EXPLANATORY TEXT => General This report provides ratios on the share of industrial activity accounted for by the largest companies, both for the United States as a whole and for each of the 459 manufacturing industries. The first presentation of concentration ratios in manufacturing by the Bureau of the Census was made in 1939 and was based on the 1935 Census of Manufactures. Ratios for all manufacturing industries were presented in the National Resources Committee publication, "The Structure of the American Economy." In the 1937 Census, concentration ratios were presented for a large sample of individual products. Beginning in 1947, with the first full census following World War II, concentration ratios have been presented as part of every Census of Manufactures. In 1954, 1958, and 1963, the Bureau conducted the project in cooperation with the Senate Subcommittee on Antitrust and Monopoly. The Census Bureau has continued to present this widely-used report in the censuses of 1967, 1972, 1977, 1982, 1987, and 1992 for the benefit of data users in the industrial, educational, and government communities. As in previous reports, no attempt is made to interpret the significance of the concentration ratios. The ratios are not used as the basis for an analysis of either the causes or effects of concentration. The report consists merely of a presentation of the ratios themselves. Through years of usage, the term "concentration ratio" has come to mean the share of the total activity or resources of a given segment of the economy accounted for by its largest companies. In order to avoid disclosure of the operations of any individual firm, the concentration ratios based on census data are presented in groups of four companies or more, that is, the four largest, eight largest, and so forth. => Concentration Ratios and the Establishment Basis of Reporting The concentration ratios based on Census of Manufactures data have consistently been prepared from establishment reports. Under the establishment system, the shipments of a given company are distributed among all of the industries in which it has establishments. In files MC92CR1 and 2 of this report, which reflect the activity of the largest companies in the industrial sector as a whole, the establishment approach means that only the manufacturing establishments of these companies are taken into account in determining their size. In file MC92CR3, a company is defined as the total of the individual establishments under one ownership within an industry. Consequently, the same company may appear in several industries if it has diversified activities. => Concentration Ratios and the SIC System In essence, the SIC system seeks to establish spheres of economic activity which are unique and are distinguishable by the composite of similar characteristics which they have in common. These characteristics include: similarity of products in terms of their uses, manufacturing processes, and materials used. The SIC system also attempts to bring together plants which specialize in making these products and account for a significant proportion of their total shipments, and plants which are economically significant in terms of their number, value added by manufacture, value of shipments, and number of employees. The standards also largely parallel the actual structure into which American businesses have grouped themselves, and it is the sum of these characteristics that make it the best single system for the largest number of uses. In the majority of instances, an industry is comprised of producers of similar goods or services. Usually, the products are made of similar materials and by similar processes, and the producers compete with one another. For the purpose of measuring concentration, the fact that the classification system is not based exclusively on the usage of the product is somewhat of a limitation, since in the economic concept of the market, it is immaterial whether products which are substitutable for each other, are produced by the same processes, or are made from the same materials. In some cases, the industry and product definitions are too broad; that is, there are products that are included in the same category which do not serve the same function and are, thus, not substitutable for each other. For these cases, the concentration ratios for the industry may significantly understate the concentration in the individual product markets. In other cases, they are too narrow; that is, a single category fails to include products which are substitutable - for example, metal and glass containers. For these cases, the concentration ratios may overstate the concentration in the market. Another limitation is the fact that the classification's industries and products are regularly being redefined. The need for redefinition arises particularly from the introduction of new products, the declining of older products, the introduction of new technologies, the growth of small fields into important industries, and similar dynamic developments. While necessary to keep the classification system abreast of the changing nature of the economy, an inevitable cost of redefinition is the loss of comparability for many categories over time. Another source of understatement of the concentration ratios is the method in which establishments are identified. The identification of which plants are controlled by which companies is based on census reports and available public records. As part of each census, each company is sent a questionnaire requiring them to list the plants which they operate directly or through their subsidiaries and affiliates. Any plant misreported as not being controlled by a company contributes to an understatement of the concentration for that company. A final limitation of the concentration ratios in the domestic market is due to the handling of imports and exports. Products imported and sold which require no further manufacturing, processing or assembly are generally not included in the shipments for an industry, and thus tend to overstate the concentration in the market. Products manufactured in the United States and then exported are included in the shipments for an industry, and therefore tend to understate the concentration in the market. => Explanation for Files MC92CR1 and 2 These two files reflect the activity of the largest companies in the industrial sector as a whole. A "company" is defined, for this purpose, as the total of its industrial establishments, including not only its manufacturing plants, but also auxiliary establishments such as warehouses and central administrative offices. Concentration at this level is measured in terms of value added by manufacture. In these census tabulations, value added is preferable to sales or shipments in measuring total company size, since an aggregation of shipments from the census establishment records would contain duplication owing to intercompany transfers of products. Value added for all manufacturing establishments of a given company was aggregated irrespective of the industry classification of the individual establishments. The companies were then arrayed by magnitude of value added in each specific year and totals computed for the 50, 100, and 200 largest companies. The formula for calculating value added by manufacture for the censuses 1958 through 1992 differs from the one used for the 1954 census and earlier years. During the earlier period, the value added of an establishment was calculated by subtracting the cost of materials, supplies, containers, fuels, purchased electricity, and contract work from the value of shipments for products manufactured plus the miscellaneous receipts for services rendered. This is known as "unadjusted value added" in census publications. Beginning with 1958, the measure of value added has been adjusted for each establishment in two respects. Value added now includes: (1) Value added by merchandising (that is, the difference between the sales value and cost of merchandise sold without further manufacture, processing, or assembly -"Resales"; and (2) an adjustment for the net change in finished goods and work-in- progress inventories between the beginning and the end of the year. The resulting figure is the "adjusted value added." Furthermore, for 1982, the value added by manufacture is not strictly comparable to prior censuses data due to a change in the instructions for reporting inventories. Effective with the 1982 Economic Censuses, uniform instructions for reporting inventories were introduced for all sector reports. Prior to 1982, respondents were permitted to value inventories using generally accepted accounting methods (FIFO, LIFO, market, etc.). In 1982, LIFO users were asked to report first the inventory values prior to the LIFO adjustment and, secondly, to report the LIFO reserve and value after adjustment for the reserve. Thus, the ranking of the 200 largest companies in 1947 and 1954 were based on unadjusted value added; those for later years were based on adjusted value added. The use of these different measures for determining size should have little effect on the ranking and relative shares of individual companies or on the aggregated shares of the 50, 100, 150, and 200 largest companies in each year. Companies were classified in size groups in each particular year based on their size in that year. Thus, a size group (such as the top four) does not necessarily include the same companies from year to year. => Explanation for File MC92CR3 This file is based on the establishment approach described in the introduction. A "company" is defined as the total of the individual establishments under one ownership within an industry. Consequently, the same company may appear in several industries if it has diversified activities. In addition, the following points should be kept in mind: (1) The top 4, 8, 20, and 50 companies are the largest for any particular year based on their value of shipments in that year and are, therefore, not necessarily the same companies from year to year. (2) For a few industries (Standard Industrial Classification codes 2011, 2013, 2084, 3312, 3331, 3339, 3585, and 3661), Value Added by Manufacture rather than Value of Shipments has been used to determine the size of companies. This is considered necessary for industries in which the aggregated Value of Shipments contains a large amount of duplication due to large shipments of partially-finished products between establishments. An example is SIC 3312, Blast Furnaces (including Coke Ovens), Steel Works, and Rolling Mills, in which there are extensive intra-industry sales and transfers of coke oven and blast furnace products to finishing plants. (3) Ratios are shown for years prior to 1987 only if the SIC industry definitions were considered comparable. There were extensive revisions in the SIC system in 1987 and 1972 which, in this file, result in suppression of data for earlier years for a substantial number of industries. In general, the criteria used for judging the comparability of definitions was the effect of the change on the number of employees in the industry under the old and new definitions. If the SIC change caused more than a 2 percent change, the historical data were suppressed. (4) The 1966, 1970, and 1976 concentration ratios are based on data developed in the Annual Survey of Manufactures. Since the industry aggregates which provide the denominators in the concentration ratios are based on a sample, they are subject to sampling errors. Sampling errors for each industry, as well as a more complete description of the Annual Survey of Manufactures sample are shown in the appendix. => Herfindahl-Hirschmann Index The Herfindahl-Herschmann Index was shown for the first time in the 1982 Concentration Ratios in Manufacturing publication. The concept for this index was developed by Albert O. Hirschmann in 1945 in his book, "National Power and Structure of Foreign Trade." A similar index was developed by Orris C. Herfindahl in his unpublished Ph.d dissertation, "Concentration in the Steel Industry," at Columbia University in 1950. The Herfindahl-Herschmann Index is a truncated index, and is calculated by squaring the concentration ratio for each of the top 50 companies or the entire universe (whichever is lower), and summing those squares to a cumulative total. The cumulative total is the Herfindahl-Herschmann Index. This index is shown in File MC92CR3 at the four-digit industry level. Application of the index is relatively straightforward. The higher the index, the more concentrated the industry group or industry is at the top. For example, consider an industry where the concentration ratio for the top 50 companies is 100. From the concentration ratio, it is impossible to determine the amount accounted for by the top ranked companies. The Herfindahl-Herschmann Index would provide an insight to this determination. If each of the top 50 companies accounted for 2 percentage points of the 100 percent, the index would be 200. However, if the top ranked company accounted for 50 percentage points, and the remaining 49 companies slightly more than one percentage point each, the index would be 2550.