In 1907, the Aluminum Company of America was founded.

It is the largest aluminum manufacturer in the world, Aluminum Company of

America (Alcoa) produces aluminum and alumina for the packaging, automotive,
aerospace, construction, and other markets. Alcoa's primary operations included
bauxite mining, alumina refining, and aluminum smelting. Its principal products
included alumina and its chemicals, automotive components, and beverage cans.
During the late 1990s, the company was organized into 21 business units, with 178
operating locations in 28 countries.


History
The Aluminum Company of America" became the firm's new name in 1907.
In 1938, the Justice Department charged Alcoa with illegal monopolization, and
demanded that the company be dissolved.
Alcoa purchased an 8% stake of Aluminium Corporation of China in 2001.It tried to
form a strategic alliance with China's largest aluminum producer, ; however, it was
unsuccessful. Alcoa sold their stake in Chalco on September 12, 2007 for around $2
billion.
In 2004, Alcoa's specialty chemicals business was sold to two private equity firms led
by Rhne Group for an enterprise value of $342, which included the assumption of
debt and other unfunded obligations
In 2005 Alcoa acquired two major production facilities in Russia, at Samara and
Belaya Kalitva
2006, Alcoa relocated its top executives from Pittsburgh to New York City
On July 16, 2012, Alcoa announced that it will take over full ownership and operation
of Evermore Recycling and make it part of Alcoa's Global Packaging group.

In June 2013, Alcoa announced it would permanently close its Fusina primary
aluminium smelter, in Venice where production had been curtailed since June 2010.

On January 9, 2014 it was reported that Alcoa had reached a settlement with the U.S.
Securities and Exchange Commission and the Department of Justice over charges of
bribing Bahraini officials.





Case summary




cost advantages and government actions gave Aluminum Company of America
(Alcoa) a U.S. monopoly in aluminum.
monopoly lasted for 50 decades.
Alcoa invention and patented lead alcoa to produce aluminum at much lower cost
than competitors
this firm controlled most domestic and many international sources of bauxite ore
Alcoa was only American producer of aluminum
Alcoa faced some competition from foreign producers, but U.S. established high
tariffs on aluminum imports
during WWI, when foreign competitors were unable to effectively produce and sell in
other countries, Alcoa became an exporter
Alcoa continued to export after war
between WWI and WWII, Alcoa remained only aluminum smelter (producer) in U.S.
due to its technological advantages and economies of scale
demand for aluminum increased substantially with start of WWII
aluminum was used to produce planes and other manufactured products for the war
effort.
during WWII, government financed new plants that were built and run by Alcoa and
encouraged development of other aluminum producers
break up
at end of WWII in 1945, U.S. Supreme Court ruled Alcoa monopoly should be broken
up
government-financed Alcoa plants sold at low prices to Reynolds Metals Company &
Permanente Metals Corporation (owned by Henry Kaiser) creating oligopoly by 1950
o Alcoa: 50.9% of all sales
o Reynolds: 30.9%
o Kaiser Aluminum & Chemical Corporation (renamed Permanente Metals):
18.2%


Pratical application
Public utilities
apparently believing theyre natural monopolies, governments grant monopoly rights
for essential good or service public utilities
water
gas
electric power
mail delivery
Electric power utilitie


Monopolist
o A single supplier of a good or service for which there is no close substitute
o The monopolist therefore constitutes the entire industry


Barriers to entry

Barriers to entry include:
o Ownership of resources without close substitutes
o Economies of scale
o Legal or governmental restrictions
Ownership of resources without close substitutes
o The Aluminum Company of America (ALCOA) at one time owned most of of the
worlds bauxite

Economies of scale
o Low unit costs and prices drive out rivals
o The largest firm can produce at the lowest average total cost
Natural Monopoly
o A monopoly that arises from the peculiar production characteristics in an industry
o It usually arises when there are large economies of scale
o One firm can produce at a lower average cost than can be achieved by multiple firm
The Cost Curves That Might Lead to a Natural Monopoly


Legal or governmental restrictions
o Licenses, franchises, and certificates of convenience
o Examples include
Electrical utilities
Radio and television broadcasting
Legal or governmental restrictions
o Patents
Intellectual property
o Tariffs
Taxes on imported goods
o Regulation
Government enforcement of safety and quality
How Society Loses from Monopoly (contd)
As a result of monopoly, consumers are worse off in two ways:
o The monopoly profits that result constitute a transfer of a portion of consumer
surplus away from consumers to the monopolist
o The failure of the monopoly to produce as many units as would have been produced
under perfect competition eliminates consumer surplus that otherwise would have
been a benefit to consumers
Crafting a monopoly by alcoa
Alcoa scaled up primary operations rapidly during period of aluminum process patent
control
Vertical integration forward and backward
Secured exclusive contracts with suppliers of scarce inputs: hydro, bauxite, etc.
R&D internalized; expertise established
Tariffs kept foreign aluminum out
Canadian operations did business in Europe
Costs (and prices) came dramatically down
By WWI--no new entrants in primary production

Problem faced by alcoa long with solution
By the time the US entered the war, 90% of Alcoas production was used in military
applications.
By 1918, the New Kensington works was producing mess kits, canteens and helmets,
instead of cooking utensils. Aluminum became regulated like other strategic materials
and prices remained low.
As the war ended, Alcoa found itself with excess capacity, a huge decline in demand,
and a return of imports. Price controls were lifted and the expansion of aluminum
spilled over into civilian uses.

Patent problem-
Patent disputes arose between the Cowles brothers and Hall. Cowles had started using
Halls process without licensing, and had acquired rights to the Bradley patents for the
electric arc process they employed. After suits and countersuits, Cowles and Hall
settled by Pittsburgh Reduction Company licensing the Bradley patents through 1909,
and Cowles agreeing to purchase 146,000 pounds of aluminum annually at ten cents
off the list price.

World war 2
the government believed that the shortage was due to Alcoa having a monopoly in US
primary aluminum production.
Alcoa received negative publicity for failing to anticipate war production needs.
Alcoas monopoly was cited as the principal reason.

After the war was over, the US canceled Alcoas plant leases and most plants were
sold to Kaiser and Reynolds, at or below the cost to build them and Alcoa was
required to license the technology necessary to run them. The only plant Alcoa was
permitted to keep was the Cressona extrusion plant.

The country was left with an oligopoly of four major companies Alcoa, Aluminium
Limited, which was to become Alcan, Reynolds and Kaiser. In 1947, Alcoa petitioned
for a ruling that it no longer monopolizes the market, but the ruling was rejected and
the Justice Department retained jurisdiction over Alcoa until 1957.


solution
With astounding speed, Alcoa met the war time challenge. In three years, Alcoa built
over 20 plants: 8 smelters, 11 fabricating plants, 4 refineries, and operated them for
the government.
Total investments in the industry during World War II rose to $672 million, of which
$474 million were Alcoa investments. Employment rose from 26,179 in 1939 to
95,044 by 1944.

Prior to the war, Alcoa concentrated on production. The war brought the realization
that product improvements would be necessary.
After World War I, as power resources in the US became increasingly expensive,
Alcoa expanded. Alcoa entered the bidding for developments in Canada by James B.
Duke.
By 1928, Alcoa had over half of the world capacity in primary aluminum: 90,000
metric tons in the US, 45,000 in Canada and 15,000 in Europe, but managing overseas
operations presented problems.
On June 4, 1928, Alcoa divested its ownership/interest in 34 companies worldwide
and transferred them to Aluminium Limited of Canada.