The Importance of Sustainable Competitive Advantage

When a value investor screens companies, he is not only looking for companies with good earnings and revenue growth including high ROE, but another intangible factor is whether the company has a sustainable competitive advantage. Under Porter's 5-Forces, we discussed the importance of "Threat of New Entrants", which referred to the barriers to entry for a new company trying to enter a particular industry. If a company has a strong competitive edge, this will make it difficult, if not impossible, for the competitor to get a solid foothold and steal market share away.

Thus, the strict definition of sustainable competitive advantage is a company which has a strong product, service or brand which no one else can replicate or perform as well; such that the company can offer a better value proposition to its customers/clients. This competitive strength has to be sustainable, meaning it has to be strong enough to last many years; insulating the company from external threats and allowing it to have pricing power and significant market share.

For the companies in my portfolio, each has its own competitive advantage, which is why they were chosen in the first place. They are as follows:-

a) Ezra Holdings - Ezra has a fleet spanning many a broad range of offshore support vessels spanning transportation, production and construction which can provide services to tne entire oil field cycle. These consist of medium AHTS, AHT, Pipe-Laying vessels and soon, an FPSO. This is in contrast to most other companies who only supplies support vessels for one aspect of the oil field cycle. By promising a one-stop solution, Ezra is able to deploy its own vessels at any phase in the cycle in order to minimize disruptions and to lower costs (avoidance of using third-party vessels); something which its competitors find hard pressed to do.

b) Pacific Andes (PAH) - PAH is a fishing specialist company which owns 63.9% of China Fishery Group (CFG). CFG, in turn, owns exclusive fishing licences to fish in the waters of Peru in order to harvest Peruvian anchovies to process into fishmeal. Since there is a limited supply of fishing licences due to over-fishing, there are thus strong barriers to entry for CFG's competitors. In addition, PAH and CFG are vertically integrated which means they cover the entire value chain (using SCM principles), thus reducing reliance on third-party fish sources which tend to ramp up costs. This positions them to be in a unique competitive position even as worldwide fish consumption continues to grow.

c) Global Voice (GV) - GV owns an extensive European metopolitan fiibre network which was built during the dot.com era. They bought over this network at a fraction of the original construction cost due to the lack of demand for such services back in the late 1990's. In addition, GV has also purchased a long-haul network and undersea cable system from Viatel to augment its fibre network capabilities. Thus, the company is in a unique position to offer solutions to customers spanning many countries and linked through many cities; something which other companies lack because they do not have the physical infrastructure.

d) Swiber - Swiber owns a fleet of small to medium AHTS vessels as well as a crane barge and pipe-lay vessel which are similar to Ezra; but the difference is that the company provides services to the EPCIC industry. This is a niche industry and they are one of Asia's more prominent operators. Most of the competition is located in America and for those companies to set up a representative office here would mean higher costs. Thus, Swiber offers a strong value proposition and is able to charge lower prices (cost advantage) due to their Asian roots. The business is also gaining traction as they expand their vessel fleet and diversify their customer base into key markets such as India, The Middle East and Brunei. Their competitive strength is their niche focus, which avoids putting them in direct competition with the larger rig buildings and support vessel owners.

e) Boustead - Boustead has three business units (see their Annual Report or website at http://www.boustead.sg/) and has expertise in managing Industrial Real Estate Solutions, and their expertise is renowned over the world just by looking at the recent projects which Boustead Projects had secured. Also, their 100% owned unit Salcon is a world leader in water and waste-water solutions, and is part of the Singapore Water Solutions Alliance organized by IE Singapore to explore opportunities in the Middle East. Their Maxitherm and Controls & Electrics division (engineering division) has also successfully completed projects in countries as diverse as Philippines and South America. Thus, Boustead has an almost complete suite of competitive advantages; and they are led by a capable Management team which has grown the business successfully for the last five financial years.

Taking the above into account, it is important for the reader to understand that many companies do seem to have a strong advantage and tout themselves as "market leader" or "trend movers". But by looking closer and thinking harder about their business model (as well as applying the 5-Forces), one can see that their so-called competitive position can be eroded very quickly should the business environment change. Industries like alternative fuels are subject to constant change and no company has the upper hand right now (e.g. Wilmar). Solar panels are also all the rage but since everyone is jumping on the bandwagon, no one knows who the dominant player will be.

Sometimes, it pays to be patient and observe the companies involved in an industry in order to determine which is the market leader. By analyzing the competitive strengths of the market leader, we can start to see why the company is able to command such a premium position. However, it is still up to ourselves to ask whether this is sustainable as we need to have a long-term perspective. It is not easy to do, admittedly; but it's not rocket science either ! Most laymen and retail investors should be able to get a grasp of things from reading the papers and business publications. All one needs to do (and please find time to do it !) is to sit down and think through the issues, and you will gain more understanding and clarity eventually.

For tomorrow, I will be doing my mid-July 2007 review of my portfolio, so stay tuned !