Big time vertical integration

v-integrationVertical integration is often a hard concept to get your head around. This article might help you understand the concept.

The world’s 4th largest steelmaker POSCO is bidding to purchase the world’s 3rd largest shipbuilding company Daewoo Shipping & Marine Engineering (DSME). While both firms are Korean, they are also multinationals (and therefore of interest to us). POSCO believes it can add considerable value to DSME by specifically tailoring its steel the specifications of the ships being built. Steel is a very significant input in ship building. As such, this can be seen as forward integration by POSCO into one of the activities where its major products are used.

The article also discusses the efforts by POSCO to buy iron-ore and coal mines in Australia. It has significant share-ownings in seven such Aussie firms. Both iron-ore and coal are major inputs in making steel, so this is backward integration. POSCO is looking at other mines in Africa, Siberia, Indonesia and Eastern Europe, and says it is looking to own 30% of its input supplies in the future.

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