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Capture and defend margin

Backward vertical integration

Examples checked

In one minute

Owning or making an input you used to buy from a supplier.

The big idea: You take over a step before you in the chain, so you keep the supplier's margin and control the input. It pays only when that margin, or the security of supply, is worth more than the capital you tie up and the flexibility you give away.

Works when
When the input is scarce or decides quality, the supplier earns a fat margin, and you will keep the plant full.
Fails when
When the input is a cheap commodity anyone can sell you, or your volume is too small to keep the plant busy.
Check this number first
Supplier margin on what you buy. This is the profit you can capture. A thin margin means little to gain.
In the worked example
Extra profit a year: USD 9 (USD millions a year). See it add up

What it is

Every company buys inputs: parts, raw materials, components, software. Backward integration means making that input yourself, by building the capacity or buying the supplier. A carmaker that makes its own batteries, or a clothing chain that owns its factories, has integrated backward.

  • Build. Set up your own plant or team to make the input.
  • Buy the supplier. Acquire the company that sells it to you, often paying a premium over its market value.
  • Partial. Make part of what you need and keep buying the rest, so suppliers stay competitive and you keep a price benchmark (sometimes called tapered integration).

Why companies do it

The economic logic, most important first. A move usually rests on one or two of these.

  • Control of a bottleneck input. If an input is scarce (battery cells, chips, a key ore), owning it means you are served first when supply is short, and rivals are not.
  • Margin capture. The supplier's profit on what you buy becomes your profit. This matters when the supplier's margin is fat.
  • Transaction costs. When a part is made only for you, writing and policing contracts is costly and each side can hold the other up; owning the step removes that.
  • Speed and quality. Owning the step lets you change designs fast and control quality, which matters in fashion, premium goods and new technology.

When it creates value, and when it destroys it

Creates value when

  • The input is a bottleneck: few suppliers, long lead times, or a technology that sets your product apart.
  • The supplier keeps a margin well above your cost of capital, so taking it over earns more than the money costs.
  • Your own volume fills an efficient plant, so you are not running a half-empty factory.
  • Coordination is worth money: shorter lead times, fewer stock-outs, faster design changes.

Destroys value when

  • The input is a commodity with many sellers; you tie up capital to earn a thin margin you could have had by buying.
  • Your volume falls, and a plant built for you sits half empty while its fixed costs stay.
  • Technology moves and you are stuck owning yesterday's process, while buyers switch to better suppliers.
  • The in-house unit gets lazy because it has a guaranteed customer and no competition.

The numbers to check

Ask for these, in this order, before you recommend the move.

  1. Supplier margin on what you buy. This is the profit you can capture. A thin margin means little to gain.
  2. Capital needed (to build or the price to buy). The gain must be judged against this money, as a return on capital.
  3. Return on that capital against the cost of capital. The move creates value only if the yearly gain divided by the capital beats what the capital costs.
  4. Utilisation: how much of the plant your own volume fills. A plant run at 60 percent full makes the input dearer than buying it.
  5. Share of the input that is scarce or special. Security of supply is worth most when the input is hard to get elsewhere.

Worked example (illustrative)

Rounded numbers for a made-up business, shaped like real ones. Positive lines add to profit; negative lines are costs.

A drinks maker buys 500 million bottles a year for USD 50 million. The bottle supplier earns a 20 percent margin. The drinks maker could buy the supplier's plant for USD 90 million.

Worked example for Backward vertical integration, in USD millions a year. Illustrative figures.
LineUSD millions a year
Supplier's profit now kept: USD 50 million of bottles x 20 percent marginUSD 10
Freight, haggling and contract costs savedUSD 2
Running a plant you never ran before (managers, systems)minus USD 3
Extra profit a yearUSD 9

Check: the lines above add up to the total.

The numbers that decide it

Return on the USD 90 million paid
10 percent
Payback
10 years
Extra profit a year if bottle volume falls 30 percent
USD 5.40
Return on the USD 90 million after that fall
6 percent

So what: A 10 percent return barely beats a cost of capital of 8 to 10 percent, so the margin alone does not justify the deal. It makes sense only if supply is at risk or the bottle is special. If volume falls 30 percent, the return drops to 6 percent, because the plant's running costs stay.

Real examples

Companies that made this move, by region, with what happened and a source checked on the date shown.

  • Tata Steel

    IndiaCreated value

    Tata Steel meets all of its iron ore needs in India from six mines it owns, and mined a record 40.5 million tonnes there in 2024-25.

    The lesson: Owning the main raw material protects a steelmaker from ore price spikes and helps make it one of the lowest cost producers.

    Source 1: Tata Steel, Integrated Report 2024-25, "Natural Capital" (opens in a new tab), checked .

  • Emirates Global Aluminium (EGA)

    Middle EastDestroyed value

    EGA spent about USD 1.4 billion building its own bauxite mine in Guinea to feed its refinery in the UAE. After Guinea revoked the mining licence in 2025, EGA wrote off the investment with a charge of AED 2.5 billion (USD 687 million).

    The lesson: Owning an input abroad secures supply only as long as the host country allows it; political risk belongs in the numbers.

    Source 2: EGA, half-year 2025 results release, 4 September 2025 (opens in a new tab), checked .

  • Wilmar International

    Southeast AsiaCreated value

    The Singapore agribusiness owns oil palm plantations (229,765 planted hectares in mid-2025) that feed its own mills, refineries and consumer brands. In the first half of 2025, profit from plantations and sugar milling more than tripled to USD 202.0 million as palm oil prices rose.

    The lesson: Owning the raw material earns most when its price is high, and steadies supply for the refining and branded steps after it.

    Source 3: Wilmar International, first half 2025 results briefing presentation (SGX filing), August 2025 (opens in a new tab), checked .

  • Tesla

    United StatesToo early to tell

    Tesla designs and makes its own battery cells and has gone further upstream: its own lithium refinery in Texas began operating in January 2026.

    The lesson: Carmakers integrate backward into batteries because the cell is the scarcest and costliest part of an electric car.

    Source 4: Tesla, annual report on Form 10-K for 2025 (US SEC) (opens in a new tab), checked .

  • Ingka Group (IKEA)

    EuropeToo early to tell

    In October 2025 Ingka, the largest IKEA retailer, agreed to buy about 153,000 hectares of land in Latvia and Estonia, 89 percent of it forest, adding to the 331,000 hectares it already owned in seven countries.

    The lesson: A furniture seller that owns forests holds a stake in its key raw material, wood, though the timber is also sold to others.

    Source 5: Ingka Group, "Ingka Investments makes its largest ever forestland acquisition", 20 October 2025 (opens in a new tab), checked .

How to recommend it in a case

Answer first, then the reasons with numbers, then the risk and the next step. Three sentences, said out loud.

I recommend buying the supplier only if we treat it as a security of supply move, because on margin alone it returns about 10 percent on USD 90 million, close to our cost of capital.

It adds about USD 9 million of profit a year, mostly the supplier's 20 percent margin, and pays back in about 10 years; what tips it is that two of our three bottle suppliers are at risk.

The main risk is volume: a 30 percent fall cuts the return to about 6 percent, so next I would test whether the plant can sell spare capacity to other buyers, and price a long supply contract as the alternative.

The numbers to quote: Extra profit a year; Capital tied up; Return on capital against the cost of capital; Plant utilisation from your own volume.

The figures in the answer come from the illustrative worked example above. In a case, use the client's own numbers.

Classic interview traps

  • Counting the supplier's whole revenue as the gain. You capture only its margin on what you buy, minus the cost of running it.
  • Ignoring the capital. A move that adds profit can still destroy value if the return is below the cost of capital.
  • Forgetting flexibility. Once you own the plant, you cannot switch to a cheaper or better supplier; say what that is worth.
  • Assuming your volume fills the plant. Ask what share of capacity you use and who buys the rest.

Where it is common

Sources

Practise it

Where this move comes up in cases

Related moves