The Power of Limited Competition: Investing in Efficient Scale Moats

Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

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Efficient scale is a type of economic moat that occurs when a market is effectively and optimally served by one or just a few firms. The key idea is that the total demand in the market is limited — and if too many companies tried to compete, all of them would suffer from reduced returns, often falling below the cost of capital. This natural limitation discourages new entrants and protects the incumbents' profitability.

Why Efficient Scale Matters to Investors

Companies benefiting from efficient scale often operate in niche or capital-intensive industries. Because the markets they serve cannot sustain many players, these companies can enjoy:

• Stable long-term profits

• Limited competition

• High returns on invested capital

• Resilience during downturns

These characteristics make them attractive additions to a long-term investor’s portfolio, especially for those seeking durable, defensible businesses.

How to Identify Efficient Scale Moats

To spot companies with efficient scale:

1. Assess the size and structure of the market: Is there room for multiple profitable players?

2. Check for high capital intensity: Does it require major upfront investment that deters new entrants?

3. Look for long-term dominance: Has one player held most of the market share over time?

4. Study the regulatory environment: Are there licenses or government protections limiting competition?

Examples of Companies with Strong Efficient Scale Moats

Here are some real-world examples where efficient scale moats are clearly visible:

• Vicom (Singapore) – A government-authorized vehicle inspection provider with dominant market share. The Singapore market is too small to support multiple competitors, making it an efficient scale business.

• Airports – Typically only one major airport serves a city. Due to high infrastructure costs and government regulation, competition is naturally limited.

• Telecommunication Providers – In certain countries with small populations or dense regulations, only a few telcos can operate viably, and additional competition would be unprofitable.

• Credit Rating Agencies (Moody’s, S&P Global) – The ratings industry is highly concentrated due to regulatory requirements and high trust barriers. The market cannot support many viable players.

• Railways – Massive infrastructure requirements and exclusive rights-of-way mean only one or two railway companies can effectively serve large geographic regions.

• Oil & Energy Utilities – High capital costs and regulatory oversight often mean that only a few players operate in a given region, creating an efficient scale dynamic.

Moody's (NYSE: MCO) is a textbook examples of company with an efficient scale moat—particularly in the credit ratings industry.

Final Thoughts

Efficient scale is one of the lesser-known but powerful types of economic moats. It doesn’t always show up in growth metrics, but its strength lies in the natural barriers that protect incumbent companies from competition. For long-term investors, identifying these opportunities can provide a layer of safety and stability in your portfolio.

Next time you're evaluating a stock, don’t just look at margins or revenue growth — ask yourself: Is this a market where more players would destroy value? 

If the answer is yes, you might be looking at a classic case of efficient scale.

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