expanded since 1997, the company has become larger as it needed specialized departments to control the business. The organisation chart has expanded become wider and more specialized as example showed at the below.

When YINSON is a small firm with few management staffs and few drivers, the workers are multi-tasking and equipped with many skills. A clerk will have to issue invoice, take orders from customers, inform the driver the delivery location, pay EPF, SOCSO, taxes and so on. Even a driver also must know basic repair knowledge and maintain the lorry in a good condition. Only when there is a major break down which the driver cannot solve, the lorry will be sent to workshop for repairment. Since YINSON expended into many branches, it requires specialised talent to ensure the growth of the business and each branches will share a same vision and goal to succeed the business. Thus, YINSON’s managing director, Lim Han Weng will lead his customer service supervisor, marketing manager, workshop supervisor, finance and administration executive to provide a better transportation service. These specialised talent will produce more in depth analysis in their field and thus a greater efficiency and effectiveness can be gained.

Diseconomies of Scale

 

When YINSON has expanded become larger, management problems of coordination usually occur. The relationships between each departments become weak because they will not have many interactions with each other as the work has been specialized. Furthermore, a non-managerial employee will face a problem when he or she is doing his or her work if the works need to be decided by two different managers. As a result, work progress becomes slower. Besides that, as the company becomes larger, they will need to hire professional employees. As usual, any employees who are professional with years of experiences will demand for higher wages. When YINSON lacks of the professional employees and have to retain those employees, the decision to retain them will push up the cost of the company.

In transportation industry, government intervention includes price floor-minimum wages. “In July 2012 the Malaysian government announced that workers in Malaysia would receive minimum wages of RM 900[USD291] (for Peninsular Malaysia) and RM800 [USD259] (for Sabah and Sarawak) and the announcement came into force from 1 January 2013” (IndustriALL Global Union).

This brings a negative impact for transportations services industry. For example, before the government imposed the minimum wage, the YINSON company has employed 7 clerks for 7 different branches to assist in control the transportation services. After the minimum wage imposed, the quantity of officer that the company can afford to employ decreases. At the same time, offer of high wage at W1 leads to quantity supplied of labour increases. When the quantity supplied of labour greater than quantity demanded for labour, it creates unemployment. At the same time, deadweight loss arises. The firm’s surplus and worker’s surplus are decreased as potential loss of job searching.

 

“Goods and Service Tax (GST) is a consumption tax based on the value-added concept. GST is imposed on goods and services at every production and distribution stage in the supply chain including importation of goods and services” (NBC,2013). When government imposes GST tax in this industry, the amount of tax will be shared by both consumer and supplier. It is because there are many closeness substitutes in this market. From the graph showed above, the firm will bear the tax more than consumer because it wants to retain customers since the demand is elastic.

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Reference

Dr. Jean-Paul Rodrigue , Dr. Theo Notteboom.  Transport Supply and Demand. Available from: http://people.hofstra.edu/geotrans/eng/ch7en/conc7en/ch7c4en.html [accessed 13 October 2013]

Goh, Lian Pin (2013) Face to Face communication to Goh Sin Yi, 23 October.

Iman Atira, Leong Ming Huey, Michelle Mondon, Yang Yaxi.  Price Floor- Minimum Wage in Malaysia. Available from: http://microarticles04.blogspot.com/2012/10/price-floor-minimum-wage-in-malaysia.html# [Accessed 12 October 2013]

martin carvalho, sira habibu,  ivan loh (2013). Lorry owner increases fee by 15%. Available from: http://www.thestar.com.my/News/Nation/2013/09/11/Lorry-owners-increase-fees-by-15-Rise-is-reasonable-and-justified-says-association.aspx [Accessed 12 October 2013]

NBC Group of Companies. (2013) Malaysian Goods and Services Tax (GST). Available from: www.nbc.com.my/goods-and-services-tax-gst.html [Accessed 23 October 2013]

YINSON HOLDINGS BERHAD. (2013) Available from: http://www.yinson.com.my/ [Accessed 13 October 2013]