Decoupling: Corporations put up internal firewalls against crises
Munich, Dusseldorf Holger Engelmann is caught in a dilemma familiar to many German CEOs. “China, with its 1.4 billion people, is and will remain an interesting market,” says the CEO of the automotive supplier Webasto in an interview with the Handelsblatt. The growing potential cannot and will not be ignored. “We will continue to invest in China.” A third of the turnover of 3.7 billion euros already comes from the China business.
Webasto is typical of German industry: China has not only developed into the most important sales market for the Stockdorf-based supplier within a decade. But as geopolitical tensions mount, concerns are growing about a cluster of risks should China become part of a future crisis scenario. The experiences with Corona and the Ukraine war have shown how fragile the supply chains are and how big the dependencies are. When South Vietnam is in lockdown, the sneakers are missing. If wire harness production stops in Ukraine, the assembly lines in car factories in Europe will come to a standstill.
Webasto and other companies such as the pump manufacturer Wilo or the electrical engineering group Schneider are drawing conclusions: a kind of internal decoupling. The major regions of the world – the USA, Europe, China and the Asia-Pacific region – should stand on their own two feet if possible.
“Almost all companies have run a scan of how their value-added links are,” says a high-ranking management consultant. “Nobody wants to be caught off guard again by the next crisis.”
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43 percent of industrial companies want to reorganize production
The companies want to build firewalls. Around 43 percent of global industrial companies are currently considering reorganizing their own production, according to the results of a recent survey by the strategy consultancy BCG. The change in strategy goes far beyond the old principle of “follow the markets”. The regions should also become more self-sufficient in terms of procurement, financing and research and development.
It is a reaction to the world economy, which is becoming increasingly unpredictable, which has been out of sync in recent years, first as a result of the pandemic and then as a result of the war in Ukraine. Numerous companies had to temporarily stop production because important parts such as semiconductors were missing. The following applies: The more closely intertwined the global site network, the higher the efficiency – but also the greater the susceptibility.
Webasto boss Engelmann wants to focus more on resilience in the future. “If one region fails, the others must be able to act independently and stabilize the company,” says the manager. Engelmann is not only thinking of China: the market in Europe could collapse if the gas fails. In the USA one does not know what will happen after the next presidential election.
And in China there are several risks: from possible trade barriers between the USA and China to far-reaching lockdowns due to the zero Covid strategy. “We have to be prepared to regularly experience negative surprises,” says Engelmann. Companies need to improve their crisis and risk management. “We always have to ask ourselves: do we have a plan B?”
In concrete terms, at Webasto this means that the supply chain is already comparatively regional. The plants are close to the customers, and the required parts usually come from the greater region. “This makes it easier to decouple the regions,” says Engelmann. In Europe and North America, the localization quota of the local Webasto locations is over 90 percent.
Diversification strategy sometimes reaches its limits
However, depending on which preliminary products are required, this strategy has its limits. Because some goods are produced by several manufacturers, but they are concentrated in a certain region of the world. For example, the Japanese building materials group Lixil, owner of the Düsseldorf-based bathroom fittings manufacturer Grohe, had a problem during the pandemic: a connector that was temporarily unavailable was missing for the production of toilet seats. This forced the company to temporarily reduce production in Japan when the supplier and all competitors were affected by the lockdown in China.
“I firmly believe that the industry will rely more on regionalized value chains in the future, this also applies to us, in addition to a certain degree of redundancy in our supply chain, especially with critical components,” said Kinya Seto, CEO of Lixil, the Handelsblatt . “But the example shows that the diversification of purchasing has certain limits.” In this case, it is simply not possible to switch to another region at short notice if the suppliers do not go along with the regionalization.
Webasto boss Engelmann is also thinking about how he can reduce the dependency on the remaining ten percent of purchasing in Europe and North America, which are not yet regionalised. An example of this are electronic components from the USA, some of which are currently being delivered to plants all over the world. If, for example, the USA were to ban the export of American chips to China, Webasto would have a problem. For alternatives, one therefore also accepts losses in margins.
But there is always a trade-off between the necessary resilience and the greatest possible efficiency. It’s no use if you have all the parts available even at a high price, but suppliers further down or up the chain fail, says Engelmann. “Your own company should never be the first that cannot deliver – but not necessarily the last either.”
Schneider Electric has had good experiences
The example of the French electrical engineering manufacturer Schneider shows that a strongly regionalized structure can help to better manage crises. For many years, the Group has relied on highly independent hubs that organize almost all of the added value for their respective regions of the world.
The regional companies are responsible for research and development as well as purchasing. With a drop in profits of twelve percent in the Corona year 2020, Schneider came through the pandemic much better than many competitors.
Schneider boss Jean-Pascal Tricoire said in an interview with the Handelsblatt that in addition to greater resilience, this region-by-region strategy also contributes to the goal of being able to offer every market tailor-made products. “Especially in the field of electrical engineering, there are often different standards that make it necessary to adapt our products to the respective markets.” The respective national companies therefore know best what the customers’ needs are. “We therefore give them the greatest possible independence.”
The Dortmund-based pump manufacturer Wilo, which also organizes its production in so-called hubs that act strongly independently, has been pursuing a similar strategy for some time. In the future, Wilo intends to operate a total of three regional company headquarters spread across the three major economic areas of North America, Asia and Europe. A high degree of automation helps to make the respective productions more flexible. In this way, almost all product groups can be manufactured anywhere should the supply chain in a single region fail.
Research and development not only at headquarters
If the major regions of the world are to be given a certain degree of self-sufficiency – i.e. ideally they should be able to handle financing, development and production themselves – this could theoretically also have consequences for Europe. Because unlike Schneider, for example, development at many German companies still takes place primarily at home. “More regionalization could, for example, lead to us building more capacities for research and development in China,” says Engelmann.
Webasto is now trying to balance the business even more regionally. The group currently generates 32 percent of its sales in China and 22 percent in the Americas region. “We want to grow more evenly regionally,” says Engelmann. Webasto is currently focusing on growth in North America and the Asia-Pacific region.
But things are not that simple. “It’s not just about volume, but also about profitability.” And then the profits from China also financed other locations. “But this cross-subsidization will no longer work in the long run.”
For a long time, says Engelmann, business relied on the ideal of globalization. “We trusted that it was the right way and used the advantages of the respective countries.” In principle, this is still the right way. “But we need stronger protection. And we must always remain vigilant and agile.”
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