Alcoa

Monopoly

In 1907, the Aluminum Company of America was founded.
It is the largest aluminum manufacturer in the world.
Aluminium Company of America (Alcoa) produces aluminum and alumina for the
packaging, automotive, aerospace, construction, and other markets.
Alcoa's primary operations included bauxite mining, alumina refining, and
aluminum smelting.
Its principal products included alumina and its chemicals, automotive
components, and beverage cans.
During the late 1990s, the company was organized into 21 business units, with
178 operating locations in 28 countries.

About Alcoa

The Aluminum Company of America" became the firm's new name in 1907.

In 1938, the Justice Department charged Alcoa with illegal monopolization, and
demanded that the company be dissolved.

Alcoa purchased an 8% stake of Aluminium Corporation of China in 2001.It
tried to form a strategic alliance with China's largest aluminum producer, ;
however, it was unsuccessful. Alcoa sold their stake in Chalco on September 12,
2007 for around $2 billion.

In 2004, Alcoa's specialty chemicals business was sold to two private equity
firms led by Rhne Group for an enterprise value of $342, which included the
assumption of debt and other unfunded obligations

Brief History of Alcoa
In 2005 Alcoa acquired two major production facilities in Russia, at Samara and
Belaya.

2006, Alcoa relocated its top executives from Pittsburgh to New York City.

On July 16, 2012, Alcoa announced that it will take over full ownership and
operation of Evermore Recycling and make it part of Alcoa's Global Packaging
group.

In June 2013, Alcoa announced it would permanently close its Fusina primary
aluminium smelter, in Venice where production had been curtailed since June 2010.

On January 9, 2014 it was reported that Alcoa had reached a settlement with the
U.S. Securities and Exchange Commission and the Department of Justice over
charges of bribing Bahraini officials.

Contd


Cost advantages and government actions gave Aluminum Company of America
(Alcoa) a U.S. monopoly in aluminum.

Monopoly lasted for 50 decades.

Alcoa invention and patented lead Alcoa to produce aluminum at much lower
cost than competitors.

This firm controlled most domestic and many international sources of bauxite
ore.

Alcoa was only American producer of Aluminum.



Case summary


Alcoa faced some competition from foreign producers, but U.S. established high
tariffs on aluminum imports.

During WWI, when foreign competitors were unable to effectively produce and
sell in other countries, Alcoa became an exporter.

Alcoa continued to export after war.

Between WWI and WWII, Alcoa remained only aluminum smelter (producer) in
U.S. due to its technological advantages and economies of scale

Demand for aluminum increased substantially with start of WWII


Contd..
Aluminum was used to produce planes and other manufacture products for the
war effort.
During WWII, government financed new plants that were built and run by Alcoa
and encouraged development of other aluminum producers.
At end of WWII in 1945, U.S. Supreme Court ruled Alcoa monopoly should be
broken up.
Government-financed Alcoa plants sold at low prices to Reynolds Metals
Company & Permanente Metals Corporation (owned by Henry Kaiser) creating
oligopoly by 1950
Alcoa: 50.9% of all sales
Reynolds: 30.9%
Kaiser Aluminum & Chemical Corporation (renamed Permanente Metals):
18.2%
Contd
Monopoly is a market structure, where there only a single seller producing a
product having no close substitute.

This single seller may be in the form of an individual owner or a single
partnership or a Joint Stock Company. Such a single firm in market is called
monopolist.

Monopolist is price maker and has a control over the market supply of goods.

A single supplier of a good or service for which there is no close substitute.

The monopolist therefore constitutes the entire industry.

What is Monopoly ?
Only one single seller in the market. There is no competition.

There are many buyers in the market.

The seller controls the prices in that particular product or service and is the price
maker.

Consumers dont have perfect information.

There are barriers to entry. These barriers many be natural or artificial.

The product does not have close substitutes.


Characteristics of Monopoly
Alcoa scaled up primary operations rapidly during period of aluminum process patent
control.

Vertical integration forward and backward

Secured exclusive contracts with suppliers of scarce inputs: hydro, bauxite, etc.

R&D internalized; expertise established.

Tariffs kept foreign aluminum out from the market.

Alcoas Canadian operations did business in Europe.

Costs (and prices) came dramatically down.

By WWI--no new entrants in primary production

Crafting a Monopoly by Alcoa

By the time the US entered the war, 90% of Alcoas production was used in
military applications.

By 1918, the New Kensington Works was producing mess kits, canteens and
helmets, instead of cooking utensils.

Aluminum became regulated like other strategic materials and prices remained
low.

As the war ended, Alcoa found itself with excess capacity, a huge decline in
demand, and a return of imports.

Price controls were lifted and the expansion of aluminum spilled over into
civilian uses.

Problem faced by Alcoa
Patent disputes arose between the Cowles brothers and Hall.

Cowles had started using Halls process without licensing, and had acquired
rights to the Bradley patents for the electric arc process they employed.

After suits and countersuits, Cowles and Hall settled by Pittsburgh Reduction
Company licensing the Bradley patents through 1909.

Cowles agreeing to purchase 146,000 pounds of aluminum annually at ten cents
off the list price.

Patent problem

The US government believed that the shortage was due to Alcoa having a
monopoly in US primary aluminum production.

Alcoa received negative publicity for failing to anticipate war production needs.

Alcoas monopoly was cited as the principal reason.

After the war was over, the US cancelled Alcoas plant leases and most plants
were sold to Kaiser and Reynolds at or below the cost to build them.

Alcoa was required to license the technology necessary to run them.

The only plant Alcoa was permitted to keep was the Cressona extrusion plant.


World War II