Vertical strategies are conducive to business acquisitions | fDi Intelligence – Your source of information on foreign direct investment
News about product scarcity and supply chain disruptions has become the norm, while fast and cost-effective sourcing of raw materials has increasingly become the biggest issue for businesses. Unsurprisingly, companies are looking to regain control of their supply chains: vertical integration is well and truly back on the agenda.
Vertical integration is described as a process of directly supporting earlier (upstream) or later stages of production (downstream integration). This is usually achieved by multinationals acquiring businesses at different stages of value creation.
Due to the perfect storm scenario we currently find ourselves in, the focus today is less on cost and more on controlling and stabilizing supply chains. The preference for lean, just-in-time, optimized inventory is giving way to reliability and resilience.
What does this mean for the FDI community? I suspect a more persistent move towards mergers and acquisitions (M&A). Consulting firm PwC expects there will 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 mergers and acquisitions
This played out to some extent in UNCTAD’s global FDI figures for 2021. The strong 64% rebound in global FDI from a remarkably low 2020 was mainly driven by cross-border mergers and acquisitions reaching an all-time high, while creative investment remained lower than before the Covid-19 pandemic.
Beyond M&A, companies are again emphasizing their level of vertical integration. In 2020, BMW Chairman Oliver Zipse claimed the automaker was one of the most integrated original equipment manufacturers, thanks to its in-house manufacture of electric motors and batteries. And in 2021, BMW also announced a $334 million deal with mining company Livent to buy lithium from its Argentinian project.
But vertical integration patterns often look surprisingly different, even within the same industry. Apple, often cited as an example of vertical integration, is active in design and retail businesses, with its iconic Apple stores. However, Samsung, its main competitor, is strongly integrated upstream in the production of LCD screens, lithium-ion batteries and cameras.
For many years, the mantra has been 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 fashionable again.
Martin Kaspar is a business development manager at a German company in the automotive industry.
Email: [email protected]
This article first appeared in the October/November 2022 print edition of fDi Intelligence. See a digital edition of the magazine here.