Pricing, Profits and the Future of the Supply Industry By Geoffrey Thornton
It is well known that when you are more than knee deep in alligators it is difficult to remember that the original objective was to drain the swamp. Equally when the P&L account is heavily in the red and competitors are driving prices even further down the fact that a business will only continue to exist in the long term if it is making enough profit to allow the owners to continue to invest in it tends to seem rather theoretical. And in the swamp there is a stark reality. The bigger the alligator, the more food it needs and even if the swamp is getting bigger (all that global warming, you understand) the alligators
are growing faster than the swamp. So the number of alligators that the swamp can support is reducing all the time. Since the beginning of the industrial revolution there has been a very clear pattern to the introduction of a major new technology. From the railways and the canals through cars and aeroplanes to computers, the pattern is the same. The new invention opens up huge new market opportunities. Many join in hoping to get rich from them. Invariably there are more than the market, even though it is expanding rapidly, can support. And with the passage of time the weaker
fall by the wayside. But it is a characteristic of technology that the R&D associated with any one generation is greater than its predecessor, and on the production side economies of scale make break even capacities higher and higher. As the market matures the escalating costs of R&D and the increasing capital investment in manufacturing combine to reduce the number of suppliers that the market will support. In the submarine cable case we have an industry that after many years of (profitable) stability has been transformed as a result of changes in technology and its market place. But the same dynamics apply – escalating R&D costs and improved production methods that require higher volumes to reach a break-even point. If we compare the global submarine cable system supply industry of today with that of 30 years ago the contrast is striking. Then there were 6 suppliers, annual cable making capacity of around 25,000 to 30,000km per annum and the industry was profitable. Today there are 4, demand is greater than 30 years ago and last year the market had recovered to a level which is probably the average over a cycle. Yet the industry was not profitable. This is important because the health of an industry depends on its being profitable. Without profit there will be no investment and ultimately a business will go bankrupt when its owners cease to be willing to finance its losses. They may of course in the meantime decide to cut their losses by selling out but the overall result is still a reduction in the number of suppliers.
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