Vertical integration in bio ethanol industry: security of supply and market access in fuel-ethanol value chain

Mr Jin Hooi Chan, Judge Business School, University of Cambridge

The global bioethanol industry expands rapidly with an average growth rate of 15% annually during the last decade. In 2009, the production was 72.8 billion litres. About 80% was for transport fuel, contributed 5% of the world gasoline supply. This paper analysed the world top 20 producers and additional 20 regional/national firms, based on data collected from industry journals, company annual reports and website and business news reports.

There are primarily six types of players, venturing into the production segment. These are oil & gas industry, giant commodity trading firms, technology suppliers including engineering and biotech, traditional food/alcohol processing,  farmers and farmers’ cooperative, and entrepreneurial start-up. A comparison has been done on the size of firm, competitive advantage, drivers and involvement  in the segments of the value chain.

The production capacity expands rapidly amidst uncertainty in policy supports, stringent sustainability requirements, large fluctuation in production margins and threats of technological substitution. There is a trend of horizontal consolidation where big players increases their production capacities by new greenfield projects, expansion on existing plants and M&A. On the other hand, there is an evidence of a tendency in vertical integration.  Oil & gas firms move upstream to enhance security of supply while the commodity and food firms migrate downstream to production and retailing to gain market access. The authors explain this trend with the theories of firm and propose a more holistic understanding of firm, taking economy, social and environment into consideration.

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