Rearrange Analysis – Big companies getting cozy with suppliers to ensure smooth deliveries and meet eco-goals
LONDON (Reuters) – Fancy brands, even the IKEA group’s investing team, are jumping on the bandwagon of car manufacturers and acquiring shares in raw material and energy suppliers. They’re after more control over production to hit emission targets and reduce disruptions.
With global supply chains cracking under the pandemic and the Ukraine conflict, a diverse range of companies are now keen on vertical integration. They’re putting their money into renewable energy, metals, agricultural products, and whatnot.
Over the last six months, more than $4 billion has been pumped into supply chain investments across industries like food, batteries, chemicals, autos, mining, waste, and recycling, says Climate Tech VC, the market intelligence platform.
The pandemic fallout has spurred a drive for stricter environmental standards. Companies are now eager to invest in innovative technologies to cut down their and their suppliers’ emissions.
“We’re witnessing the quickest industry transition ever… We’re telling our supply chain innovators that we’ll back them up,” said Andreas Follér, the sustainability head at Scania, a truck maker.
“We’re committing to source green materials and technologies for battery, steel, aluminum, and cast iron by 2030,” Foller told Reuters.
Reducing reliance on China and Russia is also in play, even though buying into their supply chains can be a massive and pricey leap into the unknown.
“The past three years have taught businesses a lot about how fragile supply chains can be. Vertical integration is, first and foremost, a strategy to minimize the risk of disruptions,” said Rebecca Campbell, a partner at White & Case law firm, advising companies on such deals.
Take the export controls Beijing is planning to impose next month on gallium and germanium, vital for the semiconductor and defense industries. China’s move took end-users in various sectors by surprise, with some dreading more restrictions from the world’s top producer of raw materials.
RETAILER-TURNED-SHOPPER
Though not a new trend, controlling and owning crucial production aspects have made a comeback since the pandemic struck in 2020. Global automakers, like GM and Stellantis, are under immense pressure to go electric fast, leading them to invest in lithium, copper, and nickel mines.
Other industries, including retail, are also joining the shopping spree.
The IMAS Foundation, IKEA’s owner’s investment arm, splurged over 1 billion euros ($1.12 billion) on “decarbonization assets and strategies,” acquiring stakes in steelmaker H2 Green Steel (H2GS) and battery manufacturer Northvolt.
The foundation told Reuters that it’s open to further investments in steel, construction, and green aluminum produced with hydropower or from recycled materials.
“In times of de-globalization and higher geopolitical risks, the security of supply has become more important,” it said in an email.
Both H2GS, building a hydrogen facility powered by renewable energy, and Northvolt call Sweden home.
Scania’s Foller said the Swedish truck maker, which also invested in H2GS and Northvolt, deliberately sought investments closer to its home base to support carbon emission reduction efforts.
Scania revealed that following its 10 million euro ($11.15 million) seed investment in H2GS in 2021, it entered a steel supply agreement starting 2027.
In the aviation industry, airlines are now investing in fuel production, concerned about insufficient biofuel supply. Several countries, including Norway, Germany, Indonesia, and Britain, are making biofuels a requirement in the jet fuel mix.
RISKY CYCLES
United Airlines invested in an algae-based fuel producer in March, while Britain’s Jet2 put money into a plant converting landfill waste into fuel. Hungary’s Wizz Air invested in a Bristol-based company converting sewage sludge into fuel.
“They’re still taking risks on supply in a business they’re not experts in,” said Maybel Saleh, EMEA managing director for aviation at Citi.
Supply chain investments come with inherent risks, partly due to the cyclical nature of commodity markets. They might only serve as temporary solutions to resolve bottlenecks and boost environmental credentials, say auditors and lawyers who assist companies in such transactions.
“Margins rise and crash with volatile prices,” White & Case’s Campbell warned. “Equity investments that looked wise in June 2023 might seem foolish on a corporate balance sheet in 12 months’ time.”
While companies will continue to invest in their suppliers in the short to medium term, the market will eventually reach saturation, according to Jon Chadwick, global energy transition lead at PricewaterhouseCoopers.
“That’s when shareholder pressure will come back, asking: ‘we’re not getting the returns on these, how do we start to divest?'”
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