- April 2013
- May 2013
- June 2013
- July 2013
- August 2013
- September 2013
- October 2013
- November 2013
- December 2013
- January 2014
- February 2014
- March 2014
- April 2014
- May 2014
- June 2014
- July 2014
- August 2014
- September 2014
- October 2014
- November 2014
- December 2014
- January 2015
- February 2015
- March 2015
- April 2015
- May 2015
- June 2015
- July 2015
- August 2015
- September 2015
- October 2015
- November 2015
- December 2015
- January 2016
- February 2016
- March 2016
- February 2016
- March 2016
- April 2016
- China Everbright Water has fallen 62% since hitting a high of $1.27 on 30 May 2014. What gives? (24 Mar 16)
- May 2016
- June 2016
- July 2016
- August 2016
- September 2016
- October 2016
- The 3 Biggest Mistakes Investors make when it comes to selling their stocks and a simple three step solution
- November 2016
- December 2016
- January 2017
- February 2017
- March 2017
4 Reasons How Vertical Integration Allows Wilmar to Dominate its Industries
In my previous article on Wilmar, I mentioned that very few companies in Asia have a vertically integrated business model like Wilmar. So what is vertical integration and how does it lend multiple advantages to a company like Wilmar?
A vertically integrated model means that a supply chain of a company is owned by that company itself – the company owns the manufacturer, supplier, distributor, retailer, etc.
In Wilmar’s case, the company owns the:
- Oil palm plantations that produce the oil palm fruit
- Milling plants that produce crude palm oil from the fruit
- Refinery plants that refine the crude palm oil into consumable uses
- Consumer products division which distributes and retails the final products
As you can see, Wilmar owns the entire supply chain upstream to downstream. It is a huge, complex operation that not many companies in Asia have. So what are the advantages of having a vertically integrated business model?
- Control. When a company owns the entire supply chain, they control the entire operation. They can effectively decide how, what, where, and when they like to manage the different segments to suit their overall corporate goals and strategies. They are not at the mercy of any third party (e.g. a supplier hiking its prices) and can basically command how the entire operation is run.
- Lower costs & higher efficiency. The key to competing successfully in any commodity businesses (like palm oil) is to be the lowest cost producer. For Wilmar, instead of transporting goods from point A to B, their plantations are located next to their milling and refinery plants to cut down on transport time and costs. Because goods are moved immediately, turnaround time is also drastically improved. The resources are also shared when the plants are co-located (i.e. milling plant located right alongside refinery plant). All of this improves overall efficiency and thus lowers the cost of production.
- Earnings stability. When commodity prices are depressed, Wilmar’s upstream division (i.e. plantations) earnings will be negatively affected. However, its midstream and downstream divisions will benefit from the lower raw material costs which translates to better profit margins. When the integrated model is at play, each segment hedges against one another. This allows Wilmar to post more stable and resilient earnings compared to a company that’s only focused on the upstream and whose earnings are subject to fluctuating commodity prices.
- Scalability. Wilmar has already successfully duplicated its vertically integrated business model it uses for the palm oil industry in the sugar industry. The company is also aggressively duplicating the model in Africa. To date, Wilmar has invested about US$800 million in greenfield agricultural projects on the continent. Kuok believes that this investment will seed Wilmar’s next phase of growth and bear a return of at least 20% per annum in the next ten years.
Are there any drawbacks to this model?
Of course, like any great thing, there are some drawbacks to vertical integration.
Firstly, it is not easy to implement successfully. As we can all see, there are a lot of complex moving parts that need to work together seamlessly for the integration to work. If the model isn’t executed well enough, the company would better off relying on the expertise and economies of scale of other vendors instead.
Secondly, large capital expenditure is required for a company to pursue this model successfully. Owning an entire supply chain is obviously very expensive. If the integration goes wrong, it can become very expensive to fix.
In Wilmar’s case, it looks as if they’ve got their vertical integration down right. They have years of experience with this model and are so successful at it they have even duplicated the model in other industries and continents. So while vertical integration might be a step too far for most companies, Wilmar has it covered.
For more investing tips, insights and strategies, get email updates (it’s free).
Are you looking for a formula that can consistently pick out the best companies to invest in and make you a LOT of money in the stock market? If you are, then this might finally be the answer you've been looking for. Because this is the same exact formula we used to create 7-figure results in a single stock portfolio - and we did it in just two years. Find out what this formula is right here.Do you think that it's nearly impossible to double or triple your investment in blue-chip stocks? If you want the stability and security of a blue-chip company but are looking for the supercharged returns of smaller, high-growth stocks, then we want to tell you that it is possible. In fact, we want to show you how we uncovered one company that's a market leader in its industry... but was still growing its revenues by up to 20.4% a year and its net profits by up to 39.8% a year. Click here to find out which company and download a FREE report that shows you how we made 243.5% returns in this "super" investment.
If you enjoyed this article, get email updates (it's free).
This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this course material and/or document be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of the Fifth Person Pte Ltd (“the Authors”); and are merely the written opinions and ideas of the Authors, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Authors make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Authors, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.
Rusmin Ang is an equity investor and the co-founder of the online investment magazine The Fifth Person. He is also the co-creator of The Investment Quadrant, an online multimedia stock investment course where students can learn how to invest profitably in the stock market. Rusmin has been featured multiple times on 938LIVE as a guest expert on MoneyWise and is on the speaking circuit for CIMB Securities (Malaysia) and has spoken at events in Penang, Sibu and Kuala Lumpur. Rusmin is also the co-author of Value Investing in Growth Companies which is internationally published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com,Amazon.co.uk, Barnes & Noble and Apple's iBooks. If you're interested to learn more about stock investing, you can join The Fifth Person Newsletter and receive free weekly insights on how you can generate higher returns and dividend income from the stock market.