From Tesla To Microsoft, Companies Are Going Vertical Again
In the century after 1870, corporations were shaped by vertical integration — the desire to bring as much of the production process as possible under the same umbrella.
Much of the history of the modern corporation could be written in terms of two slogans: Ford’s “from mine to finished car: one organization,” and Apple’s “designed in California, assembled in China.” And much of its history in the coming years will be determined by the fading of the second of these slogans and the reassertion of the first.
In the century after 1870, corporations were shaped by vertical integration — the desire to bring as much of the production process as possible under the same umbrella. John D. Rockefeller not only owned a barrel-making factory (which, in 1888, saved him $1.25 a barrel at a time when he was using 3.5 million barrels a year) but also owned the forest that provided the wood. Ford’s giant River Rouge plant in Dearborn, Michigan, was designed to take raw materials in one end and churn out Model Ts at the other end. Ford even built a town in Brazil, modestly named Fordlandia , to provide him with a secure source of rubber for its tyres.
All this began to change in the 1970s with the cult of “focus” and “core competences.” Apple got its business model from Nike Inc. which designed its shoes in Oregon and contracted everything else out to cheap workers in the emerging world. Management gurus sang the praises of “virtual corporations” that owned nothing and relied entirely on contract workers.
The pendulum is swinging back to vertical integration once again. If Nike was the poster company of the 1980s, China’s BYD Co., a battery maker that now controls lithium mines, owns carrier ships and manufactures electric cars, is the poster child of the coming era.
The obvious reason for this is political turmoil. The World Uncertainty Index shows that baseline uncertainty has more than doubled since 1990, and that “high uncertainty” events are getting more frequent and “uncertainty spikes” getting higher. Tarun Khanna, professor at Harvard Business School, points out that increased control over supply chains is often a natural response to uncertainty. Contracting out flourished in the era of globalization, when tariffs were being lowered and predictable rules being put in place. Donald Trump has destroyed this world not only by raising US tariffs to their highest level in a century but also by using them as a bargaining tool. It now makes sense to reshore activities and also to take them in house.
The revival of industrial policy, through subsidies, tax breaks and rules of origin, is also playing its part. In 2017-2023, the European Union increased its annual number of new business incentives by 465%, the United States by 518% and China by 84%, according to McKinsey & Co. Inc. Government activism typically encourages companies to sprawl, both vertically and horizontally, because the key to success becomes relationships with ministers rather than economic value — hence the sprawling conglomerates across Latin America.
But there is also something else going on — the rise of a cohort of “super-companies” that combine success and paranoia in equal measures. These super-companies are particularly prevalent in the tech sector where the “magnificent seven” account for 35% of the value of the S&P 500. Success gives them the wherewithal to purchase almost whatever they want. Paranoia means that they are always looking for the next big threat.
These super-companies started vertically integrating before Trump scrambled globalization. Microsoft Corp. and Tesla Inc. arguably led the trend: Microsoft by extending its business from office computing “downward” to servers and renewable energy to power the servers and “upward” to gaming; and Tesla by coupling software and hardware. Amazon moved into the server business to ensure security of supply (and created a thriving business selling its surplus capacity in the process) and Google moved into chip-making for the same reason. The tech companies are beginning to take vertical integration into “Fordlandia” territory — Elon Musk is trying to create a new town, Starbase, in southern Texas to house the employees for his rocket company, and Google and Meta Platforms Inc. have taken the lead in building new developments in NIMBY-dominated Northern California.
Vertical integration is pushing the world in contradictory directions: Deglobalization should increase the power of the workers, who have lost leverage because of globalization, but corporate consolidation will increase the power of bosses. But some consequences look far more likely than not.
Vertical integration will reinforce the consolidation trend. Netflix will produce much more of the content that it also distributes. Big companies will become more intertwined with government as they increasingly depend on the state for contracts and permission to operate. We will also see vertical integration playing itself out on a national level as states compete to lock up supplies of raw materials. Trump has already signed a deal with Volodymyr Zelenskiy to secure Ukrainian minerals and natural resources in return for US weapons (and of course threatened to annex Greenland) while China has locked up supplies of rare earths across Africa.
Michele Zanini, the co-author with Gary Hamel of Humanocracy, warns that vertical integration may slow the pace of innovation, as incumbents focus on squeezing the maximum return from their products. The trend for pharmacies to branch out into health insurance or buy doctors’ practices hardly bodes well. A 2022 report on innovation by the Department of Defense makes worrying reading. After a wave of horizontal consolidation in the 1990s, which reduced the number of contractors from 51 to five, the big five focused on vertical consolidation, buying up second- and third-level suppliers. The report worries that, by allowing big companies to choke off the supply of new products and ideas, consolidation helps to explain why the US fell behind China in the production of hypersonic missiles.
Perhaps the best way to understand the coming age is to look back at the beginning of the 20th century when the “great merger movement” (1897-1903) created corporate giants that controlled swathes of the economy: General Electric Co. with 90% of the market, American Tobacco, also with 90% and US Steel Corp. with 50% of the country’s iron ore.
The resulting capitalist system was much tidier than the anarchic one that had preceded it. But it brought dark clouds with it. Corporate giants increasingly relied on market power rather than innovation: The creation of US Steel ended a long period of falling prices in the steel industry. Progressives railed against the many-tentacled monsters that controlled economic life. And nationalists called for imperial expansion to ensure that America’s economic machine had access to the economic resources that it needed. The Nikefication of the global economy was the subject of much opprobrium in the 1980s. We are about to discover that vertical integration has its costs as well.
