In recent years, supply chains in Asia have been tested like never before. From the Covid-19 pandemic to raw material and component shortages, companies continue to grapple with a plethora of challenges. It is no wonder then why vertical integration is once again in focus across corporate board rooms.
Defined as owning or controlling two or more stages of production, vertical integration can be upstream, downstream or balanced. Despite the short-term risks associated with high capital investment, unbalanced output and increasing operations complexity, it remains correct that many Asian companies should continue adopting vertical integration for long-term business expansion and profitability.
Asian companies should continue adopting vertical integration for long-term business expansion and profitability
One advantage is control, to secure raw materials, streamline operations and manage supply shortages. This is evident with legacy carmakers, who have been entering into partnerships across the whole value chain to reach their electric vehicle (EV) production targets. In July, Ford announced partnerships with Chinese battery maker CATL, as well as mining firms including BHP and Vale. Newer Asian players have been doing the same like Chinese EV maker BYD , which is targeting a full industrial chain and investing in lithium projects in Chile.
Another advantage is cost reduction. Companies can reduce their production costs by acquiring their suppliers, investing in having their own distribution assets or building their own retail presence. An example is Charoen Pokphand Foods (CPF), Thailand's largest agriculture conglomerate, which acquired Canadian pork producer HyLife.
A third benefit is greater efficiency. If the entire supply chain process is managed internally, logistics will be simpler and can circumnavigate external suppliers’ market power. Wilmar International, a leading Singaporean food processing company, owns oil palm plantations, milling plants, and refinery plants. These are located next to each other, reducing transport costs and can share resources, thus increasing efficiency and lowering costs.
However, there are big challenges. Companies need to have large financial resources to acquire smaller subsidiaries. Increasing digitisation is also shaping globalisation. Some governments are reasserting sovereignty, confining companies to within their borders, like China’s crackdown on domestic big tech giants.
In this vein, other opportunities are there for Asian companies to consider if they do not have the resources to buy or build vertically. These include digital transformation technology tools of automation and digitisation including cloud-based software, direct to consumer solutions, as well as AI and big data analytics for supply chains to analyse and match changing customer needs. Whether stacking vertically or not, factories in Asia should strive to become more digital.
Lawrence Yeo is CEO of AsiaBIZ Strategy, a Singapore-based consultancy that provides Asian market research and investment/trade promotion services. E-mail: firstname.lastname@example.org
This article first appeared in the October/November 2022 print edition of fDi Intelligence. View a digital edition of the magazine here.
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