Global Value Chain: Curse Or Blessing?

Already in the first weeks of the corona pandemic it became clear: Germany's dependence on global value chains can be a curse in times of crisis when parts of domestic production and supply no longer work due to a lack of deliveries. How much does Germany's economy depend on international flows of goods? Which sectors are particularly affected? What developments can be expected in the future, especially in view of the corona virus crisis?

Germany as an export nation

Federal Minister of Health Spahn calls for part of the pharmaceutical production to be relocated to the European Union (EU). But also many classic German industrial companies, such as B. the automotive supplier Bosch has production facilities in China and is concerned about disruptions in the supply chains.

The exceptional global situation in the corona virus crisis has made it clear for months: Global value chains not only bring opportunities, but also risks. How vulnerable is Germany as a large export nation? One speaks of a global value chain if the stages of the production process take place in at least two different countries. Fig. 1 shows that almost all countries in the world are involved in global value chains. Even those like the countries of the African continent, which otherwise only play a minor role in global trade, make an important contribution to global supply chains due to their special raw materials (rare earths).

So the world can be roughly divided into different groups:

• Research and development work mainly takes place in developed industrial countries such as the USA or Europe;
• A large part of the technical processing takes place in Asia and the raw materials often come from Africa

Dependency due to relocation increases

In the 1990s and 2000s, i.e. in the heyday of globalization, many global value chains were established. Falling transport costs, easier communication options through digitalization and a further reduction in trade and investment barriers contributed significantly to this upswing. Against the background of absolute and comparative cost advantages - e.g. B. Lower labor costs for manual work in Asia - is a relocation of individual production stages in the opinion of Prof. Dr. Monika Wohlmann and Prof. Dr. Luca Rebeggiani, both KCV Competence Center for Applied Economics at the FOM University, makes good business sense.

In addition, according to the scientists, the increasing specialization can also achieve economies of scale. At the same time, the division of the production process and the outsourcing of individual production stages also entail risks: dependency on other countries increases, and at the same time the general conditions there can hardly be influenced. Disturbances in one country also spread to other countries through these interdependencies. It is particularly unfavorable when asymmetric shocks - disturbances that do not affect all countries equally - occur.

25% foreign added value

The share of foreign added value in the total added value in Germany is around 25%. This is slightly above the share that France (23%) or Great Britain (22%) have and significantly above the share of foreign added value in the USA, which is only 12%. Sectors such as mining and agriculture, which naturally do not require raw materials and food to be imported in Germany, have the highest share. However, the manufacturing sector also has a high share of foreign value added in final consumption with 50%.

Foreign textile industry share highest

A closer look at the manufacturing sector (see Fig. 3) shows that the share of foreign added value is highest in the textile industry - here the outsourcing of manual work to low-wage countries has an impact - followed by the chemical industry and the computer and electronics industry.

In order to be able to estimate to what extent Germany's economic power can be affected by an interruption in global value chains, a look at the share of foreign value added in exports to countries of origin should be taken.

The most important branches of the German export industry include:

• Motor vehicle
• chemistry
• mechanical engineering

The USA, France and China are the most important supplier countries for these drivers of the German export economy. A significant part of the foreign added value still comes from Europe; outside of Europe the USA, China and Russia play an important role for the German economy.

Dependency on suppliers in the automotive industry

Especially in the production of highly developed industrial products, the entire global value chain is hardly comprehensible even for companies. A car manufacturer like Daimler has 213 direct suppliers. The ten largest of them have 588 suppliers, which in turn depend on more than 2,900 other suppliers. These companies are distributed across the globe and also have a wide range of cross-connections and multiple relationships with one another. In general, the global value chains in the automotive industry are particularly susceptible to faults in Chinese production, since Chinese components are contained in practically every car.

Opinion on the subject

So important is "Made in Germany"

In the course of the Corona crisis, the Limtronik electronics factory also underlines how important “Made in Germany” is: Managing Director Gerd Ohl advocates more regionalism in the course of development: “The economy and health care have benefited to a great extent from the past Globalization benefits. And yet the situation in the drug sector exemplifies a dilemma. Global drug production is now focused on a few companies in Asia, leading to dependencies and currently supply bottlenecks in Europe. Let's take a look at the electronics industry, but we also see a very similar picture in many other areas. Many domestic companies are currently tied to global supply chains. The EU states should become more self-sufficient again. We should focus on our own innovative products,Concentrate intelligent manufacturing structures as well as better networked and shorter supply chains in order to remain able to act even in times of crisis. It helps everyone a lot to be able to maintain or create local production jobs, especially if we experience the full economic consequences of the pandemic.”

Deglobalization trend

However, foreign trade links have been declining slightly for several years: a trend towards deglobalization has started since the international financial crisis in 2008. The corona virus crisis is likely to exacerbate this trend by revealing the importance of securing the production of essential goods and services, also from a national security perspective.

Decline in demand and supply in the Corona crisis

In Germany, due to the strong international interdependencies, interruptions in the supply chains and resulting delivery bottlenecks can be expected? It should be taken into account that due to the particular severity of the coronavirus crisis, not only is the supply side affected (due to production downtimes or closings), but also on the demand side, demand declines as a result of quarantine measures and less participation in public life can be expected.

This parallel decline in supply and demand could help avoid bottlenecks in some industries. This does not apply to goods such as mouthguards or disinfectants, but also foods that are in particularly high demand as a result of the crisis. In this sense, the aspect of national security for essential goods such as medicines should come to the fore again and either contribute to a reduction in production or at least to risk diversification by using several suppliers.