Corning’s Mirroring Business Made a Loss of $6 Million

Case Type: improve profitability.
Consulting Firm: PricewaterhouseCoopers (PwC) Advisory first round full time job interview.
Industry Coverage: building materials.

Case Interview Question #00804: Our client Corning Incorporated (NYSE: GLW) is an American manufacturer of glass, ceramics, and related materials, primarily for industrial and scientific applications. The company was known as Corning Glass Works until 1989, when it changed its name to Corning Inc. The company is headquartered in Corning, New York.

This case is about Corning’s mirroring business unit. Corning Inc. has 3 divisions within its mirroring business unit: Large Surface, Custom Cut and Mirroring. Large Surface produces large surfaces of simple flat glass. Custom Cut cuts the large surfaces in smaller forms. Part of the glass produced by Large Surface or Custom Cut goes to external customers; part of it goes to the other business division(s). The Mirroring Division makes custom made mirrors for furniture producers. Mirroring gets the specific glass shapes from Custom Cut, adds the mirror surface through a chemical treatment and finishes them.

3 years ago Corning’s Mirroring division was break-even and last year (2015) the division made a loss of $6 million. What is happening and how could we solve this?

Possible Answer:

Note to the Interviewer or Case Giver: This is a profitability case, and we are looking for the 3 major reasons why the Mirroring division profitability has declined. This case is meant to be very interactive and you need to ask the candidate very often what he or she thinks is happening. We also want the candidate to come up with these 3 reasons and let him/her elaborate on them. In the initial structure the candidate should touch upon these.

1. Revenues, Costs, and Profits

The candidate should ask for this additional data. Do not give unless asked.

1.a. The cost components

• We assume that there are only 2 major costs: labor and cut glass, and both were 50% of total cost in 2012.
• There was a lot of capacity addition in the cut glass industry and cut glass prices dropped by 30% from 2012 to 2015.
• The client has also been investing in technology and through higher efficiency labor costs have decreased by 20% from 2012 to 2015.

1.b. The sales & revenue data

• Sales were $60 million in 2012 and $39 million in 2015.
• The company’s Mirroring division broke-even in 2012 and made a loss of $6 million in 2015.
• In volume terms sales were stagnant at 3 million square feet over this period (from 2012 to 2015).

If the interviewer provides the candidate with the profit, sales and selling price, the candidate should be able to come up with the price and the cost per unit. If he or she does not, ask him/her to calculate it.

The candidate should come up with a calculation table like the following one:

Conclusion: From this calculation table we can conclude that prices have fallen by 35% while costs have decreased only by 25% and this is the reason for the losses. We can also conclude that the drop in the cost of glass explains a drop in price of $3/sq ft and the drop in labor costs explains another $2/sq ft. The break-even price should be $15/sq ft. We, therefore, need to analyze why the price dropped more than costs.

2. Competitive Landscape

Important: let the candidate ask the right questions.

2.a. Market structure and market share

• Our client Corning is operating in a market where there are at least 15 competitors.
• There are 3 big players in the market with each about 20% of the market, the rest are all small shops.
• Our client Corning is one of the big players.

2.b. Competitors detail

One of our big competitors is located in just across the border in Mexico.

• Cost advantage in labor: The labor costs in Mexico are 40% cheaper.
• With this information, the candidate should do the following calculation and conclude: This is a big deal: labor costs are about $8 /sq foot for us, so this means our competitor can produce the glass at 7 + 8*(1-40%) = $11.8/sq foot.

The candidate should try to determine if there are any other costs incurred: For being in Mexico they incur extra shipping costs of about $1.20/sq foot.

Conclusion: One of our main competitors has a labor cost advantage of 40% and can produce and transport the glass at $13/sq ft. This might explain another $2/sq ft in price decrease to $13/sq ft. But margins, even for our competitor, are extremely thin — we need to evaluate who our customers are and what their bargaining power is.

3. Customers

Also in this area the candidate should try to find out what is going on, let him/her ask the questions.

• In 2012 we sold 80% of our products to 5 clients.
• Because of a crisis in the furniture industry, there have been 2 mergers, so that we now supply 80% of our sales to 3 clients.
• These 3 clients make up about 75% of the industry sales.

Conclusion: The bargaining power of our customers has gone up significantly and they squeeze our margins and those of the competitors. We should evaluate if there are other customer segments that we can sell to without significant investments.

4. Wrap Up

Ask the candidate to summarize the factors that influence the price decrease between 2012 and 2015.

Sample Summary:

• Our client’s price has dropped by 35% which can be explained in part by the fact that costs have gone down by 25%.
• A competitor is located in Mexico and has a significant labor cost advantage and is able to price lower than us.
• The increased bargaining power of customers, as a result of consolidation in the industry, drives margins down close to 0.

Possible options to be analyzed:

• Further improvement in efficiency.
• Moving manufacturing to a proximate low cost location like Mexico.
• Lobbying government for support (subsidies, etc) to prevent job losses to Mexico.
• Diversifying the customer base
• Consolidation