The Energy Hot Potato and Governance of Value Chains: Power, Risk, and Organizational Adjustment in Intermediate Manufacturing Firms

Abstract

Cost competitiveness remains a significant element of firms’ advantage in developed economies. Input costs, particularly nonlabor costs, are important factors underlying the competitive position of firms that are competing both domestically and internationally. Energy costs are becoming an increasing threat to the long-term survival of firms because of their more volatile nature. The distinct geographic structure of energy prices combines both international markets and intranational policies and supply structures. It is vital to understand how firms manage the risk that is generated from such a complex input. This article explores the adjustment process of intermediate metal-processing firms in the West Midlands U.K. and their wider supply chain to the energy price risk and its interaction with existing long-term adjustments to the pressure of globalization. Formal and informal relational agreements between customers and suppliers are identified as critical factors in determining the capacity of supplier firms to transfer energy price risks to their customers and to adapt to energy-related pressures.