Low breakevens have a lot to answer for

When I was investing I was always stricken by the number of companies who showed us what a low break even point they had; some were even in the low 30's. Naively, we put that down to low SG and A (it was low, but in retrospect largely because it was not needed).

Instead, it now seems to me that the break even points were low because of industry structure - the one or two fellows who came to us were in industries that for the most part had many subscale competitor's or maybe it was just that the ones who came to us had begun to redefine scale.

This sort of company has potential to generate great returns, but not by the method generally chosen by entrepreneurs which is to create more of the same by replicating plants. At some point their competitor's catch up with them and the break even for everyone rises, driven by lower margins brought on by competition.

Instead, the correct path appears to be to cut prices to the levels they would reach at a later date, and invest heavily in high productivity machines which increases barriers to entry greatly. One must withdraw from the industry the profits needed for the whole industry to grow together.

The only thing needed is to have a market big enough to allow the use of the high productivity machines, which provides a real reason to export from India.