[GRRN] myth of economies of scale in waste services

William P. McGowan (6500kai@ucsbuxa.ucsb.edu)
Wed, 14 Apr 1999 21:34:21 -0700 (PDT)


You got the idea of economies of scale down, alright, but I am not talking
about the operation of s single waste disposal facility. What made (and
still makes) the national waste service firms the darlkings of Wall Street
is that they emphasize that they can run more trucks and more landfills
with just a single management structure. That just isn't the case. While
Federal regulations on waste disposal in the 1970s and 1980s did create a
de facto national standrad that exceeded all local and state standards,
this was only a temporary phenominon. Soon, local and state standards
started exceeding Federal ones. This trend, combined with NIMBYism made
it impossible to run a national waste service firm as a true, vertically
integrated business entereprise. It would instread become increasingly
horizontally integrated, where economies of scale are less acheivaavable.

I believe this is where the nationals are now. The reason why we are
seeing so much consolidation in the industry is that there is a lot of
cash rolling around in the business, and the industry has very low price
points. Sure, there are still some efficinescies gained by
consolidating into MegaWaste Inc., but I believe that the tricks Tom
Fatjo, wayne Huzienga, et al. pulled off are less and less remunerative
each time they been tried since. The big guys will get old and fat and
eaten by some smaller, more entrepreneurial firm.

Anyway, that is a bit of what I mean about economies of scale as a myth.
Please do not get me wrong. When I began my research, I firmly believed
that what BFI and WMX were doing was the wave of the future, and that
tere would one day be some giant wast servoice firm. But luckily, I had
an advisor who forced me to prove to him that there were such things as
economies of scale. After examining the cost curves and the
organizational structure of each, I find that devolution is more likley
to occur in the coming years. We already are seeing this to a degree in
that USA Waste and others seems to be cedinbg more and more of their
operational control to the street level, and by doing that becoming more
holdiong companies and less management enterprises.

Bill McGowan
Rincon Recycling