Force 1: Customer Bargaining Power. A key question from a customer base perspective: How easy is it for customers to drive down prices? Pricing is driven by a number of factors, such as the number of buyers, the importance of any one customer to your business, the total cost of switching, the ability to switch to substitute products, and so on.

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In the U.S. metalcasting industry, perennial overcapacity compared to demand has given casting buyers huge bargaining power. Also, fast-growing capabilities of overseas foundries coupled with lower costs in sourcing from Low Cost Countries have given significant advantages to casting buyers. Over the past decade, consolidation of casting-consuming OEMs, especially as they centralize and leverage increasingly sophisticated global supply chains, is perhaps the single biggest development giving the advantage to casting buyers. My company estimates that less than 200 companies consume more than 50% of all castings, by value, globally. It seems fair to say that customers of castings have very high bargaining power overall in the industry.

Force 2: Supplier Bargaining Power

Force 2: Supplier Bargaining Power.  As raw materials, consumables, and specialized equipment are key requirements for metalcasting, understanding the suppliers' bargaining power is important, too. In addition to the number of suppliers, bargaining power is influenced by availability, unique performance attributes, service capabilities, and a foundry's cost of switching, to name a few factors.

Even more so than consolidation of customers, the U.S. foundry supplier base has shrunk dramatically over the past two decades.  Consumables and equipment suppliers specific to foundries now number only a few for any given material or specialized equipment. Suppliers of commodity metals, scrap, alloys, and the like, price and supply on a global basis. Often, other sectors drive the pricing of these materials, as foundry consumption is small by comparison. Even the supply of sand has become problematic for foundries, with the competition for limited sand supplies from the shale-gas fracking markets.

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Here, too, it seems fair to say that suppliers to foundries have high bargaining power overall. Generally speaking, it is no wonder many foundries feel they are between a rock and a hard place, given the bargaining power of both suppliers and customers!