About Mike

Prof of Economics, Wms School of Commerce, Washington and Lee University, Lexington VA

Microbrews around the world

LaBodegaBogota, Colombia from the author of the Principles book used by Prof. Hooks. Not just the US…though my sense is that Japan has a dearth of small brewers, long inhibited by a minimum tax that was not connected to how much a firm brewed or sold. [click on image to enlarge]

China’s Auto Industry Shakeout

I have a (Google blogspot) blog called Autos and Economics. My latest post (of a few minutes ago) is on a pending shakeout in the Chinese auto industry. The origins of the industry’s excess capacity include the government’s “import substitution industrialization” policies of the 1980s and 1990s, and – since 2001 – a rush by global producers to establish a foothold in what is now (by a significant margin) the world’s biggest market. But despite its size China has too many firms, too many brands, too many factories and too many models. There will be a bloodbath. What is unclear is who will survive. All but 2-3 Chinese domestic brands and the most recent global entrants are in my analysis all at risk. While we’ll focus this term on case studies of the beer and steel industries, my post on Chinese autos has in the background the application of a host of standard economics of strategy models. Read, and if you could, publicize among classmates, friends, workmates, relatives….

Texts for Winter 2016

Aside

Texts are the same as for the Fall 2015 section.

  • Warrian, Peter. A Profile of the Steel Industry. Business Expert Press, 2012. ISBN: 978-1606494172
  • Ogle, Maureen. Ambitious Brew. Mariner Books, 2007. ISBN: 978-0156033596
  • Martin, Stephen. Industrial Organization In Context. Oxford University Press, 2010. ISBN: 978-0199291199
  • Tremblay, Victor & Tremblay, Carol. The US Brewing Industry. The MIT Press, 2009. ISBN: 978-0262512633

Beer and survival

… that is, survival of breweries during Prohibition. This is the topic of a “job paper” (what an economics PhD job candidate sends out with their application) from UCLA, “Product Switching, Adaptation and Firm Survival in the Brewing Industry during Prohibition” by Carlos Eduardo Hernández. Here is an abbreviated version of his abstract:

… states and counties chose to prohibit the sale and production of alcohol in the years leading up to the 1919 federal prohibition. Because of high transportation costs, local prohibition in nearby markets [thus] reduced the demand for beer production for some breweries more than others. Using novel micro-data at the brewery level, I show that breweries adapted to this first shock … produce[d] alternative products like soft drinks. … [such] breweries … were 12 percent more likely to survive the entire prohibition period (local + federal) …

Organizational theory encompasses two “pure” models. The first is that, once founded, organizations don’t change. This underlies the population ecology approach of Carroll and Hannan. The other is that firms continuously adapt to their environment, resource dependency which I associate with Scott, Powell, Pfeffer and others. So Hernández’ dissertation framework appears to me to be close to that of Carroll and Hannan, that organizations don’t readily change. Hence those that had a head start in developing non-beer products did better.

Oddly, there’s no reference to this literature in the job paper. I ought not be surprised: I wrote a paper years ago that played with these ideas, albeit in a different context (can firms – in my case Japanese firms – “borrow” technology). I found that while sociologists referenced the economics literature, economists didn’t read sociologists. (Carroll and Hannan are an exception.) Examples include:

  • Dimaggio, Paul J., and Walter W. Powell. 1991. “Introduction.” In The New Institutionalism in Organizational Analysis, edited by Walter W. Powell and Paul J Dimaggio, 1–38. Chicago: University of Chicago Press.

  • Pfeffer, Jeffrey. 1982. Organizations and Organization Theory. Boston: Pitman Publishing.

  • Powell, Walter W. 1990. “The Transformation of Organizational Forms: How Useful Is Organization Theory in Accounting for Social Change?” In Beyond the Marketplace: Rethinking Economy and Society, edited by Roger Friedland and Alexander Robertson. New York: Aldine de Gruyter.

  • Scott, W. Richard. 1987. “The Adolescence of Institutional Theory.” Administrative Science Quarterly, no. Dec.: 493–511.

  • Scott, W. Richard. 1995. Institutions and Organizations. Thousand Oaks, CA: Sage Publications.

  • Swaminathan, Anand, and Glenn R. Carroll. 1995. “Beer Brewers.” In Organizations in Industry: Strategy, Structure and Selection, edited by Glenn R. Carroll and Michael T. Hannan, 223–43. New York: Oxford University Press.

Global Steel, China Steel

Industries have industry associations. Nine of those for steel jointly claim:

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Estimates from the OECD Steel Committee indicate that there is almost 700 million metric tons of excess steel capacity globally today. China’s overwhelmingly state-owned and state-supported steel industry has an overcapacity ranging from 336 to 425 million metric tons and it is expected to grow in the coming years. This situation, together with a declining steel consumption, has resulted in record levels of steel exports from China to the rest of the world in 2014 – and which are on track to exceed 100 million metric tons this year.

What does this say of the nature of the industry? Why large swings in prices? Is this a Bertrand market with occasional price wars?

Additional query: what was the ECSC?

Bud + Miller = spinoff?

The hot news item (here) is the $106 billion agreement for AB InBev NV [a Belgian firm] to acquire SABMiller Plc [a UK firm]. The proposed venture will control 1/3rd of the global beer market and 50% of global beer profits. This is the latest in a cumulative $90 billion in acquisitions following the buyout of a group of Brazilian investors of Brahma beer.

The final form of the firm will be a function of antitrust rulings in the US [surely MillerCoors and Budweiser won’t be allowed to merge] and in China [Snow Beer, partially owned by SABMiller, is by far the largest firm, but AB InBev has 14 breweries there, too].

A big question: why (if at all) can a merger of this sort add value? At first glance, all it does is rearrange who owns which brand. Will this allow higher prices? Are there breweries that are poorly utilized so that this can produce operating efficiencies? or large sales forces that overlap and can be pared? But unless they kill brands, there are no savings on advertising. So no gains to beer operations, no gains to shareholders, only one group of execs grabbing the bonuses of another. For the lucky few, that is a big chunk of income.

Now don’t forget that 1/3rd figure. Here’s an infographic from an Oct 12, 2015 Bloomberg article on markets where neither is dominant:

http://www.bloomberg.com/news/articles/2015-10-12/forget-inbev-and-sabmiller-here-are-the-markets-where-local-beers-rule

Managerial Markets

We focus on firms as profit maximizers; for our purposes the details of the goals of a firm aren’t critical, and πmax offers simplicity.

Then there’s the real world of stock buybacks. This is a triangle trade that creates fees and riches. But is that because firms are profitable, or because it’s a complex shell game?

See details in this post on the Wolf Street blog (of Wolf Richter). The basic story is that execs are typically granted stock options that are priced to be “in the money.” They cash in their options, which increases the number of shares outstanding and thus dilutes the value of those held by regular shareholders. So the firm buys the shares back. Begin again.

Oh, and there’s one modest fillip: at present buybacks are of sufficient scale that firms are borrowing to undertake them. That’s right, profits aren’t sufficient. The accounting is sufficiently complex that shareholders don’t complain, and boards are just following industry norms and so aren’t guilty of ignoring their fiduciary duties. But then why should executives worry about profits at all? – it looks as though they can run this shell game for a very long time, long enough to retire.

So maybe our “innocuous” assumption that firms pay attention to costs and profits will prove less useful than in the past.