You want to grow your business so you decide to add new product lines or buy a business to vertically integrate the business. All of a sudden, you now become a competitor to your customers and they start to get worried. Over time, they will investigate your expansion and my decide to give their business to other suppliers. Ever noticed why some restaurants offer Coke as a soft drink and not Pepsi? Pepsi owns many restaurants and I am guessing that a competing restaurant do not want to generate more profits for their competitor because Pepsi will use those profits to increase the competition by providing more capital to their restaurants to expand the business or expand the product line of the business.
Another recent example is Magna, a auto parts manufacturer who has been making parts for many of the car companies. One minute they are working with the car companies as a parts manufacturer, the next minute they are trying to buy Opel, the European car division of General Motors. All of a sudden, car companies could be giving trade secrets to a competitor, one who just made parts but now is a direct competitor.
BMW is now speaking up and saying that they do not want Magna to learn about their new technology because that would be giving away trade secrets to the competitor. BMW generates 19% of Magna’s sales. Will other car companies be making the same comments? I am sure that they will. In my opinion, the business that has been built up today will change dramatically because they stepped outside the box and started to compete with their customers. Even if they have an iron wall and one side of the business does not talk to the other, the profits from the parts manufacturing will prop up Opel, a car company who competes directly with their customers. Will this hurt the company over time financially? Time will tell but I think that if the competitors still keep sending business to Magna, the complexity of the products will drop and only simple parts will be produced, at least until a new competitor is formed. They will in my opinion not provide information about new technology to Magna. I think this opens the door for new competitors to arrive and start selling the same products to the automotive industry as Magna and over time, the new companies will become large companies and the traditional business of Magna will decline. Only time will tell if my prediction is correct.
I have identified two public companies who compete with their customers, there are many more. In summary, you have to think what business are you in. It is acceptable to expand a business and provide more products to your customers but once you step over the boundaries and start to compete with your customers, you change the rules of the game and you could lose your bread and butter business very quickly.