How the German economy is affected by supply chain shortages

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FRANKFURT – In Germany, where one in four jobs depends on exports, the crisis in global supply chains is weighing heavily on the economy, which is Europe’s largest and a mainstay of world trade.

Recent surveys and data point to a marked slowdown in German manufacturing power, and economists have started to predict a “bottleneck recession.”

Almost everything German factories need to operate is lacking, not just computer chips, but also plywood, copper, aluminum, plastics and raw materials like cobalt, lithium, nickel and carbon. graphite, which are essential ingredients in electric car batteries.

The auto industry has been the hardest hit. Opel, a unit of Stellantis, the company that owns Jeep and Fiat, announced in September that it would close a plant in Eisenach until next year due to a semiconductor shortage. The 1,300 workers at the plant will be put on leave.

Over 40 percent of German companies said they lost sales due to supply issues in August investigation by the Association of German Chambers of Commerce and Industry. Europe-wide, exports would have increased by 7 percent in the first six months of the year without the supply bottlenecks, according to the European Central Bank.

While all the world’s economies suffer from shortages, Germany is particularly sensitive due to its dependence on industry and commerce. Almost half of Germany’s economic output depends on exports of cars, machine tools and other goods, compared to just 12% in the United States.

Because Germany is a nation of factories, “the impact is dramatic,” said Oliver Knapp, senior partner at Roland Berger, a Munich-based consulting firm.

The country is also going through a period of political uncertainty. Last month’s elections left no party with a clear majority, and there is a risk that whatever coalition government emerges will lack cohesion enough to act decisively.

The slowdown has made the German economy a test of how businesses can become less vulnerable to power shortages in China or to ships stranded in the Suez Canal.

Already many companies are increasing their inventories of parts, ordering raw materials further in advance, and finding creative – some might say desperate – ways to keep products out of the factory gates. Traton, Volkswagen’s truck unit, said last month it was cannibalizing hard-to-find truck components that had been built but not sold, and reinstalling them in trucks for which there were firm orders.

In the longer term, companies have been thinking about ways to protect their supply lines, for example by purchasing parts and raw materials closer to home rather than from contractors across the world. planet. Some political leaders have even suggested that the pandemic may have a silver lining, as it will prompt companies to bring manufacturing back to Europe and the United States, creating well-paying factory jobs.

But disentangling the networks that move products around the world isn’t that easy, and maybe not even a good idea, some economists and business leaders say.

The popular assumption that suppliers close to home are more reliable has not always been true. During the turmoil caused by the pandemic, some German companies had more difficulty obtaining supplies in France or Italy, due to strict confinements, than in Asia.

“It’s not true that if we weren’t dependent on China we would have gotten through the crisis without any problems,” said Alexander Sandkamp, ​​an economist who studies supply chains at the Kiel Institute. for the global economy in Kiel, Germany.

There is mounting evidence that shortages are depressing German growth. The most recent from the Ifo Institute survey of German business leaders, considered a reliable indicator of the direction of the economy, indicated a marked slowdown. More than three-quarters of German companies told the Munich institute that they had difficulty obtaining raw materials and spare parts.

Obeying the law of supply and demand, prices go up. The annual inflation rate in Germany was 4.1% in August, the highest in almost three decades. While most economists believe the spike is temporary, inflation is still a hot topic in Germany, reminiscent of hyperinflation and poverty in the aftermath of WWI.

Businesses are caught in a vicious cycle. Robert Ohmayer, global purchasing manager at Voith, a Heidenheim-based company that builds and equips paper mills and hydropower plants, calls it the toilet paper effect.

Just as panicked consumers hoarded toilet paper at the start of the pandemic, businesses worried about running out of key materials order more than they need and put them in warehouses. This created even more shortages.

Businesses had little choice. “We are ordering more to protect our business,” Mr. Ohmayer said.

Supply issues are doubly frustrating for businesses because many of them have large order books that they cannot fill.

Take the bicycle shops. Malaysian factories that make gears, shock absorbers and other parts for bicycles have been locked down due to the pandemic. In addition, sea containers have been scarce and the movement of cargo ships has been disrupted by events such as the closure of Chinese ports as dockworkers have tested positive for the virus.

Problems have stifled the supply of things like brake pads that bike shops need for repairs. Still, demand is booming, in part because many Germans have turned to cycling as an alternative to public transport during the pandemic, or have decided to take a cycling vacation near their homes rather than taking the road. plane to a beach in Spain.

“All things in the global market hit us at the same time,” said Tobias Hempelmann, owner of a bicycle dealership in Lage. “High demand, no containers and people want to cycle. “

One of his employees is just picking up components, searching for rare items on eBay or Amazon, or bartering with other resellers, Hempelmann said.

The tensions in the system were evident even before the pandemic. Tensions between China and the United States, along with rising protectionism, had already prompted many companies to reconsider their reliance on distant suppliers.

An additional complication for German businesses is a new law, due to come into effect in 2023, which requires them to ensure that they do not buy from suppliers who use child labor or slave labor.

“We knew global supply chains were risky before we had Covid,” said Mr. Ohmayer, Voith’s chief purchasing officer. “The Covid crisis is an accelerator, but it is not a new trend. “

Companies are now trying to figure out what lessons to learn and how to reorganize their supply networks so that they are less susceptible to crises.

As political leaders had hoped, Voith is buying from suppliers closer to its factories in Germany and the United States. China’s cost advantage has eroded because wages have gone up, and sometimes a small machine shop in Wisconsin is more profitable, Mr. Ohmayer said.

But what may work for Voith, which buys a small number of specialized components, may not work for an automaker who buys millions of the same part. There is always a strong incentive to buy from suppliers who can mass produce a decent quality component at the lowest price. Among German companies surveyed in August by the Association of German Chambers of Commerce and Industry, only 8% said they plan to move production.

“You can try to bring production back, but you have to expect that these products can only be produced at higher prices,” said Mr Sandkamp of the Kiel Institute. “We will lose in competitiveness.

Supply shortages are expected to ease as suppliers expand their factories to catch up with demand. German chipmaker Infineon, which specializes in the automotive industry, last month opened a factory that had been planned before the pandemic. The plant, in Villach, Austria, can produce enough chips to power 20 million electric vehicles, said Peter Schiefer, president of Infineon’s automotive division.

Many other chipmakers have announced plans to expand production. But, noting that it takes just a year and a half to acquire the necessary machinery, Mr Schiefer said: “It won’t happen right away.


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