News of scarcity of products and supply chains breakdowns has become the norm, while timely and cost-effective supply of raw materials has increasingly turned into the single biggest problem for companies. Unsurprisingly, businesses are seeking to regain control over their supply chains: vertical integration is well and truly back on the agenda.
Vertical integration is described as a process of taking direct ownership of earlier (backward) or later stages of production (forward integration). This is typically achieved by multinationals acquiring operations in the various stages of value generation.
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Owing to the perfect storm scenario we are currently in, the emphasis today is less on cost and more on control and stabilising supply chains. A preference for lean, just-in-time and optimised stocks is giving way to reliability and resilience.
The emphasis today is less on cost and more on control and stabilising supply chains
What does that mean for the FDI community? I suspect a more persistent shift towards mergers and acquisitions (M&A). Consultancy firm PwC expects there to be even more vertical integration deals in 2022, as companies seek to secure raw materials and components, as well as how their products are distributed.
Cross-border M&A
This was played out to some extent in Unctad’s 2021 global FDI figures. The strong 64% rebound in headline FDI from a remarkably low 2020 was driven mainly by cross-border M&A reaching an all-time high, while greenfield investments remained lower than before the Covid-19 pandemic.
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Beyond M&A, companies are again emphasising their level of vertical integration. In 2020, BMW chairman Oliver Zipse claimed that the carmaker is one of the most highly integrated original equipment manufacturers, thanks to its in-house manufacture of electric motors and batteries. And in 2021, BMW also announced a $334m contract with mining company Livent to buy lithium from its Argentine project.
But models of vertical integration often look surprisingly different, even within the same industry. Apple, often cited as an example of vertical integration, is active in design activities and retail, with its iconic Apple stores. Yet Samsung, its main competitor, is heavily backward-integrated into LCD display, lithium-ion battery and camera production.
For many years the mantra was to focus on core competencies and core processes, and outsource all ‘peripheral’ activities to ensure maximum focus and avoid using scarce financial resources. As with many other business theories, vertical integration is subject to trends. This time, it is very much back in vogue.
Martin Kaspar is head of business development at a German mittelstand company in the automotive industry.
E-mail: martin.georg.kaspar@googlemail.com
This article first appeared in the October/November 2022 print edition of fDi Intelligence.
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