Meralco Analysis 4x1u2c

Industry Analysis According to the Philippine Stock Exchange, Manila Electric Company, more commonly known as MERALCO, belongs to the industrial sector (i.e. electricity, energy, power and water subsector). Its market is composed of four sectors: residential, commercial, industrial and streetlights. Celebrating its 110th year this 2013, MERALCO is sure to continue its operations in the long run. The question now is whether the industry is growing or headed to a potential decline. For over a hundred years, Manila Electric Company has been the sole provider of electricity in some specific areas in the Philippines. As a monopoly, it is the only player in the energy industry in the areas that it serves. The company has no competition so it has all the powers. The company controls the prices and the market. In addition it is very challenging for new companies to rise for MERALCO is already a known name and a trusted brand. Through the years, the demand for electricity is rising, especially now with the advent of technology where almost everything needs electric power. Furthermore the increase in population adds to the demand in electricity. With this in mind, the following factors will be taken into consideration in the conduct of an industry analysis:          

Barriers to entry Industry level of concentration Impact of industry capacity Market share stability Industry life cycle Price competition Demographic influences Government and regulatory influences Social influences Technological influences

Furthermore, an industry analysis will be also conducted based on Porter’s Five Forces:     

Threat of new entrants Threat of substitute products Bargaining power of customers Bargaining power of suppliers Rivalry among existing firms

Barriers to Entry With the current position of MERALCO, it would be very difficult for companies to enter the industry. MERALCO is not only a monopoly in the energy industry but also an established, trusted brand in the past 110 years of its operations. New entrants in the industry would have difficulty in competing with them especially in of gaining market share. In fact, according to data presented in their website, MERALCO is the company in charge of 75% of Luzon’s energy sales and 55% of the country’s energy sales. One of the entry barriers that potential customers may face is the fact that it would be better and more efficient if MERALCO is the only business that supplies power and energy. Potential competitors would incur very high costs if they try to enter the market. This is also the reason why MERALCO is considered as a monopoly. MERALCO has been in business for such a long time, even older than almost all of us, that it has gained the know-how to sustain its market and continue growing. Thus, in the energy sector, there is very high barrier to entry.

Threat of substitute products Energy is considered as the basic need of any home or business but only a few have access to its sources. Fossil fuels are the main source of energy for MERALCO. Other alternatives have gained popularity such as hydroelectricity and solar energy. However, these alternatives are very expensive and there is still limited capacity. Threat of substitute products is affected by the ability of customers to find a different source of what you are offering. In the case of MERALCO, there is little threat of substitute products because as stated above, it is responsible for the supply of energy in Luzon, specifically the whole Metro Manila, Rizal, Cavite and Bulacan, and parts of Batangas, Pampanga, Quezon and Laguna. Consumers are deprived to choose what electric company they will avail electric services of because there is no other company which offers this service besides MERALCO. Because there is no demand for a substitute product, this has no impact on the pricing of MERALCO. It has the capacity to manipulate the price of electricity such that they can earn profits. Since substitution is not possible, it strengthens the power of MERALCO.

Bargaining power of customers

As a monopoly in the energy distribution industry, MERALCO is not affected by this because all the power is in the hands of the company. In a monopoly, it is the firm that dictates the price and the supply of any product. This is the current situation in the energy distribution industry. However, according to MERACO’s 2010 Annual Report entitled Re-energized, the Philippine power industry is in the process of fundamental restructuring under the Electric Power Industry Reform Act (EPIRA) of 2001. Two of the EPIRA’s restructuring measures include (1) “deregulation of, and introduction of competition in, power generation and supply activities and pricing”, and (2) “freedom of consumers to choose electricity suppliers”. These two has the possibility of affecting the operations of MERALCO. One activity that the Department of Energy is spearheading is implementation of Retail Competition and Open Access. According to the Energy Regulatory Commission, the aforementioned measures will allow electricity consumers to choose their own Retail Electricity Supplier or RES. This will be initially exercised by commercial and industrial customers. The RCOA is targeted to be completed by November 2013. If this act is finally implemented, demand will be elastic and this will give the customers the ability to affect the pricing. There will be lesser buyer switching costs thus increasing the power of consumers. Moreover, there is high buyer volume because almost all people need electricity which can lead to influence on the price of electricity. There will be a greater number of consumers than the number of suppliers in the energy distribution industry. As a consequence, electric companies would have to strategically price their products/services and will also cause increase in competition in the industry. Lastly, it would be undeniable that the industry will grow and demand will increase, which may potentially lower the pricing of MERALCO.

Bargaining power of suppliers MERALCO is only a distribution company and does not generate its own capacity yet. Instead it purchases the power it distributes from the National Power Corporation (NPC) and Independent Power Producers (IPPs). In 2012, 48% of the power supply was from IPPs, 45% from NPC and the rest is from Wholesale Electricity Spot Market (WESM), a place where suppliers and buyers trade electricity as a commodity. MERALCO is dependent to its supplier thus it would be difficult for them if one party would not sign the contract. With this, the company should prioritize their relationship with their suppliers to ensure stability of supply. Furthermore, the company, in agreement with Chubu Electric Power Co. of Japan, will establish MERALCO Power Gen Corporation (MGen) that will generate more or less 300 MW power capacity. Through this, the company will not be too dependent with its suppliers.

Rivalry among existing firms As mentioned earlier, Manila Electric Company is a monopoly which means it does not have any direct competitors. Consumers are left with no choice but to purchase their electricity from MERALCO. In the Philippines, there are several electricity providers but the difference is that they cater to different markets. For example, MERALCO caters to most of Luzon. In Visayas, specifically Iloilo City, Panay Electric Company, Inc. (PECO) dominates the industry. Lastly, STEAG State Power Inc. (SPI) supplies electricity to the Mindanao island. Rivalry would increase when these electricity providers compete for the same customers and resources. In general, having the same market will intensify rivalry. However, with the advent of technology, energy consumption has tremendously increased. This is good for electricity providers because it means they will increase market share and thus their overall profits. Overall, there is low rivalry among firms in the energy distribution industry because of high buyer switching cost, brand identification, high entry barriers and low exit barriers.

References "Meralco | Ang Liwanag Ng Bukas." Meralco | Ang Liwanag Ng Bukas. N.p., n.d. Web. 31 Aug. 2013. . "THE PHILIPPINE STOCK EXCHANGE, INC." THE PHILIPPINE STOCK EXCHANGE, INC. N.p., n.d. Web. 31 Aug. 2013. . "Porter’s Five Forces." Porter's Five Forces. N.p., n.d. Web. 31 Aug. 2013. . "Porter's Five Forces." Porter's Five Forces. N.p., n.d. Web. 31 Aug. 2013. . "Retail Competition and Open Access." Energy Regulatory Commission. N.p., n.d. Web. 31 Aug. 2013. < http://www.erc.gov.ph//Files/Documents/RCOA2012.pdf/>.

Re-energized: MERALCO 2010 Annual Report. Publication. N.p.: n.p., n.d. Web. 31 Aug. 2013. . Deparment of Energy. 21ST EPIRA Implementation Status Report. N.p., n.d. Web. 31 Aug. 2013. .