Companies Prioritize Vertical Integration and Green Investments to Secure Supply Chains
Major brands and investment arms, such as IKEA Group, are following the lead of automakers in acquiring stakes in suppliers of raw materials and energy. This trend is driven by the need to gain greater control over production to meet emissions targets and avoid disruptions in the wake of the pandemic and geopolitical conflicts.
In the past six months alone, companies across diverse industries, including food, batteries, chemicals, autos, mining, and waste and recycling, have invested over $4 billion in their supply chains. This surge in investment comes as global supply networks recover from the shocks of the pandemic and as companies face stricter environmental standards that necessitate the adoption of new technologies to reduce emissions.
We are in the fastest transition in our industry ever… We are sending clear signals to the innovators in our supply chain that we will support them, said Andreas Follér, head of sustainability at Scania. The truck maker plans to source green materials and technologies in key areas such as battery, steel, aluminum, and cast iron by 2030.
The desire to reduce reliance on China and Russia also drives companies to invest in securing their supply chains. Recent events, such as China’s impending export controls on gallium and germanium used in semiconductors and defense, have underscored the vulnerability of global supply chains. As a result, businesses are increasingly embracing vertical integration as a strategy to minimize disruptions and safeguard their operations.
This trend is not limited to the automotive industry. The IMAS Foundation, the investment arm of IKEA’s owner, has invested over 1 billion euros ($1.12 billion) in decarbonization assets and strategies. The foundation has acquired stakes in steelmaker H2 Green Steel and battery manufacturer Northvolt, among others. It is also exploring further investments in steel, construction, and green aluminum produced through hydropower or recycled materials.
Similarly, in the aviation industry, airlines are investing in fuel production to ensure a dependable supply of biofuels. Several countries around the world, including Norway, Germany, Indonesia, and Britain, require biofuels to be part of the jet fuel mix. United Airlines, for example, has invested in an algae-based fuel producer, while Jet2 and Wizz Air have invested in companies converting landfill waste and sewage sludge into fuel, respectively.
However, experts caution that supply chain investments carry inherent risks, particularly due to the cyclical nature of commodity markets. Short-term investments may serve as temporary solutions to address bottlenecks and enhance environmental credentials but might not generate sustainable returns in the long run.
As companies continue to invest in their suppliers, the market may eventually reach saturation, leading shareholders to question the returns on these investments and push for divestment strategies.
In summary, companies across various industries are prioritizing vertical integration and investments in their supply chains to enhance control and achieve green targets. This trend is driven by a combination of factors, including the need to reduce environmental impact, secure supply chains, and minimize disruptions. However, the long-term viability and returns on such investments remain uncertain.
