Read the critique provided below and provide feedback around 120 words. You are expected to include a new perspective, idea, experience, real world examples, and the course learning activities to support your assertions. You will be grated on the quality of your posts.
When the 2015 Ford F-150 was released in January 2014, one of the
technical revelations was the extensive use of aluminum in the body structure. Many people, like me, thought that this
increased amount of aluminum in the best-selling passenger vehicle in the US
would lead to a windfall for the aluminum supplier, Alcoa. Indeed, Alcoa’s stock price increased from
$11/share in Jan ’14 to over $17/share in Sept ’14. Recently however, Alcoa’s stock price has
fallen back below $11/share, is down 30% this year alone, and the most recent
quarterly report indicates potential further struggles. This slowdown is a result of a few different
economic conditions. First, the price of
aluminum is down 14% based on China’s reduced demand as well as shrinking
profit margins in the smelting business, which is the process of making raw
aluminum. In addition to the potentially
lucrative automotive products market, Alcoa has also been expanding into newer,
higher technology alloys to supply the aerospace industry. In response to these two diverging futures
for its aluminum producing vs finished product operations, Alcoa announced two
weeks ago that it would split into 2 separate companies. One company would be responsible for raw
materials, including bauxite mining, aluminum refining, and aluminum
production. This company reflects
Alcoa’s historical competencies, and will continue to be called Alcoa. The other, yet to be named company, will
include rolled, engineered, and transportation products. Interestingly, Alcoa’s CEO since 2008 and
former CEO of Siemens, Klaus Klinefield will take over as head of this new
spin-of, leaving the historical business unit to a new leader.
The dramatic differences in performance
between Alcoa’s two business units, and the resulting split creates an
interesting scenario in an industry that only expects to grow based on future
demand for lightweight and high-tech raw materials and finished goods. Despite the reduced demand and dropping
prices for raw aluminum, the divestment of additional value-adding units could
provide some new strength to the historic company. Founded in 1888, Alcoa’s core competency and
capability has always been the creation of useable aluminum alloys for
industrial and consumer product applications.
This divestment means that Alcoa’s resources and management can refocus
on that core competency, and not be distracted by the high-tech, R&D heavy,
engineered and finished products divisions.
Unfortunately, this strength does not come without major tradeoffs. With this new corporate-level strategy, Alcoa
is giving up an envious position of vertical integration. By controlling the raw material mining,
smelting, and refining, Alcoa is able to directly influence and control the
input costs to its value-added divisions such as transportation and engineered
products. Without more information on
the divestment, it is difficult to predict what relationship the new companies
will maintain. In a worst case scenario,
the companies will begin to operate completely independent of each other. This means that these new companies will have
to pay market prices for raw materials, and will not be able to internally
feedback long-term demand forecasts.
The divestment of value-adding units
from its raw aluminum producing business does create additional opportunities
for both future companies to take advantage of.
With its more direct focus on aluminum production, Alcoa will be able to
focus its R&D capabilities into the improvement of that process, rather
than the development of finished goods.
In addition, without the internal pressure to supply its downstream
divisions, Alcoa can reach out to other raw aluminum consumers and sell its
products at a higher profit. For the
high-tech, engineering intense, spinoff there are also additional potential
opportunities. Without the drag of a raw
material manufacture weighing it down, the new company will be able to spend a
higher percentage of its profits into long-term R&D, rather than investing
in expensive aluminum smelting and mining.
Finally, this new corporate strategy will introduce some new threats,
specifically to the spun off finished products business. Without the intrinsic advantage of vertical
integration, the door is opened to other aluminum finished goods manufacturers
to step up and become a stronger competition in the finished goods
markets. With this decision, Alcoa is
essentially reducing key barriers to entry in this industry.
Ultimately, it is very difficult to
understand Alcoa’s decision to implement this new corporate-level strategy,
even in the context of the current raw aluminum market. Essentially, Alcoa appears to be announcing
that its high-value finished goods and engineered products business units will
be more valuable under someone else’s management rather than its own. This decision could reasonably be linked to
the current CEO’s background in Seimens, a technology-based company rather than
a mining and raw material manufacturing company. It might even appear that Klaus Klienfield
has cherry-picked his pet business divisions to split out on its own, while
leaving the historical business units to be managed by the old guard. It is yet to be seen what the strategic
relationship between the two separate companies will be. My recommendation would be for the new spin
off to maintain a close contractual relationship with Alcoa in order to retain
some level of vertical integration benefit, while also minimizing the benefit
to competitors in the market.