European companies are currently working flat out to localize their value chains, as our recent study of 150 large firms in six core European markets shows. Across all sectors, 85 percent say they are planning to bundle their structures, from production to sales, more strongly within the respective markets in the future ("local for local").
Europe is regaining importance as a sourcing and production market in many industries, for example for the production of battery cells for the local sales market for electric vehicles. However, this does not mean that companies are closing themselves off to non-European markets.
Majority of companies also focusing on new market potential outside Europe
Of the companies that are planning to open up new markets in the next three years – that's seven out of ten – 85 percent also intend to leverage potential outside Europe. While Europe is at the top of the list of the most promising potential markets at 66 percent, almost half of respondents are now (even more) focused on Asia (47 percent), followed by North and South America at 37 and 33 percent, respectively. The Middle East (26 percent), Africa (17 percent), and Oceania (11 percent) bring up the rear among the most attractive potential markets.
There will, therefore, be no alternative to non-European markets in the future due to a lack of local sources for certain key materials. This list includes energy, rare earths, rechargeable batteries, semiconductors and more – not least because procurement channels and production structures cannot be relocated overnight. There can therefore be no question of strict deglobalization in the sense of a Europe-centric outlook, and China also remains a key sales market for global corporations.
"Globalization is unstoppable, current (trade) conflicts will not change that. Nevertheless, cooperations and economic interdependencies need to be more flexible," says Frank Fiedler, CFO of Volkswagen Financial Services AG.
"Globalization is unstoppable,
current (trade) conflicts will
not change that. Nevertheless,
cooperations and economic
interdependencies need to
be more flexible."
Non-delineated trading blocs
The majority of European top managers surveyed in the Horváth study believe that there is now a trend towards forming trading blocs. However, these new blocs will not consist of delineated economic areas, such as Western countries on the one hand and BRICS countries on the other. Instead, there will be alliances between markets that can offer each other geopolitical stability and shared values. The composition of these blocs will become clear in the coming months.
Trend towards diversification
In the case of Asia, our survey indicates that 62 percent of companies are working to relocate at least some of their China-based operations in order to increase their resilience and reduce their dependence on the country. Several Asian countries are being considered as potential new supplier markets, with no single country emerging as a clear front-runner. In particular, India and Japan are seen as potential alternative (or new) production locations, followed by Singapore, South Korea, Taiwan, and Indonesia.
In our consulting practice, we are also increasingly seeing relocations from China to Vietnam and Cambodia, and to Bangladesh or Pakistan in the textile industry. This trend toward diversification will continue, which also makes sense in terms of the potential risks.
Risk management, data transparency, and procurement are becoming increasingly important
The pending reorganization is about unbundling supply chains and consciously choosing (new) partners for reasons that are not purely cost-driven. Risk management – and the data transparency that it requires – are thus growing in importance. "Political risks will have a greater impact on business risks in the future, and negative effects will need to be hedged. For example, in terms of credit and residual value risk," says Frank Fiedler, CFO of Volkswagen Financial Services. Procurement is also becoming even more significant – make-or-buy decisions will need to be renegotiated in this context.
Shortage of skilled workers hampers sustainability efforts
Overall, companies also have high hopes of better achieving their sustainability goals through greater localization. The establishment of a circular economy is also expected to have a major, positive impact in this area.
The enormous relevance of sustainability for the entire value chain is also emphasized by VWFS CFO Frank Fiedler: "Sustainability doesn't end with Co2-neutral business operations but can be continued both by providing a Co2-neutral product and by ensuring its Co2-neutral use by the customer."
Given the current supply bottlenecks, sustainability will have to take a back seat in the short term, as Joachim Christ, CPO of Merck, also confirms in a separate interview. The majority of top managers surveyed in our study also believe that supply chain issues are complicating their sustainability efforts. However, they also see another problem on the horizon, i.e., the worsening shortage of skilled workers, which will place renewed focus both on sustainability issues and supply chain optimization – for example, due to personnel bottlenecks in logistics or a lack of experts with the requisite specialist know-how. In other words: Crisis management remains ongoing.
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