I'm evaluating a potential dealing the manufacturing sector that presents a significant concentration risk: 60-70% of its revenue comes from just one customer. Imagine a scenario similar to a local gasket manufacturer supplying to an automobile producer. While typically such concentration would be a deal breaker for many, there are compelling factors to consider:
Critical Dependency: The customer relies solely on this supplier for a critical component but represents a minor fraction of their total production costs. Suggesting a lower incentive for the customer to switch suppliers.
Barrier to Entry: There's minimal competition. There is a high entry barrier, making it less likely for new entrants to disrupt this relationship.
Expansion Potential: The facility is well-positioned to diversify its product line for retail and online sales with minimal capital investment, presenting an opportunity to improve revenue diversification.
Would love to hear thoughts from the community on this scenario. Are there potential pitfalls I might be overlooking? If anyone has come across case studies, podcasts, or discussions that delve into similar investment scenarios, could you please point me towards those resources?
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