Chemical firm Ineos is looking to fill the off-roader shaped void left by the end of manufacturing of the Land Rover Defender, but does the decision make sense?
WBS academic Loizos Heracleous is not convinced. Here he explains why it seems an unusual decision.
Chemical giant Ineos’ plan to enter car manufacturing is a rather unusual decision. While undoubtedly exciting for the people involved, from a corporate strategy perspective one would ask such questions as: is the company diversifying in an area where it has strong competencies, or where it can use its current competencies to extend its product lines to adjacent markets? Is the new area of business structurally attractive? Can the company enter at a reasonable cost?
In this case, the answer to these questions seems prima facie to be negative. While Ineos has leading edge competencies in chemicals manufacturing, it has no competencies in vehicle manufacturing.
It is indeed recruiting experienced people from that industry. However, recruiting experienced people is not the same as building tailored organisational learning over many years, which includes optimisation of processes and particular processes and culture.
Given the asset heavy, mature and low-margin nature of the vehicle manufacturing industry (i.e. it is what would be called a ‘structurally unattractive’ industry), such optimisation capabilities are crucial and take years to build.
Does Ineos have a plan?
It is possible that Ineos has a plan to enter this industry at a reasonable cost, i.e. perhaps to buy rather than make as high a proportion of the final product as possible, so that it can aim for an asset-light business model which would give more flexibility and reduce risk.
However, even so, bargaining power with suppliers is crucial in this industry. With relatively low production runs, the company may be penalised in terms of its cost of inputs, which would adversely affect profit margins.
Stock markets do not like unrelated diversification, imposing a conglomerate discount on companies that veer away from their core competencies and core businesses (unless you are Berkshire Hathaway, that thrives on Warren Buffet’s legendary investing skills).
Boards of directors would normally be sceptical about unrelated diversification proposals. In this case, Ineos is privately held, so this would not have been a concern. Having said all that, from a corporate strategy point of view it is a risky decision and one that is hard to explain on other terms than a love of the auto-industry and of off-road vehicles in particular.