View from Europe: will European investment go local?

Global value chains have become the norm in a world based on the division of labour. A sizeable chunk of these supply chains spanning the globe are, however, intra-company imports and exports. Experts estimate that more than 50% of international trade occurs within multinational companies themselves.

Reasons for this development are manifold: the lead factory concept to optimise capital-intensive production by driving economies of scale; centres of excellence to drive intellectual property development; the wish to benefit from low labour costs for intermediate products; or just-in-time concepts requiring localisation close to end customers. The easy days of global supply chains, however, appear to be drawing to a close, for a number of reasons. 

From a business perspective, the escalating trade tensions between the US and China, rising protectionism and increasing local content requirements start to hinder the free flow of goods. Here in Europe, Brexit and talk of customs procedures in EU/UK trade do not augur well. Neither do the increasingly vociferous climate protests and calls for local produce.

But there are many non-economic reasons threatening to slow the global flow of goods and services. Coronavirus and its non-health side-effects – from travel bans to closed down Chinese production plants or a European export ban on face masks – are the most obvious examples (and not for the first time, as the SARS outbreak or the Fukushima disaster aptly demonstrate). 

But while previously people rushed to get back to the status quo, we are arguably witnessing the first signs of a new era – one in which the global flow of goods is replaced by a more regional – potentially even national – supply base. Apart from the startlingly candid observation of German health minister Jens Spahn that we are too dependent on China for the import of active substances, we have also noticed (over a number of years) a growing Chinese emphasis on domestic demand rather than export growth and the US weaponisation of the dollar.

Collectively, we all seem to have lost the belief in the benefits of international markets. Most importantly, we are on the verge of a production revolution. While 3D printing will not replace mass-production technologies any time soon, it will allow for new manufacturing processes of small volume/high capital-intensive products. Labour costs will increasingly become less of a concern. But with companies being able to have smaller production units on each continent (even in each country), trade  and FDI flows will be in for a revolution.

Martin G Kaspar is head of business development at a German mittelstand company within the automotive industry. E-mail: martin.georg.kaspar@gmail.com

This article first appeared in the April-June edition of fDi Magazine.