Clarvin Auto Glass supplies 70% of the windshields for three car makers who together buy 90% of its output. Who holds the pricing power, and what does that mean for Clarvin's margins?

The three car makers hold most of the pricing power, because Clarvin depends on each of them far more than they depend on Clarvin. Clarvin's 70% share and the two-year approval cycle make it sticky within a model's life, but at every renewal the buyers take about 2% a year in price cuts. Margins are therefore capped and steady at best: Clarvin keeps its 13% only by finding 2% of savings every year, and they go to the customer.

A caterer who feeds three large office campuses may run their canteens well, but if one campus leaves, a third of the caterer's business goes with it, while the campus just calls another caterer. Pricing power sits with the side that would lose less if the relationship ended. Use Porter's five forces as the checklist, then ask which force actually presses hardest. For Clarvin it is buyers: three customers are 90% of sales and the largest alone is 40%.

It counts within a model's life. A car maker cannot switch windshield suppliers mid-model without two years of testing and approval, so Clarvin's contracts are sticky and its volumes predictable once a model is won. That is real, and it is why Clarvin's margin is stable rather than collapsing. But the power is lopsided at renewal, when the car maker can bring in the other supplier for the next model. The switching costThe cost in money, time or risk a customer bears to move to another supplier; high switching costs protect a supplier between contract renewals. protects Clarvin between renewals, not at them.

The car makers take about 2% a year in price. If Clarvin cuts its own costs by 2% a year, its margin stays near 13%; at 1.5% it slides to 10.8% in five years, and at 1% to 8.5%. The productivity Clarvin earns goes to its customers, so the analyst should model a flat margin at best and treat any year of expansion as temporary. Add the quarter's lag on raw material pass-through, and margins dip whenever glass or energy costs rise quickly.

The investment conclusion follows from the structure. Clarvin is a steady, predictable business whose margins are capped by its customers, so value it on stable cash flows, not margin expansion. The number that would change the view is customer mix: a fourth car maker, or export orders, would loosen the buyers' grip more than any efficiency programme.