Advantages of Vertical Integration in the South African Tile Industry

As covered in the WOW report on the Tile Industry in South Africa, the advantages of vertical integration in the tile industry relate to the fundamental principles of economic organisation of business activities. The economic benefits of vertical integration by a producer are generally accepted to be positive as they bring about efficiencies such as the elimination of transaction costs. However, in the case of scarce goods, where integration has the effect of restricting downstream producers from access to essential inputs, the integration may be considered anti-competitive.

Benefits of vertical integration in the Tile Industry

Vertical integration is a practice mainly performed by large businesses and in production processes that require substantial investment. Small enterprises would not have the financial means to invest the capital required to bring the integration to fruition. This does not mean they cannot have or find a place in the production value chain.

“The use of power will in time always give rise to a countervailing power”.
Economist: K Galbraith

The practice generally enables large businesses to create efficient production processes and bring products to market at lower prices, which eventually benefits the consumer. But it also results in large businesses deriving these efficiency gains from a sometimes disproportionate control over value chains.

Vertical Integration and regulation in the Tile Industry

According to the WOW report on the tiling industry in South Africa, regulation and antitrust laws are in place to prevent rent-seeking which happened in the early days of apartheid when large companies and wealthy individuals were favoured, leading to limited competition and the exclusion of certain sectors of society and smaller players.

The WOW report indicates fair concentration or vertical integration of tile production has brought a wide variety and new tiles to the consumer, given their investment in innovation and R& D, while smaller tile manufacturers have continued to carve out a place for themselves in the sector.

The difficulty of access to market has been an issue for small manufacturers, as compared to major businesses who have the advantage of having their own outlets and retail burstinesses like hardware store. This is gradually changing in their favour with the advent of online stores such as Takealot, now offering an avenue for them by providing a platform and acting as third-party sellers directly to the market.

Vertical Integration and economic realities in the Tile Industry

Competition always encourages participation and reduces the risk of having a single provider dominating the market. As economist Kenneth Galbraith said: “The use of power will in time always give rise to a countervailing power”, bringing a balance to the economic environment. Temporary distortions are mitigated by regulatory authorities in most countries, shortening the time it may take for the pendulum to swing back.

We believe that vertical integration in the South African tile industry is within the range considered to be having a fair balance between larger and smaller players in the sector, providing consumers with a wider choice of tiles, and providing the industry with improved production methods and the ability to sell tiles as a preferred or attractive option when covering floors and walls.