There is currently a lot of discussion about the rise of the super-fabricator (1500 - 6000 windows per week) and how this is a natural progression. But is this really inevitable and are smaller fabricators faced with a stark choice between growth or death?
The basic assumption in these statements is that as an industry gets older then it will move towards consolidation with a decrease in the number of players in the industry. This is based on a model where some companies gradually become dominant and the others are left behind in both size and profitability. This means that the larger companies get richer and bigger whilst the smaller companies gradually wither on the vine and go out of business. So far, so traditional and many fabricators are trying to expand to prepare for this natural progression.
The only problem with this analysis is that it doesn't seem to be happening, despite the predictions being made for many years. We have always had national companies that fit the super-fabricator image but they don't seem to be able to eliminate the opposition and to establish a truly dominant position. Some of the largest fabricators in 2000 were only formed 5-8 years ago when people had been talking about consolidation for several years. Old large companies are there but they also seem just as likely to go bump as the new companies and when they do go bump it is at both high speed and cost. The reality is that there is little concrete evidence of a move towards consolidation. The industry is undoubtedly mature but for fabricators it is not consolidating and remains fragmented and disorderly. We are no longer following the German experience (where the industry consolidated very quickly in the mid 1980's) and are going against all the predictions made in the late 1980's.
It is possible for an industry to mature and yet remain in a stable fragmented state and this may be the model that is really applicable to our industry. Fabricators may be capable of profitably surviving or even profitably growing in the fragmented industry provided they understand what is happening and why. A fragmented industry may be caused by many factors but it needs only one of these factors to be present to block the consolidation of an industry. The factors which are blocking consolidation for the window fabrication industry are:
Low cost start-up.
Machinery and profile suppliers have traditionally worked to give a very low entry cost to fabrication. It is still possible to start up in window fabrication with under £15,000 and to operate out of a small unit on an industrial estate. The consequence has been firms which are under-capitalised and under-managed but have staggered on for years, changing suppliers to get the best deal before perishing with large debts and leaving space for another new start-up. In window fabrication the low entry barrier contributes to the fragmentation and no end to this is seen. Production capacity still outstrips demand and will continue to do so for many years.
No economies of scale.
Economies of scale drive an industry towards consolidation and a fragmented industry typically shows no economies of scale or experience. Window manufacture is a simple fabrication and assembly operation which is capable of being taught to relatively unskilled labour and the direct labour cost for a typical fabrication company rarely exceeds 8% of the cost of the product. Economies of scale imply that the more windows you produce the cheaper it is to produce them. The reality is that the conventional route of investment in automatic machinery rarely significantly reduces the cost of the product. Reducing the labour content by 50% only gives a cost reduction of 4% and how do you reduce the labour content by 50%? The true cost of advanced machinery is not simply the purchase price but also the cost of the investment, the increase in the overheads, the cost of maintenance and the cost of down-time if the machine fails to operate. Investment in expensive automatic machinery rarely provides the returns that are forecast. Indeed unless the scale up to super-fabricator level is handled correctly, the scale factor can be negative and growth can give higher cost products because of uncontrolled overheads. If growth is not tightly controlled (and such control is not usually present in small firms) then there may be no cost benefit in producing above 300 windows per week. This is shown by the start-up of small fabricators who can attack the larger more established firms on the basis of cost (which is a major factor in the purchase decision). Even commercial contracts (where there is generally a requirement for higher trading and experience levels) are affected if the price is low enough, despite what the specification documents say. The experience to date is that there are no significant economies of scale in the fabrication of windows and that there are no orders of magnitude savings in cost due to size.
Negative economies of scale.
These are areas where growth can actually be bad and include:
- Bespoke products - where rapid product changes are needed or where every item is custom built then small may indeed be beautiful.
- Low overheads - small companies have low overheads and it is a mistake to assume that the overhead structure will remain the same during growth.
- Close local control - companies may lose control during expansion as some activities move away from the core site.
- Personal service - customers like to deal with a local firm and the local firm selling direct to the public counts very strongly.
- Local image and local contacts - recommendation sales continue to be a potent force in the domestic replacement window industry and it is possible to develop a strong and high value "local company" image, the national fabricator is remote and is dependent on consumer advertising with the associated high costs. At the contract level for local authorities there is still an incentive to deal with the local firm as this keeps the local labour employed.
Little advantage of size in dealing with suppliers or buyers.
All fabricators are the same in the dark for both suppliers and buyers. In the current industry conditions even a small fabricator can get significant discounts from suppliers, although large fabricators are becoming more aggressive in seeking keener prices and are using their bargaining power with less restraint. For buyers there is little perceived benefit in dealing with large fabricators.
High product differentiation based on image.
This is not an important factor because, no matter what we in the industry think, the consumer regards a window as a window. Windows are not generally bought on brand name nor any associated consumer image.
High transport costs.
The transport cost of frames means that there will always be an advantage for the local fabricator but this is not a vital factor.
These factors are blocking any consolidation of the industry and it is by no means certain that the industry will ever consolidate into the "super-fabricators and the rest" type of model. Until the industry is restructured in a fundamental way to overcome these factors blocking consolidation then the great shake up will never occur .
Our current fragmented industry will continue for many years.
This does not mean that growth is impossible for any fabricator but that growth must be very carefully managed to make sure that the production systems, machinery investment, staff training and overhead growth are monitored, managed and controlled. Growth to super-fabricator level is plagued by many pitfalls along the way and expert help may be needed to avoid the potentially lethal traps.
It's not size that counts, it's what you do with it.
Last edited: 11/03/10
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