Newsletter 42 – Dewhurst - Economic franchise?

​This Newsletter starts the examination of the corporate strategic position of Dewhurst (LSE:DWHA).  Is it strong vis-à-vis its rivals, customers and suppliers?  Is it vulnerable to substitute products or new entrants to its market?  (The frameworks used are explained in chapters 9 and 10 of my book The Financial Times Guide to Value Investing).

​Industry analysis
(Asking if this industry is likely to achieve high rates of return on capital employed)
It is very difficult to obtain information on these niche areas of engineering.  In fact I could not find another push button manufacturer – this is more likely due to my unwillingness to search every international market rather than a complete absence of rivals.  Much of what follows must be tentative given the poverty of solid data.

• Threat of entry to the industry?  The costs of entry are relatively low in terms of factory set-up costs.  However, the extant players have some name recognition and relationships with architects, building constructors and owners.  But, in the face of a sustained onslaught from a new entrant offering lower prices this may be a relatively weak barrier.  There is some degree of differentiation through design excellence but this is not a very strong barrier.   Experience and knowledge of the industry may provide some protection, but it is not insuperable.
• Rivalry in the industry? The high margins and return on assets indicate that the industry has settled down to a stable, gentlemanly way of pricing.  The size of customer market is growing (more lifts in high-rise buildings, more trains, etc.) and therefore the stress of increased competitive pressure that comes from a declining industry is not a concern.
• Substitute products?  It is difficult to imagine potential substitutes being created to take away this industry.
• Buyer power strength?  There are a limited number of lift and train manufacturers in the world.  However, these products are not commoditised because of the high design content.  They are often specified by architects, e.g. push buttons in the Shard (Dewhurst’s specified). Also, they are not a large proportion of the cost of a lift/train/ATM installation and therefore the buyers may not push too hard on price.   The consequences and risks of product failure are high, which also suggests that customers will pay up for quality (or perceived quality).   Is it possible that lift/train/ATM manufacturers could integrate backwards and start manufacturing these components themselves thus limiting the prices charged as bought-in items?
• Supplier power?  Bought-in elements tend to be highly commoditised; many potential suppliers, thus little supplier power.
• Industry evolution? Constant technological change is to be expected.  This assists the existing highly experienced players so long as they continue to innovate (e.g. adopt touch screen technology – which Dewhurst is doing).  Increased urbanisation and more high-rise living and working are to be expected. There are 5 million lifts in Europe (278,000 in UK) half of which are more than 20 years old, therefore need replacement/updating to meet modern safety standards.  China has 2.2 million lifts, N America 1.2 m and India 0.27 million. Accessibility for disabled is becoming increasingly important, thus more lifts will be needed both in public buildings and in homes.

 
The next Newsletter asks if the company has an extraordinary resource.  It also poses some concerns.