Horizontal Integration in CleanTech
By Nick Blitterswyk, CEO
Over the last few years, an increasing amount of renewable energy companies have used vertical integration as a strategy to capture both larger market share and obtain greater margins on projects. SolarCity recently set out to produce their own solar panels, and similarly, module producer SunPower began developing and installing systems.
While the move to own more of the supply chain can be useful under certain market conditions, the strategy is not without hazards. Coordinating among diverse business segments can prove challenging after a transaction, further exposing companies to risk. Alternatively, consolidation is a strategy that recognizes synergies between complementary organizations already operating in the same space.
Choosing to integrate the supply chain horizontally offers strategic benefits over vertical integration, for several reasons.
Consolidation increases operational leverage.
When companies integrate vertically, management is tasked with coordinating operations among separate business units. However, when companies choose to develop with strategic alignment in mind, it creates a more productive organization. In the case of UGE’s recent acquisition of Endura Energy, the former will enhance their current engineering capabilities to better concentrate efforts to understand and develop market opportunities.
The economics are undeniable.
Expanding horizontally increases purchasing power, allowing companies to lower their expenditures. Increasing market share through acquisitions can help companies leverage economies of scale when working with suppliers.
Consolidation helps avoid uncertainty over the long term.
Consider that the lifetime of a solar panel is currently longer than most solar providers have been in business. When a solar company operates in only one market, there is a risk for customers if conditions in te market go south. Customers may have to scramble to find someone to cover operations and maintenance should the company who manages their solar system go out of business. However, by acquiring companies that are active across several markets, there is a reduction of risk that ultimately increases security to the end user.
While vertical integration may be the current trend among most cleantech companies, we feel that the more traditional pathways to expansion will be the most profitable. Staying tuned in to your organization’s strengths - and perhaps more importantly, weaknesses - will allow management to move quickly to capitalize on opportunity before your competitors.