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Future of Our Global Economy
The Beginning of De-Globalization
The corona crisis is changing the global economy.
Production security is growing more important than efficiency. Here is what
that might look like.
By
Alexander Jung
05.05.2020,
10.46 Uhr
Corona is
here, and it won't be leaving anytime soon. Which means that hopes for a return
to normal are likely to be in vain. Furthermore, everybody has become
hyper-aware of the dangers of infection and it is a fear that will stay with
us.
Social
distancing will continue to guide our personal interactions, restaurants will
leave every second table empty, open-plan offices are being divided up and only
two, maybe three, people will get into the elevator at a time, and each will be
facing a different corner. Such is our new reality, and such are the changes
coming to the world of work. More than that, companies are trying to make
themselves more resistant to sudden economic shocks and resilience is the new
guiding principle.
Industrial
machine producers, of the kind that make a huge contribution to the German
economy, have begun shifting priorities from making the supply chain as cheap
as possible to making it as secure as possible. Wholesalers have turned to
video chats when making large sales rather than flying halfway around the world
as they used to. Airlines, meanwhile, find themselves fighting for survival and
many have had to take public-sector bailouts.
Indeed, in
the foreseeable future -- for months, or perhaps even years -- the state will
be the savior of last resort for many companies. It alone has sufficient means
at its disposal to battle the pandemic, minimize its economic consequences and
prop up entire industries. And not only is the state in Germany providing
emergency aid, cheap loans and economic stimulus, it is also ensuring that the
minimum wage is significantly increased for care workers in retirement homes
while top executives at companies like Daimler and Lufthansa are voluntarily
forgoing their bonuses.
Will It Be
More Just?
Such is the
new world at the beginning of the 2020s. Its outlines are already taking shape.
It will be a world in which security will play a greater role, as will central
governments. But will it be more just?
Matthias
Horx, a 65-year-old futurologist, dared making an optimistic prediction right
at the beginning of the corona crisis, arguing that many things would change
for the better. He believes the crisis provides us with an opportunity to slow
down the economy, to inject more solidarity into society and to learn to be
satisfied with less.
Bazon
Brock, however, believes such ideas are nonsense. People never learn the
correct lessons from catastrophes, says the 83-year-old art theorist. Following
the financial crisis, he points out, banks speculated more than ever. Arguing
that crises are opportunities is naïve, he believes.
Either way,
in situations such as the one we are currently experiencing, everyone yearns for
a return to some form of business as usual. This crisis, though, is leaving us
will little choice. It is forcing us to chart a course for a future that seemed
impossible just a short time ago.
It was,
after all, global mega-trends that made this pandemic possible in the first
place: mobility, urbanization, interconnectedness, the worldwide division of
labor and the destruction of the environment are all part of it. Which is why
everything must now be examined with a critical eye.
This
article marks the launch of a DER SPIEGEL series examining the vast changes we
are facing. Among those shifts is the move away from globalization and the
changes in the worldwide division of labor that entails. Another is the
trillions in debt that will limit the flexibility of both countries and
companies for years to come. Technology is likely to become an increasingly
prominent feature of our daily lives. And more attention will have to be paid
to the pressure heaped on the shoulders of workers and to ideas for making our
economic model both fairer and more sustainable.
"Humanity
learns only through suffering or persuasion," said the Swiss educator
Johann Heinrich Pestalozzi back in 1799. The world after coronavirus provides a
chance to combine the two.
From
International Efficiency to Regional Stockpiling: Deglobalization
Crisis?
What crisis? At agricultural machine manufacturer Grimme, production has
continued at all its factories throughout the entire coronavirus shutdown. None
of the company's 2,700 employees has been placed in a work furlough program and
the only thing that has changed is that the shipping department now works in
shifts because of social distancing rules. Otherwise, everything is as it has
always been, says Grimme executive Jürgen Feld. "Our philosophy is helping
us in these times," he says.
The company
was founded in 1861 as the village blacksmith in Damme, southwest of Bremen.
These days, it is the world leader in potato harvesting machines. The
bright-red behemoths, some of them boasting more than 500 horsepower, dig the
potatoes out of the earth before cleaning and sorting them. Eighty percent of
the machines are exported, but the vast majority of production takes place in
Germany, as it always has.
Grimme has
consistently refused to adhere to modern-day management principles, such as the
idea that large industrial manufacturers must produce globally and outsource
services to remain as flexible and efficient as possible. Damme has frequently
examined whether such an approach would work for the company, but has always
chosen to go another direction.
The
company, if you will, is more old school, preferring to produce as much as it
can at home, particularly critical parts like screens and reels. In-house
production depth, a reference used by economists to measure how much a company
makes itself, is around 85 percent. "We've always been laughed at because
of it," says Feld. Now, though, the erstwhile critics have become envious.
Greater
Emphasis on Security
Whereas
competitors such as Claas and Fendt have been forced to shut down their
production lines, Grimme has become something of an avant-garde in the
agricultural machinery industry and is indeed setting a trend for the economy
as a whole. At the moment, production managers are receiving a rather brutal
lesson in how crisis resistant their supply chains are, or aren't.
The results
of that lesson can be seen from a survey conducted by the consulting firm EY
among 145 companies in Germany. It found that a third of the companies are
planning to make changes to their supply chains as a result of the corona
crisis, placing greater emphasis on security and less on price.
Economist
Thomas Straubhaar has never understood why companies insisted on establishing
production sites overseas. "Producing cars in China, thus frivolously
jeopardizing intellectual property and technical advantages, cannot be
considered sustainable," he says.
Straubhaar
is in no way a critic of globalization. On the contrary, he points out that
free trade and the global division of labor has led to a situation in which
more people are doing better than ever before, particularly the Germans.
Straubhaar
has, however, observed that globalization is losing momentum. China's price
advantage is shrinking, and wages have risen to Eastern European levels in many
parts of the country. The pandemic risk has introduced yet another factor to
slow the pace, the economist says, and it won't go away soon. "We all know
that this won't be the last pandemic."
It is a
realization that changes everything. Those who are 45 years old today, the
average age in Germany, have never experienced anything else in their adult
lives than a world of open borders, free markets and accelerating
globalization. It is an era that began three decades ago with the fall of the
Berlin Wall.
The Stuff
of Dreams
A quarter
century later, the rise of populists and protectionists slowed this process.
The pandemic then brought it to an end.
The virus
has revealed just how vulnerable our economic model is, regardless of how
profitable it has been for Germany's export industry. Those companies whose
production chains are largely international will face the greatest challenges
-- companies such as the sportswear company Adidas, which has an in-house
production depth of just 5 percent.
The company
is headquartered in Herzogenaurach, near Nuremberg, but pretty much every other
aspect of the company is spread out across the globe, including design and
product development, but especially production. Finished products are supplied
by around 630 companies in 52 countries. For an entire generation of
executives, this model was the stuff of dreams. Everybody wanted to be like
Adidas.
Some prefer
to outsource (Adidas shop in New York) while others make almost everything
in-house (such as the agricultural-machinery producer Grimme): Supply chains
are only as strong as their weakest link.
Some prefer
to outsource (Adidas shop in New York) while others make almost everything
in-house (such as the agricultural-machinery producer Grimme): Supply chains
are only as strong as their weakest link.
But in this
crisis, it has become apparent just how fragile such a structure can be. Border
closures in Europe have made things much more difficult, Germany's Mechanical
Engineering Industry Association has complained, even bringing production
completely to a halt in some instances. A survey conducted by the association
in mid-April found that 89 percent of companies have experienced clear
hindrances to normal business operations. Supply chains, as has once again
become apparent, are only as strong as their weakest link.
Indeed, the
Fukushima catastrophe in March 2011 demonstrated just how rapidly they can
break. Japanese automobile manufacturers were forced to suspend production for
several months and suppliers around the world suddenly had an order shortage.
Indeed, the indirect effects of the disaster were a hundred times greater than
the direct, economic consequences.
The remedy
is a strategy that is as old as humanity itself: Stockpiling. The problem,
though, is that stockpiling binds capital, which has resulted in the shunning
of the practice in favor of extreme efficiency. Now, though, executives seem to
be changing their minds. In recent weeks, demand for storage space has
skyrocketed. Stockpiling is the new black.
Multiple
Supply Sources
Nowhere
have the weaknesses of "outsourcing" and "just-in-time"
manufacturing become more apparent in Germany than in the pharmaceutical
industry. Basic ingredients often come from just a few factories in China and
India -- and in early March, India suspended the export of 26 active
ingredients and drugs, including paracetamol and the ingredients used to
produce antibiotics. A study compiled by the logistics consulting firm
Resilience360, a subsidiary of DHL, warns that the current crisis has shown
just how important it is to maintain multiple supply sources. "Overall,
the COVID-19 outbreak may be a wakeup call to the pharma industry and
governments," the consultants write. And the industry wouldn't be opposed
to bringing elements of production back home, assuming health insurance
companies would be willing to pay the added costs. Because a restructuring of
pharmaceutical supply chains, it seems obvious, would mean that a package of 20
paracetamol tablets would no longer cost just 1.29 euros ($1.41).
That, indeed,
is the flip side of de-globalization: Bringing things home increases security
but it raises costs and shrinks profit margins. Still, the price of
independence can, perhaps, be minimized -- using technology.
Arburg is a
producer of injection molding machines, which their clients use to produce
their own products -- including, most recently, face masks. The company is
based in Lossburg, a town of 7,500 in the northern Black Forest. It is also the
location of the company's only production site, which is rather unusual for a
global player employing 3,200 people and generating revenues of 750 million
euros.
The company
has always wanted to be independent, which is partially a function of its
location: Even just a trip to Stuttgart used to mean a day of travel back in
the day. To ensure that production can still be profitable despite the higher
salaries that must be paid in Germany, the factory is highly automated.
Industrial robots do all kinds of jobs that used to be taken care of by
workers, from mounting parts to welding. Indeed, they can even produce
customized machines at prices that are comparable to mass produced pieces.
When it
comes to the use of robotics in industrial production, Germany is among the
world leaders, behind such countries as Singapore and South Korea. Even
mid-sized companies like Arburg are increasingly embracing them. They can be
used around the clock, they don't get sick and they don't have to go on
vacation. They also don't have to stay 1.5 meters away from each other in times
of pandemic. In short, they make it possible for production to continue in
Germany.
Avoiding
the Virtual Pandemic
Should
coronavirus end up reversing globalization, in other words, it doesn't
necessarily have to be disadvantageous to the export industry. Furthermore, not
all products have to be packed into containers and shipped overseas.
Globalization these days also refers to the exchange of virtual goods, such as
data. And digitalization opens up vast potential to German industry.
Machine
manufacturers, for example, can use a so-called "digital twin" to
simulate how a particular unit works best before it is produced. Or it can be
built on the computer and then produced locally by the customer with the help
of a 3-D printer. Or, as is already frequently the case, machines can be
serviced remotely, with sensors ordering replacement parts before they break.
Germany's
"Hidden Champions," those myriad companies around the country that
are leaders in their specific technological fields, are driving the digital
transformation forward. Agricultural machine producer Grimme, for example, has
come up with a "digital potato," essentially a potato-sized ball
covered in sensors. The farmer places it in his field and then
"harvests" it with a Grimme machine. As it makes its way through the
harvester, it transmits all kinds of information related to optimal
functionality, including potential damage done to real potatoes.
Digitalization
will become the answer to globalization," says the economist Thomas
Straubhaar, though he says that there is a significant danger to the process --
namely that digital infrastructure and cyberspace are susceptible to attacks.
"We have to make sure that the current biological pandemic isn't followed
by a virtual pandemic," he warns.
The consequences,
he says, could even be worse than the consequences of the corona crisis. Homes
without power, offices with no internet connections, banks lacking the ability
to perform transactions: a complete shutdown. It is an eventuality that must be
prevented at all costs -- a task that only the state is powerful enough to take
on. It's role, in other words, will continue to grow. Even beyond the current
crisis.
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