InvestorQ : Can cost advantages ever be a moat?
Deepa Salunkhe made post

Can cost advantages ever be a moat?

Juvina Maggie answered.
3 years ago

To an extent, cost advantage can be a moat. The cost advantage can turn into an advantage if it is driven by a particular factor that is going to be hard to replicate. Reliance Jio could create a cost advantage in telecom because it had the infrastructure and the technology which enabled them to commoditize voice and provide zillions of bytes of data at virtually no cost. Quite often, cost advantage as a moat can be actually quite transient as cost advantages can be replicated. In the past, India had a cost advantage in textiles which it subsequently lost to countries like Vietnam and Bangladesh. However, China has managed this economic moat much better.

Today, China is able to produce most metals and heavy equipment at a cost which other countries are just not able to compete with. To an extent, the advantage for China comes from the incredible scale that its factories operate in. More than the low costs, it is the scale that is going to be hard to replicate. In fact, Indian IT and Pharma actually grew on the back of this economic moat for all these years. Similarly, while Apple and Samsung continue to dominate the smartphone market, Chinese names like Xiaomi and Oppo have dominated the lower and mid-end of the smartphone market. In fact, cost advantage can be a major entry barrier.