Authorities are keeping a closer eye on vertical mergers as businesses like Apple and General Motors strive for supply chain dominance.
TakeAway Points:
- In AI and decarbonisation, vertical integration is becoming more popular as businesses like Apple and General Motors make calculated decisions to manage their supply chains.
- Authorities, such as the FTC under Lina Khan, are examining vertical mergers more closely for possible anti-competitive implications.
- A renewed sense of caution regarding market domination is indicated by recent regulatory measures such as the rejection of Illumina’s acquisition of Grail and the lawsuit to dissolve Live Nation.
Trends in Vertical Integration
Vertical integration is becoming increasingly popular among companies aiming to compete in artificial intelligence (AI) and decarbonization. Firms believe that controlling more of their supply chains and sales channels can accelerate innovation and help them manage geopolitical disruptions. For instance, General Motors purchased a lithium mine last year to secure essential minerals for its electric vehicles.
Similarly, Chinese automaker BYD controls most of its supply chain, including the ships that transport its cars, and is reportedly seeking further acquisitions to expand its reach.
Apple recently announced a partnership with OpenAI to integrate ChatGPT into its devices, aiming to catch up with Microsoft, which has invested $13 billion in the AI startup and incorporated its technology into multiple products.
Alphabet, the parent company of Google, is also ramping up its AI efforts by developing its own large language models and proprietary chips to power its offerings. These moves highlight the strategic importance of vertical integration in the tech industry.
Effectiveness and Management
Vertical integration offers several advantages beyond technological advancements. Tight connections within the supply chain can increase efficiency and improve the ability to recover from disruptions. Direct ownership also simplifies monitoring for labor abuses, overseas bribery, and other regulatory violations, while making it easier to calculate carbon emissions. These benefits make vertical integration an attractive strategy for companies looking to streamline operations and enhance sustainability.
However, competition watchdogs are increasingly concerned that vertical integration can also be used to stifle competition. Powerful companies may leverage their control over key inputs or sales channels to foreclose competition, particularly in areas where technology is still developing. This has led to increased scrutiny from regulatory bodies, which are now more vigilant about the potential anti-competitive effects of vertical mergers.
Regulatory Scrutiny
Under the leadership of Lina Khan, the Federal Trade Commission (FTC) has taken a more aggressive stance against vertical mergers. The FTC attempted to block Microsoft’s acquisition of game group Activision and Meta’s takeover of virtual reality company Within, although these challenges were unsuccessful. The FTC did succeed in blocking biotech group Illumina’s acquisition of Grail, a company that makes cancer screening tests.
A federal appeals court agreed that Illumina’s dominance in DNA sequencing tests gave it too much power over potential competitors Grail in the nascent screening market. The European Union also fined Illumina €432 million for completing the merger without approval, leading to the ousting of Illumina’s CEO and plans to spin Grail back out in an initial public offering.
More cases are in the pipeline, including some that reconsider earlier leniency. The Justice Department recently sued to break up Live Nation, arguing that its control over musical acts, arenas, and concert ticketing stifles competition. This trend of increased regulatory scrutiny is not limited to the current administration; it began under the Trump administration, which brought the first vertical merger court case in over 40 years by seeking to block AT&T’s purchase of Time Warner.
