European multinationals reorganize to reduce dependence on China

European companies reorganize their supply chains due to geopolitical risks
  • Jonathan Rowe
  • 20.11.2023

In the face of rising geopolitical risks, Europe's largest companies are reviewing their location and sourcing strategies, according to an ECB study. However, Europe is not always on the winning side.

New geopolitical realities are forcing European multinationals to rethink their supply chains. A published survey of 65 companies by the European Central Bank (ECB) found that 42% of multinationals based in the European Union (EU) plan to shift their sourcing to friendly countries in the next five years. Compared to previous years, this figure was only 9%.

However, Europe will not necessarily benefit greatly from this development. Only 20% plan to ship from other EU countries.

China is a concern

For two-thirds of the companies surveyed, China is the country primarily cited as a potential source of supply problems. The US, Taiwan, India, Turkey, Turkey and Russia are also mentioned in more than 10% of cases.

In reality, however, achieving disengagement is not easy. Nearly two-thirds of multinationals find it "very difficult" to substitute raw materials or semifinished products from these countries if they suddenly become unavailable. Whether for political, climatic or health reasons, as was the case with the Covida pandemic.

As for manufacturing, the move to consumer countries - a fairly common trend in the past - will now intensify. Setting up a production site in a "friendly" country will also become increasingly important: 42% of multinationals plan to pursue this strategy, compared to only 11% in the previous five years.

Europe is not in favor

A notable fact is that an increasing proportion of companies are considering moving production outside the EU rather than within it. The cost of labor, energy and the changing geographic distribution of sales are powerful factors behind this trend of leaving the Old Continent.

As a result, the value added created in Europe is likely to decline over the next five years. This will have a negative impact on the employment of multinationals still based in the EU.

Rising prices

Changes in value chains have an impact on prices. A total of 60% of companies surveyed stated that changes in production and/or supply location had led to an increase in average prices over the past five years. Only 5% stated that prices had decreased.

The proportion of companies expecting prices to increase over the next five years remains high (45%). This pressure is likely to ease, though. "Measures to make business operations and supply chains more resilient are costly in themselves, but their impact on costs, and therefore prices, can be mitigated if these changes are carefully planned," reassure the study's authors.

These changes could have serious consequences for the European economy. They could lead to lower employment, higher prices and reduced competitiveness of European companies on the global market.

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