European leaders talk of shortening supply chains and curbing China’s Belt and Road Initiative, but on the ground in Italy, Gimmi Baldinini said that his designer footwear company is in no position to cut ties with China.
“Chinese workers have a better hand with gym shoes,” said the chairman of Baldinini, founded by his family in 1910 in northern Italy, where it still has the main production hub for the top segment of his goods.
To produce sports shoes, the company relies on a Chinese plant in the Shenzhen area.
“Production costs over there are 75 percent lower than in Italy. I cannot consider cutting them off and reshoring that particular production line. Simply, there is no other way — unless the Italian government decides to dramatically cut tax and labor costs,” Baldinini said.
Already buffeted by US-China trade tensions, the EU has stepped up efforts to produce closer to home in the wake of the global COVID-19 pandemic, which is causing the steepest recession in almost a century. While drugs and medical gear have been an immediate priority, the initiative is wide-ranging.
In an unusual foray into industrial policy, European Central Bank President Luis de Guindos and Dutch central bank President Klaas Knot have independently argued that companies should consider moving parts of their supply chains closer to home even if that meant higher costs.
While the US might have voiced its concerns about China’s economic rise earlier and more loudly, Europe is seeking to thwart China’s expansionist policies, including using tariffs to try to curb the Belt and Road Initiative.
As part of a proposed 750 billion euro (US$843 billion) virus recovery package, the European Commission is talking about ensuring “strategic autonomy” in key sectors and building stronger value chains within the EU. It says that a new pharmaceutical strategy would address risks — such as Europe’s limited production capacity — exposed during the crisis.
The task will not be easy. China manufactures about 40 percent of all active pharmaceutical ingredients used worldwide, according to Stada Arzneimittel AG, a German producer of generic and over-the-counter drugs whose manufacturing facilities are mostly located in Europe.
While China is an essential part of the supply chain, the company has increased inventories of components with longer shelf lives in the past few months and is trying to source supplies from more than one manufacturer and from different countries, a Stada spokesman said.
The push is not just a proposal sitting in Brussels. National governments across the bloc are pushing to source supplies locally, competing for investments in production capacity in the process.
Germany plans to present a supply chain strategy in the next few months as it aims to reduce the vulnerability of core industries to potential disruptions in trade flows. As part of the process, Europe’s largest economy is seeking to enforce tighter rules on human rights and environmental protection on incoming goods, a way to help protect local manufacturers.
Any rules should be designed in a way that does not create an additional burden for companies, German Minister of Economic Affairs and Energy Peter Altmaier said in June after meeting industry representatives.
Supply chain resilience is crucial for German industry because 17 percent of its production relies on global suppliers — a much bigger share than in other countries. A study from the Munich-based Ifo Institute for Economic Research showed that Germany’s dependence on international suppliers could hold back the economy’s return to business as usual after the pandemic.
Evidence suggests a massive shift back to Europe is unlikely because of the ever-growing importance of China. The Asian superpower already accounts for about 40 percent of global vehicle deliveries and is the leading Volkswagen AG market. In May, the German auto giant increased its exposure to the country by buying stakes in battery company Guoxuan High-Tech Co and in its electric-vehicle partner.
“Manufacturers are moving toward more regional sourcing,” said Elmar Kades, a consultant at strategic planning advisory firm AlixPartners.
“But there won’t be 100 percent regional sourcing as companies will still need to ship certain raw materials, precious metals or electronics components that are used worldwide,” Kades said.
To counter Asian dominance in electric-vehicle batteries, France and Germany have pooled efforts to launch a European industry. The bloc plans to invest about 8.2 billion euros over the next few years to build champions in battery-cell production, French Ministry for the Ecological and Inclusive Transition Director General for energy and climate Laurent Michel said.
Bringing manufacturing closer might not necessarily mean inside the EU, and new plants could be located just outside the bloc.
While French President Emmanuel Macron has been trying to keep manufacturing at home, the country’s automakers have reduced capacity in France and opened new export-oriented plants in Morocco. Peugeot manufacturer PSA Group opened its largest plant outside Europe and China there last year.
Eager to boost exports, Moroccan authorities have managed to attract nearly 70 manufacturers of automotive components with the help of incentives, including free plots of land, tax breaks and massive investments in infrastructure.
Bolstered by relatively low wages for an EU country, Portugal was already noting the efforts to shorten supply chains even before the virus outbreak.
“We were seeing some moves in this direction about two years ago, in both industrial and services sectors,” Luis Castro Henriques, chief executive officer of Portuguese trade and investment agency AICEP, said in an interview.
Examples include investments by Japanese automotive textile maker Howa Tramico, German exhaust expert Eberspaecher Gruppe and South Korean Hanon Systems, which produces compressors for air-conditioning in cars.
In eastern Europe, countries like Poland and Romania are also pitching to attract investment, leveraging their EU membership, existing links to Western companies and labor costs that are a fraction of what employers in Germany pay.
“Many entrepreneurs and investors are wondering how to rebuild those damaged supply chains,” Polish Prime Minister Mateusz Morawiecki said on June 17, as he announced a plan to waive taxes for companies that plan to reinvest their profits in the country.
“We are telling the whole world — come to us,” Morawiecki said.
Romania has been working on a state guarantee program for large companies to boost so-called “green field investments.”
The disruption in international supply chains caused by the virus crisis has forced companies to give greater weight to the proximity of vendors, De Guindos said.
His comments were echoed by his colleague.
“We relied very heavily on international value chains in recent years and also actually pressed every buffer out of our system in our urge to efficiency,” Knot said on Dutch TV last month.
Maybe it is time to be less reliant on foreign countries and focus more on supply security, but “that would come at a cost,” Knot added.
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