Zip manufacturing is not the most often discussed industries in investor forums. Yet this article brings out some key insights about the implications of international trade on competitive intensity and more generally the competitive advantage and its implications on the consumers in the industry. We often think about pricing power as the manifestation of underlying moats or competitive advantage. And that pricing power is simply the ability to take price hikes with no commensurate impact on volumes or market share. However, the article shows that pricing power is perhaps more in relation to the firm’s ability to drive efficiencies superior to competition so that it obviates the need for any price increases which inturn puts pressure on competition. The zip industry’s experience shows that whilst opening up of global trade could drive competitive intensity, we could still end up with an oligopoly of sorts where one or two companies through sheer efficiencies could end up dominating up the industry. And despite such dominance, the consumer remains the biggest beneficiary of such efficiencies through lower prices. This is very akin to what we see in some of Marcellus’ Consistent Compounders Portfolio – where an Asian Paints or a Relaxo Footwear or Dr Lal’s Pathlabs have kept price increases fairly modest, driving their profitability through internal efficiencies (sourcing, workforce productivity, smart use of tech, etc) better than competition who in turn get suffocated by the lack of price increases.

“…Take a sample of five items in your clothes closet and examine the tabs on any zippers. Odds are that at least one is marked with the letters YKK. It was made by a Japanese firm, currently the world’s top zipper manufacturer, with $10 billion in annual revenue and a 40% global market share—pretty impressive.

In the 1960s the incumbent zipper manufacturer, Talon, enjoyed a comfortably dominant position in its home market. Its name featured on seven out of ten tabs. But a decade later it had lost half its market share and these days it barely rates just a few percentage points. This was a classic case of a monopoly coming unstuck after resting too long on its laurels. It didn’t do enough to improve productivity, so its prices were too high; it failed to innovate, consequently neglecting new applications such as handbags, luggage or outdoor gear; averse to risk, it exported little, despite the fact that textile manufacturing was fast relocating.

Soon after the Japanese firm was incorporated, it started building its own machines to achieve faster, higher-quality production. It also went abroad, soon setting up subsidiaries in Malaysia, Thailand, and Costa Rica. It first appeared in the US market in 1960, marketing zippers that were cheaper than Talon’s and comparable, if not better. YKK’s first US production unit followed 12 years later. In a humiliating blow to Talon, the pressure suits worn by the first two astronauts to walk on the moon were fitted with YKK zippers. It was as if James Bond’s zipper-unzipping magnetic watch in Live and Let Die hadn’t been invented by the gadget-master Q, but by the R&D division at YKK.

For our champion zipper manufacturer, one of these assets was its machine-tool know-how. Unlike its competitors, the Japanese firm based its expansion on developing its own materials and equipment. From the outset it designed its own tools and fed them proprietary materials. It only purchased plastic pellets and a mixture of alloys of its own invention.

Under equivalent competitive conditions this will benefit the consumer because the price will be lower. Which is indeed the case in Melitz’s model. The same competitive regime prevails regardless of how open international trade may be. At equilibrium all the firms cover their average unit cost and none of them behave strategically. The firms go on operating as separate entities, as in a situation of perfect competition.

Yet international trade generally encourages the emergence and consolidation of powerful firms with substantial market share, or in other words oligopolies which coalesce and gather strength. So it changes the intensity and competition regime.”


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