How Germany’s economy is affected by supply chain bottlenecks

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FRANKFURT – In Germany, where every fourth job depends on exports, the crisis that is sticking together the global supply chains is weighing on the economy, which is Europe’s largest and the lynchpin of world trade.

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

Almost everything that German factories need to operate is in short supply, not just computer chips, but also plywood, copper, aluminum, plastics and raw materials such as cobalt, lithium, nickel and graphite, which are crucial components of electric car batteries.

The auto industry is hardest hit. Opel, a unit of Stellantis, the company that owns Jeep and Fiat, announced in September that it would close a factory in Eisenach by next year due to a shortage of semiconductors. The 1,300 workers at the plant are on leave.

More than 40 percent of German companies said they had lost sales in August due to delivery problems opinion poll from the German Chamber of Commerce and Industry. Across Europe, exports would have risen by 7 percent in the first six months of the year without delivery bottlenecks, according to the European Central Bank.

While every economy in the world suffers from bottlenecks, Germany is particularly sensitive due to its dependence on industry and trade. Almost half of Germany’s economic output depends on the export of cars, machine tools and other goods, compared to only 12 percent in the USA.

Since Germany is a factory nation, “the effects are dramatic,” says Oliver Knapp, Senior Partner at Roland Berger, a Munich-based consultancy.

The country is also facing a period of political uncertainty. Neither party had a clear majority in last month’s elections, and there is a risk that any coalition government will not have enough cohesion to act decisively.

The slowdown has turned the German economy into a test case of how companies can become less vulnerable to electricity bottlenecks in China or ships in the Suez Canal.

Many companies are already increasing their parts inventories, ordering raw materials in advance and finding creative – some say desperate – ways to get the products out of the factory gates. Traton, Volkswagen’s trucking unit, said last month it was canning hard-to-find components from trucks that were built but not sold and reinstalling them into trucks that had firm orders.

In the longer term, companies have been thinking about how to bulletproof their delivery lines, for example by buying parts and raw materials near their home country rather than from subcontractors on the other side of the planet. Some political leaders have even suggested that the pandemic could have a silver lining as it will inspire companies to bring manufacturing back to Europe and the United States and create well-paying factory jobs.

But untangling the networks that move products around the globe is not that easy, and maybe even not a good idea, say some economists and business administrators.

The widespread assumption that local suppliers are more reliable has not always come true. During the turmoil caused by the pandemic, some German companies had more difficulty getting supplies from France or Italy than from Asia due to strict lockdowns.

“It is not as if we would have survived the crisis without any problems without our dependence on China,” says Alexander Sandkamp, ​​economist who studies supply chains at the Kiel Institute for the World Economy.

Evidence is mounting that bottlenecks are dampening German growth. The newest . of the Ifo Institute Survey among German business economists, which is considered to be a reliable predictor of economic development, indicated a significant weakening. More than three quarters of German companies stated that the Munich institute had difficulties in procuring raw materials and parts.

According to the law of supply and demand, prices rise. The annual inflation rate in Germany was 4.1 percent in August, its highest level in almost three decades. While most economists consider the rise to be temporary, inflation is always a sensitive issue in Germany, reminiscent of hyperinflation and poverty after the First World War.

Businesses are caught in a vicious circle. Robert Ohmayer, Global Purchasing Manager at Voith, a company based in Heidenheim that builds and equips paper mills and hydropower plants, calls this the toilet paper effect.

Just as panicked consumers were hoarding toilet paper at the start of the pandemic, companies worried about running out of critical supplies are ordering more than they need and storing them in warehouses. This has led to even more bottlenecks.

Companies had little choice. “We’re ordering more to protect our business,” said Mr. Ohmayer.

Delivery problems are doubly frustrating for companies because many have bulging order books that they cannot fill.

Take bike shops. Malaysian factories that make gears, shock absorbers and other bicycle parts have been closed because of the pandemic. In addition, shipping containers were in short supply and cargo ship traffic was disrupted by events such as the closure of Chinese ports because dock workers tested positive for the virus.

The problems have choked the supply of things like brake pads that bike dealers need to fix. But demand is booming, also because many Germans switched to bicycles as an alternative to local public transport during the pandemic or decided to take a cycling holiday near their home instead of flying to a beach in Spain.

“All things on the world market hit us at the same time,” says Tobias Hempelmann, owner of a bicycle store in Lage. “High demand, no containers and people want to ride bicycles.”

One of his employees does nothing but search for components, search eBay or Amazon for scarce items or haggle with other dealers, said Hempelmann.

Loads in the system were already apparent before the pandemic. Tensions between China and the US and increasing protectionism had already led many companies to reconsider their dependence on widely dispersed suppliers.

An additional complication for German companies is a new law that is due to come into force in 2023 and which obliges them to ensure that they do not buy from suppliers who Child or slave labor.

“We knew that global supply chains were risky before we had Covid,” said Mr. Ohmayer, Voith’s Head of Purchasing. “The Covid crisis is an accelerator, but not a new trend.”

Companies are now trying to find out what lessons they can learn and how they should reorganize their supply networks so that they are less vulnerable to crises.

As politicians hope, Voith buys from suppliers near its plants in Germany and the USA. China’s cost advantage has waned as wages have risen, and sometimes a small machine shop in Wisconsin is cheaper, Ohmayer said.

But what works for Voith, which buys small numbers of special components, may not work for a car company that buys millions of identical parts. You still have a strong incentive to buy from suppliers who can mass-produce a part of reasonable quality at the lowest possible price. Of the German companies surveyed by the German Chamber of Commerce and Industry in August, only 8 percent said they were planning to relocate production.

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

Supply bottlenecks should ease as suppliers expand their factories to meet demand. Last month, the German chip manufacturer Infineon, which specializes in the automotive industry, opened a factory planned before the pandemic. The plant in Villach, Austria, could produce enough chips to equip 20 million electric vehicles, said Peter Schiefer, President of Infineon’s automotive division.

Numerous other chip manufacturers have announced that they will expand production. But noting that it would take a year and a half to procure the necessary machines, Mr. Schiefer said: “That will not happen immediately.”


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