Raw Material Subsidiaries
Where the subsidiaries are engaged in extracting raw materials for use by the parent company, obvious conflicts of interest could arise over the selling price and the degree of processing, if control were not assured.
Thus, a U.S. steel producer with iron ore mining operations in Canada explained its position as follows:
“As you no doubt realize, the only subsidiary functions which we have in Canada are related to iron ore operations. We do not construe this operation as an Independent function but rather as one of several essential functions of an Integrated steel manufacturer. We have never felt that this type of venture was appropriate for public participation in the United States and this viewpoint also holds with respect to Canada.”
Another United States corporation with wholly-owned Canadian mines explicitly refers to the conflict of interest which would result from minority stock holding:
“In our case the overwhelmingly important Canadian operation from a financial standpoint is that of mining – the mines produce a raw material for factories in the United States and Canada – but of course on account of the difference of population. The United States factories consume by for the larger part. This makes the mine an integrated part of our entire production scheme. If we had minority stockholders in the mine itself with our parent company’s stockholders therefore owning only part of the mine, too would have two conflicting interest, within the company regarding a single Integrated process. This fact has always caused us to reflect the idea of selling a minority interest.”
It is implicit in the above statements that the raw material supplied by the subsidiary to its parent is under-valued as an export from the hinterland. Indeed. there are good reasons why it serves the interests of no integrated corporation to under-value raw materials. One of these is that the output of small independent producers can be purchased at a depressed price.
Another is that to show unduly large profits might result in the reduction or withdrawal of concessions. or increases in taxation. Then again, low valuation of exports staples reduces the exchange risk to the companies where hinterland governments find themselves in revenue or balance of payments difficulties nod might seek to prevent the repatriation of profit Considerations of corporate security thus point towards pricing policies which provide the parent companies with cheap inputs.
Ultimate control over the ability of marginal or new producers to sell lo independent users, however, is assured only when processing facilities are tight! controlled by the existing big companies. Corporate resistance to minority share-holding in the raw material sector is, therefore, also a defence against demands for local processing installations.
Interestingly, it is no longer enough for a raw material producer to control smelting and refining facilities. The new trend is to vertical integration forward towards final manufacturing. This is in the service of both corporate security, and profits to be made from technological advance in manufacturing.
An interesting example of this trend is provided by the aluminium industry which experienced serious over-expansion of ingot capacity in the 1950’s.
“All through the world aluminium Industry, the jostling is still going on to align smelter capacity with fabricating mills and markets for Meet and shapes. More and more, the bia producers are going vertical and farther into technically-oriented products – because that’s where the profits lie. An ingot producer can’t have alone these days. He’s murdered on the open markets.”