Fraunhofer Talk – ways out of the (de-)globalization trap

The pace of globalization has been slowing down since 2010. Have the covid pandemic and the Ukraine war merely accelerated this development?

Henke: Yes and no. Yes, because after the crises of the last three years, the calls for de-globalization quickly grew louder due to the need to acquire materials. No, because the latest publication of the DHL Global Connected Index, for example, comes to a different conclusion, as the index is higher than it was before the pandemic.

Germany has benefited considerably from the virtually unlimited opportunities offered by world trade. This applies equally to sales markets and relocation of production. How does Germany's growth model look after hyper-globalization has ended?

Henke: Hyper-globalization has indeed come to an end, but globalization can no longer be turned back. Germany, for example, is closely intertwined with China and will remain so for the time being despite all words of warning from politicians. Nevertheless, de-coupling is a long-term trend and requires companies to continuously adjust their business strategies in order to remain competitive with other nations in the long term. Due to an increasing shortage of skilled workers, we in Germany will have to do much more to leverage the potential of new technologies for digitization and autonomization of value creation.

We talk to companies a lot about the resilience of their supply chains. Not only in times of crisis, but especially then. What makes a supply network resilient and what do companies need to pay attention to? How can digitization help?

Henke: With the help of new digitization technologies like artificial intelligence and blockchain technology, a resilient supply network is able to anticipate and analyze dangerous developments in such a timely manner that, at the moment exogenous shocks occur, it is possible to switch in real time from one partner affected by them to another that is not.

Supply chains can be reliably tracked via the blockchain.

Henke: Exactly. And ideally, appropriate alternative measures will be specified in smart contracts in the future so that, for example, a change of supplier can be triggered virtually automatically. In recent years, and especially in Germany, companies have often knowingly run into supply problems – even to the point of disrupting supply chains despite predictability. If companies are prepared to learn from the crises of the last three years, then they can implement their experiences in new strategies.

For many preliminary products, the list of suppliers can be expanded and secured with just a little extra logistical effort. The situation is different for raw materials, which are mostly lacking in Germany and much of Europe.

Henke: Fortunately, the situation has eased somewhat in recent months, but Germany is still too dependent on raw material suppliers in crisis regions around the world. The first step away from this dependency would be to create transparency, or in other words, to have a clear picture of which suppliers a company is dependent on and to what extent. Then risk management strategies can be developed that are relevant not only for companies in Germany, but also – due to the diverse international interdependencies mentioned above – in Europe.

We welcome the efforts to establish a circular economy in Germany and the EU in order to make the economy more resilient. In addition to all the positive effects on the environment, sustainability will actively contribute to securing economic performance.

Henke: There are efforts to establish a circular economy not only in Germany and Europe, but worldwide. This is important for making a very concrete contribution to sustainability and for actively counteracting climate change. Moreover, sustainability and resilience cannot be viewed separately, but are closely linked. Sustainable systems are designed for the long term. Planning a sustainable system therefore includes strengthening the resilience of such systems. After all, businesses will always go through crises, whether geopolitical, pandemic or societal. Only if economic systems can survive these challenges – in Germany, the EU and worldwide – can we speak of a sustainable economy. Sustainability investments must be seen as an opportunity and turned into drivers for growth and profitability.

Recently, there has been increased discussion about the concept of friendshoring. Trading only with friendly nations is a legitimate and simple concept, but unfortunately, the reality of it is a bit more complicated.

Henke: I personally believe that, in light of the crises that have become our new normal, friendshoring is a perfectly understandable objective for companies, especially in the Western world. However, against the backdrop of the global interdependencies described above, friendshoring, just like nearshoring, does not seem to be an entirely achievable goal. Disruption in a fragile geopolitical situation must be seen as a normal state of affairs. Global trade flows that will hopefully remain free must therefore be questioned and adjusted over and over again. Friendshoring can be used as a concept in this context on a situational basis, but not always and not everywhere.

Many of the problems we face today stem from the fact that entire industries have moved manufacturing almost entirely to Asia. In chip and drug manufacturing, consideration is being given to bringing back parts of production. How concrete are reshoring plans in Germany, the EU or the USA?

Henke: The recent pharmacy strike in Germany made it clear that the value-added processes in the pharmaceutical industry are not ideal. In the chip industry, Germany is currently spending a lot of money to attract international heavyweights to our country. Ultimately, though, the fact that companies in such sectors moved their production centers abroad many years ago is rooted in the unattractive political conditions in Germany and Europe and the comparatively high labor costs here. In the USA, the government is also trying to lure companies and counteract de-industrialization, for example through large subsidies. It could even be said that certain industries were first driven out of these countries and regions just to spend a lot of money now to bring them back. I don't want to comment on any specific plans here, but it will take longer than some would like. Ultimately, it’s up to the politicians to set the course for this.

For many years, relocation of production to low-wage countries or regions with more favorable overall conditions ensured lower prices and healthy corporate profits. Now the pendulum seems to be swinging in the other direction. The crucial question is: Will we be able to counteract the threat of price increases from bringing manufacturing back home with the help of technology-driven efficiency gains?

Henke: Due to the increasing shortage of skilled workers, we need to apply any technologies we have as quickly as possible. If we succeed in doing this to a much greater extent than we do now, then we will still be able to manufacture products and product lines in our own country in a few years' time and pay the resulting prices. To achieve this, we need to close the technology gaps between shop floors and top floors – in addition to changing the political framework, including an absolutely necessary reduction of bureaucracy.

In addition to all kinds of controversial decisions, politicians have also recently provided positive impetus for making Germany "weatherproof" as a business location. Is the collective loss of wealth due to structurally higher commodity prices avoidable?

Henke: If all this comes to pass, that might be the case. But first, we must succeed at stabilizing the supply chains again in all sectors that have been or are still affected by the crises of recent years.