View from City Road: Pilkington risks its credibility

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The Independent Online
GIVEN its experience over the past two years, Pilkington's decision to impose an 8 per cent increase on its British glass prices from February looks foolhardy. In 1991, it tried to put through an 8 per cent rise, but prices slumped by 20 per cent during the year; last year, they were still dropping - albeit less steeply - despite a 7 per cent increase in list prices in June. More seriously, the 1992 attempted increase cost it about 10 percentage points of market share as competitors undercut it.

This time, the company expects its increase to hold. That is not because business is improving - construction output is expected to fall a further 2 per cent this year, while the car market is likely to remain depressed - but because Pilkington's main competitors, with 40 per cent of the market, are foreign companies like St Gobain of France. And devaluation means the cost of imports has risen by 15 per cent.

Leaving aside the implications that Pilkington's action has for Norman Lamont's inflation targets - particularly if it is followed by other manufacturers - it is a high-risk strategy. Its customers, the construction companies, are buckling under the strain of falling workloads and disappearing margins. Many will have bid for contracts on the assumption that material prices will at least remain flat, if not fall further. Until there is firm evidence that the recovery is under way, they will be unwilling to countenance increases.

Pilkington is assuming that it will not provoke retaliation from importers willing to suffer short-term pain to maintain their market share. But, with much of the rest of Europe, including the key German market, now going into decline, that is a dangerous assumption. And the risk is that, if this rise does not stick, Pilkington's credibility will be undermined, making it difficult to seek another increase later in the year.

That explains why other building materials producers, whose markets are almost exclusively domestic, are holding fire. There is anecdotal evidence of an improvement in the last two months of 1992, with prices stabilising at best, or falling less quickly at worst, but that is hardly enough to herald a recovery. The key to that remains an improvement in volumes, and no one is banking on that until the end of the year at least.