German Companies Stick With Their Global Supply Chains

Despite the coronavirus pandemic, only a few companies in Germany have turned to new national supply chains and are looking to replace global procurement. This is the finding of an ifo study for the Konrad Adenauer Foundation. Of the 5,000 companies surveyed, only one in ten intends to rely more heavily on domestic supply chains in the future. “Instead, many companies are planning to scale up their warehousing and increase the number of suppliers they use,” says Lisandra Flach, Director of the ifo Center for International Economics.

This trend is sweeping all sectors of the economy. Large companies are relying on a wider pool of suppliers, while small and medium-sized enterprises are planning to increase their warehousing capacity. In manufacturing, 44 percent of companies plan to change their procurement strategy. “Manufacturers affected by shortages of materials are more likely to report that they are changing their procurement strategy,” Flach says. In wholesale, the figure is 35 percent; in retail, it is just 27 percent. In the service sector, only 10 percent of companies are planning a different procurement strategy.

The study also found that shifting production back to Germany or countries nearby would lead to a major loss of prosperity. “This kind of relocation could cause Germany’s real economic output to fall by almost 10 percent,” Flach says. The same applies to a relocation of production back to European neighbors, which would reduce Germany’s economic output by 4.2 percent.

This makes it clear that “a politically driven, comprehensive reorganization of German companies’ supply chains would not only be unnecessary. Reshoring of this nature would also be immensely costly for the economy and society,” notes Jan Cernicky, an expert on international trade and economics at the Konrad Adenauer Foundation.

Small and medium-sized enterprises (SMEs) in particular often find it difficult to further diversify their supply relationships. For them, it often takes a relatively large effort to establish and coordinate business relationships with several foreign suppliers. “Trade agreements that were more SME-friendly would be of great help when it comes to making supply chains more robust,” says Andreas Baur, co-author of the study. Simplification and harmonization of rules of origin would, for example, make it much easier for SMEs to use free trade agreements, which would open up new opportunities for diversification.

The study shows that value chains within the EU play by far the most important role from a German perspective. The EU also plays a decisive role for Germany in geopolitical terms. On its own, the German economy is less important as a supplier to China and the US. But as a whole, the EU is the most important supplier of intermediate products to both China and the US. “These interdependencies between China and the EU tend to reduce the likelihood of aggressive trade policies, as both sides would have a lot to lose in a trade conflict,” Flach says.

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Konrad-Adenauer-Stiftung