Economics of Heavy and Light Vehicle Market in Australia

Introduction

The novel COVID-19 pandemic brought the world to near stand-still. The pandemic has led to disruption of economic and social aspects of human life. According to UN News (2021), the employment globally rose to over 200 million globally. Businesses in hospitality, hotelier, and entertainment industries were forced to shut down. Transportation and travelling paralysed. Aviation industry including airport and airlines businesses are yet to recovery from the impact (Buffington et al., 2020; Roy, 2020). The air transport remains one of the hardest-hit global industries by the crisis culminating in shut-down and grounding of the airlines. In Australia, according to National Freight and Supply Chain Strategy (2020), the international passenger service dropped by 98% between June 2019 and June 2020. Whereas, the air freight sector saw a drop by 23% (Figure 1).

Whereas, the air freight

The restriction imposed by nearly all governments globally on movement of people, countrywide lockdown, and curfews meant airlines lost their core business stakeholders. Unlike freight transport sector, movement of people and goods plunged into international crisis with most forced cancel business travels, vacation trips, and general travelling (Mckinsey, 2020). The pandemic led to shutdown of major airports and bring operations to a halt. In principle, the dramatic drop in passenger air transport exacerbated by government restrictions as containment measures saw a significant drop in revenue in the entire aviation industry (McKibbin, and Fernando, 2020). Similarly, the hospitality industry where events, restaurants, and hotels were forced to either close or effect ‘social distancing’ protocols that meant limited number of customers.

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Collectively, the crisis precipitated a sharp rise in unemployment, drop in consumer demand, low consumer spending, and, due to closure of industries, supply (Maital, and Barzani, 2020). However, the surface transportation that include rail and road, and sea freight was slightly affected seeing small drop in both number handled and revenue. The surface transport a small change in activity during the pandemic period. The Bureau of Infrastructure, Transport, and Regional Economics (BITRE, 2020) estimated that heavy vehicle did not decline during the lockdown and restrictions peak. More so, the trend saw an increase in vehicle kilometres travelled by the heavy vehicles compared to pre-COVID-19 restrictions. As shown in Figure 2, compared to light vehicles sector which movement by kilometre fell relative to the restrictions, the heavy vehicles sector saw no drop in movement but rather increased over the same period.

Surface transport trends between Jan and July 2020

Microeconomics of Transportation

Due to globalisation manufacturing and labour industries, movement of goods and people as grow to become a core component in socio-economics of any community. The interconnectedness means disruption in any aspects would cause a significant implication to whole logistics process. For instance, more of the computer microcontrollers used in computers, communication devices (mobile phones), vehicles, refrigerators, and home gadgets are largely manufacturing in Asian countries then shipped by air, road, and sea to other end user. The entire process is interconnected through demand and supply but supplied by logistics process (Kwon, 2020). Consumer demand for such goods as mobile phone in a short time imply willingness to pay more for availability within specified period. As such, the supplier would ship the goods by air to consumers. On the hand, the product such as clothes, in addition to its bulkiness and lack of urgency, is normally transported using sea freight reducing cost but taking longer.

The economics of transportation is determined by number of factors. Fundamentally, allocation of resources for transportation of goods and services are subject to demands and supply. However, the principles of transportation are primarily driven by fixed space and time (Keser, 2020; Stubbs et al., 2017). The discussion on the economics of surface transportation touches on relationship between firms producing goods and consumers. The demand for and supply of transportation for both freight and passengers, the space capacity, time factors, and pricing is a market driven as well as subject to governments regulations (Darayi et al., 2017). There are various agents in the entire transportation sector. The supply of transportation is done by individual firms and government agencies. In a free market, transportation provided by profit-oriented entities are modelled to reflect the consumer demands and needs. Although in some jurisdictions government can mandate certain transportation means such as railway and heavy vehicles to ease traffic congestion and infrastructure regulations, in such cases, control of transport market require supplementing with subsidies and incentives. However, in a market with few restrictions, consumers trend to choose from a least expensive as a priority then followed by other determinants.

McCullough and Hadash (2012) noted by ‘transportation is a derived demand’ highlight there would not be transporting goods and service without the activities being undertaken at both ends; source of supply, and demand. The demand for transportation is subject to demand for one goods and service from another sector. A customer will require transportation for products to an area where the demand is there. As pointed by Rodrigue (2006), use of transport is primarily due to wish to access of other services but not direct benefits. For example, horticultural industry is supported by air transport because of the fragility of the product that require being transported within a strict period before spoiling. However, in the both ends, demand for the horticultural products is essential element and fuel supply. Without demands the entire industry would not exist. Importantly, the demand for fresh products and willingness of consumers to pay more for it allows supplier to ship using more expensive means, air freight rather than road or sea transport. During the pandemic period, shutdown of industries that include entertainment, event, hospitality, and hotelier the biggest consumers of horticultural products meant a drastic drop in demand. The problem reverberated to supply end and logistic aspect.

Demand and Supply curve of Transportation

Building from microeconomics principle, the demand for transport services decreases with increase in cost while supply increase with increase in prices. The demand-supply curve (Figure 3) demonstrate the price point at which consumers are willing to buy certain quantity while holding other factors such as income/ budget, reliability, and other transport services. Walmsley and Minor (2020) highlighted that a change in another factor that affects consumers’ willingness to pay for the transport service result in shift change in demand curve. The market elasticity causing a shift from S1 to S2 is influenced by several factors that include cost, price, technology, market organisation, and prices of substitute. Similarly, consumer demand for transport is influenced income, prices, consumer behaviour, and population (del Rio-Chanona et al., 2020). For instance, demand for heavy vehicles rather than light vehicles or other transport means (rail and air freights) is driven primarily by consumer demand and willingness to pay for goods being transported. In a market where heavy vehicles offer cheaper transportation cost due to economies of scale means end consumers of the goods under freight would pay less.

Demand / Supply Curve for Transport

As illustrated by Guerrieri et al. (2020) demand and supply for transportation is about movement of people and goods in order to satisfy a need that include recreation, education, work, and need for the products being transport. Feo-Valero et al. (2011) described the sector as induced demand that is a response demand to several factors in both macro- and micro- economic spectra. When a customer buys a good in a store will likely trigger replacement of the brought product that in turn generate demand activities such as sourcing, manufacturing, and transport. The demand and supply cannot exist alone. Reduction in transportation cost, commodity, that include the lower perceived cost of travel would result in increased demand. The perceived cost of travel captured by under traffic (reliability, delay, travel time), and actual cost of fuel plays a critical role in determining the demand for and supply of transportation.

According to Gao et al. (2019), another determinant in shaping decision-making on demand for and supply of transport is value of travel time (VOTT) perceived under opportunity cost. The VOTT is determined by wage rate, value of enjoyment of work, value of enjoyment of travel (Martens, and Di Ciommo, 2017). In goods freight, VOTT captures the amount a consumer is willing to pay for time savings. The willingness-to-pay goes hand-in-hand with consumers’ income, socio-economic status, and use of the product. In a situation where a consumer does not have an urgent need to use the good bought, the VOTT becomes relatively low.

Implication of COVID-19 on Heavy and Light – Vehicle Transport Market

COVID-19 impact on consumer purchasing behaviour went beyond the travelling but also the capability of purchasing and prioritising expenditure. According to the data by Beck and Hensher (2020), the movement restrictions and lockdowns not only in Australia but globally saw people spending their time indoors at home more frequently than pre-COVID. The consumers migrated to online shopping where they would buy goods from global market then shipped to their homes. Key driving factor in consumer consumption is that it shifted both rate and nature.

Unemployment forced consumers to modelled their purchasing behaviour change ways they consume goods and services that reduce of luxury goods and shifting to essential goods and services. Mckinsey (2021) reported that while engaging in certain out-of-home activities such as indoor dining, online shopping, social activities, and remote working became common. Investing in their homes became also fashionable to consumers. According to Sheth (2020), the pandemic disrupted the consumer habits of both shopping and buying. They improvise old habits while picking new behaviour fitting socio-economic needs. Combination of fall income and being confined in their home thus losing value time, meant willingness to pay more for same product declined. At the start of the pandemic, the consumers were stockpiling essential products that include toilet paper, meat, disinfecting and cleaning products resulting in temporary shortages.

The pandemic curtailed the demand for transport from cars, public transport, airlines, trains, cruiser ships, and ships. The industry being a derived demand sector relying on the demand of other goods, meant a fall or an increase of certain goods directly impacts its performance. Therefore, an increase in demand for essential household goods such as tissue paper and cleaning products result in increased demand for transport means oriented to that goods segment. Similarly, change in consumer behaviour to being price and cost conscious leading to unwillingness to pay more for VoTT forced suppliers to choose transportation means that would offer cheapest value of money. Such variables sharp the demand-supply curve for goods under demand.

The Australian Design Rules (ADRs) categorises light vehicles under NA vehicles with gross vehicle mass (GVM) not exceeding 3.5 tonnes. The vehicles in this category include utility vehicles, panel vans, cab chassis, and passenger vehicles with capacity of 10 seats. Whereas, heavy vehicles include class 2 classification covering the prime movers towing semitrailers. The response of the two categories to the pandemic is primarily due to the market segment each is in. For light vehicles, demands for services in hospitality and events in which are involved in was curtailed while consumers shifting consumption behaviour to online and in-door activities supported majorly by freight goods.

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Conclusion

Closure of business in such industries as hospitality, events, and hotelier result in a drastic fall in demand for goods and services critical to them. However, shifting to out-of-home activities and online shopping created a new sphere where demand for different goods and services increased. In turn, the demand for transport of goods in the industries affected negative fell while those affected positively including emerging areas saw increase in demand. Therefore, although restrictions and lockdowns imposed by governments affected nearly all aspects of socio-economics, some industries were affected different due to consumer reaction and demand response to certain goods and services. These containment measures forced people to remain indoors, buy in large quantities essential goods, and modified purchasing behaviour. All these changed the demand for transportation of certain goods evident in increased demand for heavy vehicles transport while a significant drop in light vehicle transport.

References

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Buffington, C., Dennis, C., Dinlersoz, E., Foster, L. and Klimek, S., 2020. Measuring the effect of covid-19 on us small businesses: The small business pulse survey (No. 20-16).

Darayi, M., Barker, K. and Santos, J.R., 2017. Component importance measures for multi-industry vulnerability of a freight transportation network. Networks and spatial economics, 17(4), pp.1111-1136.

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