Rebar Steel Producer TAMCO Responds to New Competitor

Case Type: business competition, competitive response; reduce costs.
Consulting Firm: NERA Economic Consulting first round job interview.
Industry Coverage: metals production; manufacturing

Case Interview Question #00477: TAMCO Steel, Inc. is a rebar steel manufacturer based in Rancho Cucamonga, California, United States. A rebar (short for reinforcing bar), also known as reinforcing steel or reinforcement steel, is a common steel bar, and is commonly used as a tensioning device in reinforced concrete and reinforced masonry structures holding the concrete in compression. The company’s products are used in the construction of buildings, freeways, bridges, parking garages, and concrete structures. It serves markets primarily in California, Arizona, and Nevada. As of October 2010, TAMCO Steel becomes a wholly-owned subsidiary of Gerdau Ameristeel US, Inc.

TAMCO Steel has one steel mini-mill in California. The plant is fairly old and is only marginally profitable. A competitor of TAMCO Steel recently built a new steel plant 300 miles away. What is the competitive threat? How should the client respond?

Note to Interviewer:

This is a strategy case with some light math. As the interviewer, you should have the candidate do a few calculations to help drive to the answer. Also, at the end, let the candidate brainstorm a few strategic options that the client firm could explore. An important question they should consider is why the client’s California steel plant exists at all.

Possible Answers:

A logical approach (3C’s framework: Company, Competitor, Customers) to this competitive response case is to look at the client company’s cost structure, the competitor itself, and the customers/market place. Additional information that can be provided to candidate is shown below.

Additional Information: (to be given to candidate if asked)

1. Company

• Client’s California steel plant has a capacity of 500,000 tons per year.
• They charge a price of $300 per ton.
• The California steel plant currently runs at 80% capacity, and has run at this level for years.
• The client company enjoys a 20% net margin.
• The client company’s cost structure is:
  • 20% fixed costs
  • 10% incidental expenses
  • 30% labor costs
  • 30% raw materials
  • 5% inventory expenses
  • 5% overhead

2. Competitor

• The new competitor also manufactures the same rebar steel as the client.
• The competitor’s steel plant cost $200M to manufacture and is 50% larger than the client’s steel mill.
• The competitor enjoys a 10% cost advantage over client’s steel costs, which is passed onto customers.
• The competitor enjoys a 50% labor cost advantage relative to our client’s steel costs.

3. Customer

• Currently TAMCO Steel’s California steel plant has one customer, located 300 miles away from the plant.
• The customer buys 400,000 tons of rebar steel from TAMCO Steel per year.
• They are satisfied with client’s product quality and price.
• TAMCO Steel represents approximately 45% of their total annual steel purchases.

Possible Solution:

• The client sells the rebar steel for $300 per ton.
• Client’s costs per ton are $240 (80% of revenue = $300 * 80% = $240, as net margin = 20%).
• The competitor’s costs are only $216 per ton (90% of client’s costs = $240 * 90% = $216, as they enjoy a 10% cost advantage).
• If we assume that both client and competitor have equal gross margins (20%), then the competitor sells their steel for $270 per ton ($216 / 80% = $270).

A quick quantitative analysis as outlined above shows that TAMCO Steel’s California steel mill is extremely vulnerable. They sell the rebar steel for $300 per ton, while the competitor sells the same rebar steel for $270 per ton only.

Since the client seems to be at a significant labor cost disadvantage (200% as high as the competitor’s, as they enjoy a 50% labor cost advantage), perhaps the firm could reduce its labor costs per ton.

TAMCO Steel’s California steel mill currently incurs $72 per ton in labor costs (30% * $240 = $72). If they could achieve the competitor’s labor cost levels of $36 per ton ($72 * 50% = $36), then their total costs would be $204 per ton ($240 – $36 = $204), less than the competitor’s total costs of $216.

However, steel is a competitive industry, and it would seem unlikely that the client’s fairly old steel mill could obtain such dramatic cost savings. Thus, we should also consider other options.

The client firm should perhaps find new customers, or enter into new steel markets, for instance the high quality steel segment or specialty coated steel.