Most scenarios, vertically-integrated = better margins, as long as cost of key inputs becomes small fraction of costs eventually.
If KI are 50-60% cost at final stage w/ sharp price hike = business at sole mercy of end-customer w/ demand destruction.
Observe next few quarters.
If KI are 50-60% cost at final stage w/ sharp price hike = business at sole mercy of end-customer w/ demand destruction.
Observe next few quarters.
In this scenario, commodity producer will not budge as many buyers in the market. Person who gets squeezed is the penultimate link in the chain. If end-customer unwilling to absorb full price hike, manufacturer WILL be holding the bag to keep the relationship.
Especially pertinent for exporters and industries where demand is very price sensitive. During benign pricing scenario you can get more efficient with vertical integration and improve realizations. However, when basic commodities roar, you will bear disproportionate impact too.
The whiplash of price hikes in supply chain are never fully transmitted, or at least never in time. The extent depends on the structure of the industry and consumers down the supply chain. Commodity producers have pricing power during this phase - take it or someone else will.
Many companies will report temporary boost in earnings even during this time - reasons can be many, but older inventory is the most common reason. You don't know what the margins will be once higher costing inventory enters the system.
If such phases last for a while, you will definitely see companies imploding too. Strong players can get by on the strength of their balance sheet and wait out the contraction. Weaker ones will flutter for a while and head straight to NCLT. This will still be some time away.
What's the point of this impromptu thread? Watching price hikes ripple through the supply chain is fascinating - you can find out who has pricing power + inelastic demand. That abstract stuff you hear Buffet & Munger spout? This tough phase is where you unearth them.
Most of you won't even reach this far in the thread (since I didn't number the first one), so if you got here - thanks :)
Postscript - this thread was to set you thinking on how to understand business when you read transcripts and other such materials in the coming months. Being able to place where a company lies in the pecking order, supply chain, hierarchy, etc. gives important perspective.
Postscript 2 - every company will have nuance to its business model, and there will always be factors working against each other. Not all of it is fully predictable, you will have to see every case on its merits. The idea is to contextualize the business of company you analyze.
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