Article > Editor’s Note

Vertical integration: This New Way is Actually Old

By Mark Phillips

Some companies have found a different way of maintaining control over the production and distribution of their products. As it turns out, this way is actually about 100 years old. Will automotive aftermarket companies follow suit?
Mark Phillips
Some companies have found a different way of maintaining control over the production and distribution of their products. As it turns out, this way is actually about 100 years old.

A recent Wall Street Journal points out that companies including ArcelorMittal, PepsiCo, General Motors and Boeing are turning to “vertical integration,” whereby companies control the key aspects of a product’s sourcing, production and distribution. This is different from the early part of the 20th century, where some companies controlled absolutely every aspect of a product’s life.

These companies are employing vertical integration to battle against such things as volatile commodity prices and financial pressure at suppliers, the Journal points out.

Boeing’s step into vertical integration was solidified when it bought a 50 percent stake in a joint venture that makes parts for its 787 Dreamliner jet. The 787 is supposed to fly higher, faster and use less fuel than anything out there. But now Boeing is looking to clamp down on production of the jet, which features space-age parts and all kinds of newfangled technology. Why? Because the company ran into some big problems and it’s pushed back the date the jet was supposed to enter service by at least two years.

It started when Boeing basically turned the typical production mode on its ear. Instead of having vendors ship parts to a central location where Boeing technicians would put the jets together, contractors were supposed to piece together larger parts of the jet at their own facilities, then ship those components to Boeing for final assembly. But some plans look better on paper than in reality. The contractors had problems getting hold of parts and couldn’t stay on schedule. And Boeing had to contend with production problems created outside the company.

Turning to the tried-and-true “if you want it done right, do it yourself” method, Boeing ended up buying the company that was providing it with fuselage sections. There are still plenty of kinks to be worked out, but the company is addressing those to get this jet up in the air.

Throughout the automotive industry, there are various degrees of outsourcing, from engines, to undercar parts to doors. But probably no one does it like Porsche, which has a contract with a Finnish company to produce the Porsche Boxster and Cayman. (Not to produce parts for the vehicles, the Finland-based company Valmet produces the WHOLE vehicle.)
Will an aftermarket brake manufacturer buy a steel plant to make its own backing plates? Not likely. But perhaps a larger manufacturer of a multitude of aftermarket products could. It’ll be interesting to see how well companies who go “vertical” will do.
I’m going to evoke the tireless cliche/genius marketing slogan “What Happens in Vegas Stays in Vegas.” Why? Because I don’t believe it. Many people attending AAPEX in Vegas thought it would be a show full of gloom and doom. But it wasn’t. The great thing about the show was I heard no such thing. And those good vibes should follow us home from Vegas.
Economists say a recession typically lasts about 18 months. I’ve looked at my calendar. We’ve done our 18-month sentence.
  Previous Comments
avatar   Wolfe   star   1/1/2010   9:36 AM

Out of everything I can comment on, I choose the Vegas section to drop my two cents. Are you sure that we have done out 18 months? Just because there were some financial issues about a year and a half ago, does not mean we were actually in a recession. Although the exact starting and ending dates are generally classified after all is said and done. Maybe to prevent being held libel? I am not saying that I do not want the recession to be over, I just don't want to get my hopes up that my wallet is going to stop feeling the pain.

avatar   Mark Phillips   star   12/28/2009   2:45 PM

Hi Ryan - Good question... The Dec. 15 flight doesn't mean it's in service; that was its maiden flight. When airlines take delivery and put passengers on it, that's when it'll officially be in service. It's maiden flight was originally supposed to be September 2007, so it's behind on that by more than two years already. Hope that helps.. take care, Mark

avatar   ryan    star   12/28/2009   2:41 PM

you mention in this article that Boeing pushed back the flight on this A/C for at least two years. If this was pushed back then how did this A/C make its debute flight just over 2 weeks ago

avatar   robert k   star   12/22/2009   11:35 AM

wow ED it must be great to know everything.

avatar   B.R.   star   12/16/2009   3:29 PM

Sorry mark. While I see ur point, the main reason Boeing did what they did and when and how they did it can be summed up in one word. Union.

avatar   Ed   star   12/16/2009   12:28 PM

Going vertical is only successful if the core company itself, is solid. They announced the other day that Boeing will begin construction of the Dreamliner at its South Carolina plant, after Boeing employees at the original production plant went on strike. Not even the "big three" parts houses are, or probably will ever, be in a position to buy out an entire manufacturing company, what you may see is the purchase of sections of that company/plant, with stipulations that this particular product is only available to that purchaser and no one else.

avatar   Chris   star   12/15/2009   4:16 PM

Outsourcing auto part manufacture is a double-edged sword at best. If the company makes high-quality parts, like Cloyes or Sealed Power, then many of the aftermarket parts houses that rely on those brands are in good shape. On the other hand, (I won't name names because I don't want to beat up on anyone), several "house brand" chassis parts in the so-called "big three" are made by a rather poor manufacturer. A lot of customers will make the switch to another store's house brand, not knowing they're buying an identical part.

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