Are you investing in the right industry? ● By Joshua Tay　Does the term book-to-bill ratio sound familiar to you? Do you know the demand and supply numbers of private condominiums in Singapore for the next year ? If you do, youmust have already performed some sort of industry analysis on the electronics and property industries (or sectors as commonly referred to in stockmarket terms).　Most investment processes include some sort of industry analysis. This is important because many studies have shown that over a period of time, some industries have per-formed better than others. For example, between 1987 and 1996, banking stocks in Singapore have generated better returns than other industries such as shiprepair. Industry analyses will uncover these performance differences and helpidentify both unprofitable and profitable opportunities (situations).　It is also important to note that past performance alone will not help predict future performance. The factors or conditions that helped an industry to prosper in the past will change over time. Identifying and studying these factors will provide some clues to the entry and exit pointsof the investments. Going back to our earlier example, economic growth is an important criterion for banks earnings. Between 1987 and 1996, Singapore enjoyed an uninterrrupted average GDP growth of 8.9%. This allowed the banks earnings to grow at a compound rate of 11.3% when thebroader market generated only 8.5% growth. With GDP growth decelerating because of the Asian crisis, can we maintain the same sanguine outlook for the banks?　Having determined that industry analyses are important forsuccessful investing, the next step is to find out how we can go about doing one. There is no generic framework that is applicable to all industries, but there are commonalitieswhich we can identify. In a free market economy, demand and supply are key determinants of price, and price is always animportant contributor to any profit-driven organisation. Hence, a successful indstry ana-lysis will have to identify the underlying fac-tors driving demand and supply.　Factors that drive demand vary across industries, and are too numerous to list. However, it is important to note that demand can be categorised as "seasonal", "cyclical" or "secular". As the word suggests, seasonal fac-tors recur year after year. Cyclical factors, on the other hand, followvery closely to the economic cycles of the market. Secular factors are more long term in nature. Seasonality or economic cycles will have minimal impact on secular trends.　Take an airline as an illustration. Most Singaporeans taketheir vacation in December. That is why airline seats are difficult to secure during that time. This is the seasonal factor because it occurs every year around the same time. Having said that, Singaporeans usually take vacations more frequently when the economy is doing well, and less so during reccessionary times. The rise and fall in demand in accordance to economic activities is the cyclical factor. Finally, the middle class population in Singapore has been rising over the last 20 years. This group is generally more affluent. Part of the lifestyle usually includes taking regular vacations to exotic destinations. Such lifestyle doesnt change annually, nor does it follow the ups and downs of economic growth. The demand for air travel will grow so long as the middle class population continues to increase. This is an example of secular demand.　Classifying demand factors into these categories is very useful. As long-term inves-tors, we do not want to be constantly reacting to signs that are short term and volatile in nature such as seasonal, and to a lesser extent,cyclical trends. Buying and selling stocks based on these short-term trends are not only expensive (brokerage cost) but difficult to time as well. Instead, we should focus on long-term trends. They usually have a longer and more permanent impact on share prices.　A key factor in identifying an attractive industry is pricing power. The ability of an industry to price its product at a profitable level without compromising its business pros-pect is important, and this is affected by many factors. Inelastic demand allows the tobacco producers to maintain good profits despite the rapidly rising tariffs all these years. Barriers to entry is another factor. Mobile-phone charges used to be very expensive because therewas only Singapore Telecom providing the ser-vice (monopoly). With increased competition from M1, rates have been declining gradually. All things being equal, the more competitive the industry is, the lower the pricing power, and hence profits. Competition may be good for the consumers, but it seldom benefits the shareholders. 　Another factor that will impact the com-petitive environment of an industry is the cost structure. In general, indsutries with high fixed costs are more competitive than those that have high variable costs. We often hear about coun-tries