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Fears of a ‘bottleneck recession’: how shortages are hurting Germany

In Germany, where 1 in 4 jobs depend on exports, the crisis in the world’s supply chains is taking a toll on the economy, which is Europe’s biggest and a linchpin for global commerce.

Recent surveys and data point to a sharp downturn at the German manufacturing powerhouse, and economists are beginning to predict a “bottleneck recession”.

Almost everything needed to operate German factories is in short supply – not just computer chips but plywood, copper, aluminum, plastics and raw materials such as cobalt, lithium, nickel and graphite, which are important elements of electric car batteries.

The auto industry has been the most affected. Opel, a unit of the Jeep and Fiat-owned Stelantis, said in September that it would close a factory in Eisenach by next year due to a shortage of semiconductors. The plant’s 1,300 employees will be laid off.

More than 40% of German companies said an August survey by the Association of German Chambers of Industry and Commerce resulted in a decrease in their sales due to supply problems. According to the European Central Bank, if not for supply constraints, exports would have been 7% higher in the first six months of the year.

While every economy in the world is grappling with shortages, Germany is particularly vulnerable because of its reliance on manufacturing and trade. About half of Germany’s economic output depends on the export of cars, machine tools and other goods, compared to only 12% in the United States.

Because Germany is a country of factories, “the impact is dramatic,” said Oliver Knapp, a senior partner at Roland Berger, a Munich-based consultancy.

The country is also grappling with a period of political uncertainty. No party got a clear majority in last month’s elections, and there is a risk that any coalition government that emerges will lack enough cohesion to take decisive action.

The recession has turned the German economy into a test case for how companies can be less vulnerable to power outages in China or ships stuck in the Suez Canal.

An employee on the factory floor of a German company, Voith, in Heidenheim, Germany, on September 22, 2021, starts buying from suppliers close to their factories. Europe’s largest economy is particularly vulnerable to shortages of key parts and raw materials. With regard to its dependence on exports. (Felix Schmidt / The New York Times)

Already many firms are expanding their parts inventory, ordering raw materials in advance and finding creative – some might say desperate – ways to keep products out of factory gates. Volkswagen’s truck arm, Trautan, said last month that it was cannibalizing hard-to-find components from trucks that were built but not sold and re-installing them into trucks, which There were strong orders.

For a long time, companies have thought of ways to bulletproof their supply lines, for example by buying parts and raw materials closer to home rather than subcontracting them on the other side of the planet. Some political leaders have even suggested that the pandemic could be a silver lining, as it would prompt companies to bring manufacturing back to Europe and the United States, creating well-paying factory jobs. Will be born

But isolating the networks that move products around the world isn’t that easy and probably not even a good idea, some economists and business managers say.

The widespread belief that suppliers closer to home are more reliable has not always been proven true. During the turmoil caused by the pandemic, some German companies have had more trouble getting supplies from France or Italy than Asia due to strict lockdowns.

“It’s not like if we didn’t depend on China we would have gone through the crisis without any problems,” said Alexander Sandkamp, ​​an economist who studies supply chains at the Kiel Institute for the World Economy in Kiel, Germany.

Evidence is accumulating that the shortage is depressing German development. The most recent survey by the Ifo Institute of German business managers, considered a reliable predictor of the direction of the economy, pointed to a marked recession. More than three-quarters of German firms told the Munich Institute that they were having trouble obtaining raw materials and parts.

Following the law of supply and demand, prices are moving up. The annual rate of inflation in Germany stood at 4.1% in August, the highest in nearly three decades. While most economists think the spike is temporary, inflation in Germany has always been a sensitive topic, recalling the hyperinflation and poverty in the wake of World War I.

Businesses are caught in a vicious cycle. Robert Ohmire, global head of procurement at Voith, a company based in Heidenheim that builds and equips paper factories and hydropower plants, calls this the toilet paper effect.

Just as panic-stricken consumers hoarded toilet paper at the start of the pandemic, companies fearing a shortage of key ingredients are ordering more than necessary and stashing them in warehouses. This has created even more scarcity.

Companies had little choice. “We are ordering more to protect our business,” Ohmire said.

Robert Ohmayer, the global head of a Voith buying at the company’s factory in Heidenheim, Germany, on September 22, 2021. Voith has started buying from suppliers close to its factories. (Felix Schmidt / The New York Times)

Supply problems are doubly frustrating for firms as many have order books that they cannot fill.

Take a bicycle shop. Malaysian factories manufacturing gear, shock absorbers and other bicycle parts have been closed due to the pandemic. In addition, shipping containers have been in short supply, and events such as the closure of Chinese ports have disrupted the movement of cargo ships after dockworkers tested positive for the virus.

The problems have stopped supplying things like brake pads, which need to be repaired to bike shops. Yet demand is booming, as many Germans turned to cycling as an alternative to public transport during the pandemic or decided to take a cycling holiday closer to home instead of flying to a beach in Spain.

“All things in the global market are killing us at the same time,” said Tobias Hempelmann, the owner of a bicycle dealership in Liege. “High demand, no containers and people want to ride bikes.”

Hempelman said one of his employees does nothing but scour for components, scour eBay or Amazon for rare items or barter with other dealers.

The tension in the system was evident even before the pandemic. Tensions between China and the United States, as well as rising protectionism, had already prompted many companies to re-examine their reliance on far-flung suppliers.

An additional complication for German companies is a new law to take effect in 2023, which requires them to ensure they are not buying from suppliers who use child or slave labor.

“We knew the global supply chain was risky before we had COVID,” said Ohmire, Voith purchasing chief. “The COVID crisis is an accelerator, but it is not a new trend.”

Companies are now trying to figure out what lessons they should take and how they should improve their supply networks so that they are less vulnerable to crises.

As political leaders expected, Voith is buying from suppliers close to his factories in Germany and the United States. China’s cost advantage has diminished as wages have increased, and sometimes a smaller machine shop in Wisconsin is more cost-effective, Ohmire said.

 

But what may work for Voith, which buys a small number of specialty components, may not work for a car company that buys millions of the same parts. They still have a strong incentive to buy from suppliers who can mass-produce an ingredient at the best quality for the lowest price. Of the German companies surveyed in August by the Association of German Chambers of Industry and Commerce, only 8% said they planned to move production.

“You can try to bring back production, but you have to hope that these products can only be produced at high prices,” said Sandkamp of the Kiel Institute. “We will lose the competition.”

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