Focus topics

Rethinking global supply chains

By Gerhard Hinterhaeuser
Gerhard Hinterhäuser schreibt hier zu Chinas Aufstieg
Banker with China experience: Gerhard Hinterhaeuser

The war in Ukraine has made us painfully aware of how dangerous it is to become dependent “in good times” on regimes whose basic philosophy we do not share. With open eyes, we have become unduly dependent on Moscow for energy, even though there have been enough warnings about President Putin’s goals.

Now the world is looking to China, where the problem is potentially much greater. Again in good faith, we have become critically dependent on China as a sales market as well as a central link in global supply chains. The dependence on China as a sales market is particularly evident in the automotive industry. Volkswagen generates 40 percent of its sales there. The dependence on China in the context of global supply chains is also evident in products that are of key importance for the desired energy transition: More than 80 percent of all solar cells are manufactured in China today. The country dominates the market for many of the industrial metals required: rare earth elements. In the past, it has used this to assert its political interests. Similarly, up to 90 percent of the precursors for antibiotics come from China. As consumers, we only have to look back a few months, when the fight against the Covid pandemic was jeopardized by the lack of FFP2 masks from China.

Yet China has consistently established itself as an unrelenting systemic rival in recent years. The latest study by the German Institute for International and Security Affairs (Stiftung Wissenschaft und Politik) even speaks of a Chinese attack on the liberal-democratic international order. Against this background, at the recent World Economic Forum in Davos, according to the remarks of a participant from the consulting firm McKinsey, there was talk of “China-free supply chains”.

Of course, this idea is neither practicable nor desirable. But it is just as undoubtedly true that we must consistently and significantly reduce our high dependencies on China. Taking political considerations into account in the strategic positioning of the economy is the order of the day.

Here, it would be desirable that we acquire a collective memory that goes back more than just a few short years. We remember traveling back to China with flying colors and unhesitating optimism as early as 1992, just three years after the suppression of the 1989 Tiananmen uprising. The moral indignation against what we saw as the regime’s unthinkable actions quickly faded and was forgotten in light of unparalleled market potential.

Reducing dependencies on China, however, does not mean living past the world’s second-largest economy. China now manufactures products that are in some cases of a higher technological standard than our own, and this trend will only continue. Disengaging from this development not only reduces our standard of living, it also cuts us off from technological progress and impairs our comprehensive knowledge of our strongest systemic rival.

How to deal wisely with China

So it is not a question of thinking up China-free supply chains, but of rethinking and reordering relations with China in the context of global supply chains. In the coming years, the task will be to bring more of the production now made in China back to our own countries, and to reconfigure supply chains in such a way that Chinese companies begin to shift production to Europe. This kind of division of labor is new in the case of China, but already well established elsewhere. For example, in the wake of the steady rise of the yen against the US dollar, Japanese companies consistently moved production abroad years ago, and German industrial companies have also been successfully producing in many parts of the world for years, as is well known.

This will not only reduce our dependence on China, it will also facilitate the supply of critical raw materials such as rare earth elements, which Chinese companies will bring to Europe to manufacture their products. Of course, it will also create value and employment in our countries.

The first strategic partnerships of this kind are already being initiated. Spectacular corporate acquisitions like that of Kuka in 2016 are not desired as part of this strategy. Rather, it aims to find suitable local partners with whom the market can be jointly developed. Possible Chinese solo ventures should be approached with caution.

As with other initiatives with China, there is a question of depth of knowledge about potential Chinese partners. In this context belongs the proposal of building an open-source database to effectively collect necessary information on China and distribute it to governments, the private sector, and other interested parties.

The extraordinary dependencies on China have developed over decades. Reducing them is a multifaceted and comprehensive process that will challenge us for a long time to come. The development of production in countries with a similar value framework, which is referred to by the word “friendshoring,” is certainly one of the appropriate measures.

The relocation of production by China to Europe, in turn, makes it possible to reduce dependencies based on our own governance. It meets the justified demand for a balance between political and economic priorities. Today, this trend is still negligible in terms of volume. But it is foreseeable that the development of European manufacturing capacities by Chinese companies will represent an important alternative.

Dr. Gerhard Hinterhaeuser is a partner at the management consulting firm Strategic Minds Company. He lives in Asia and Germany and was a member of the management board of the investment house PICC Asset Management in Shanghai from 2006 to 2014. His professional stations in Asia included Deutsche Bank, Hypovereinsbank and Munich Re.


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