How Germany’s Economy Is Hurt by Supply Chain Shortages

FRANKFURT – In Germany, where one in four jobs depends on exports, the crisis that is sticking up global supply chains is weighing on the economy, which is Europe’s largest and the lynchpin of world trade.

Recent surveys and data point to a sharp slowdown in the German manufacturing power plant, and economists have begun to predict a “bottleneck recession”.

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

The auto industry is hardest hit. Opel, a unit of Stellantis, the company that owns Jeep and Fiat, announced in September that it would close a factory in Eisenach by next year due to a shortage of semiconductors. The 1,300 workers at the plant are on leave.

In an August survey by the German Chamber of Commerce and Industry, more than 40 percent of German companies stated that they had lost sales due to delivery problems. Across Europe, exports would have risen by 7 percent in the first six months of the year without delivery bottlenecks, according to the European Central Bank.

While every economy in the world suffers from bottlenecks, Germany is particularly sensitive due to its dependence on industry and trade. Almost half of Germany’s economic output depends on the export of cars, machine tools and other goods, compared to only 12 percent in the USA.

Since Germany is a factory nation, “the effects are dramatic,” says Oliver Knapp, Senior Partner at Roland Berger, a Munich-based consultancy.

The country is also facing a period of political uncertainty. Neither party had a clear majority in last month’s elections, and there is a risk that any coalition government will not have enough cohesion to act decisively.

The slowdown has turned the German economy into a test case for how companies can become less vulnerable to electricity bottlenecks in China or ships in the Suez Canal.

Many companies are already increasing their parts inventories, ordering raw materials in advance and looking for creative – some say desperate – ways to get the products out of the factory gates. Traton, Volkswagen’s trucking unit, said last month it was canning hard-to-find components from trucks that were built but not sold and reinstalling them into trucks that had firm orders.

In the longer term, companies have been thinking about how to bulletproof their delivery lines, for example by buying parts and raw materials near their home country rather than from subcontractors on the other side of the planet. Some political leaders have even suggested that the pandemic could have a silver lining because it will inspire companies to bring manufacturing back to Europe and the United States and create high-paying factory jobs.

But untangling the networks that move products around the globe is not that easy, and maybe even not a good idea, say some economists and business administrators.

The widespread assumption that local suppliers are more reliable has not always come true. During the turmoil caused by the pandemic, some German companies had more difficulty getting supplies from France or Italy than from Asia due to strict lockdowns.

“It is not as if we would have survived the crisis without China without any problems,” says Alexander Sandkamp, ​​economist who studies Supply Chain at the Kiel Institute for the World Economy.

There is increasing evidence that bottlenecks are dampening German growth. The latest survey by the Ifo Institute among German business economists, which is regarded as a reliable indicator of economic development, indicated a clear weakening. More than three quarters of German companies stated that the Munich institute had difficulties in procuring raw materials and parts.

Updated

Oct. 4, 2021, 10:18 p.m. ET

According to the law of supply and demand, prices rise. The annual inflation rate in Germany was 4.1 percent in August, its highest level in almost three decades. While most economists consider the rise to be temporary, inflation is always a sensitive issue in Germany, reminiscent of hyperinflation and poverty after World War I.

Businesses are caught in a vicious circle. Robert Ohmayer, Global Purchasing Manager at Voith, a company based in Heidenheim that builds and equips paper mills and hydropower plants, calls this the toilet paper effect.

Just as panicked consumers hoarded toilet paper at the start of the pandemic, companies order more than they need and store them in warehouses for fear of key supplies being scarce. This has led to even more bottlenecks.

Companies had little choice. “We’re ordering more to protect our business,” said Mr. Ohmayer.

Delivery problems are doubly frustrating for companies because many have bulging order books that they cannot fill.

Take bike shops. Malaysian factories that make gears, shock absorbers and other bicycle parts have been closed because of the pandemic. In addition, shipping containers were scarce and cargo ship traffic was disrupted by events such as the closure of Chinese ports because dock workers tested positive for the virus.

The problems have choked the supply of things like brake pads that bike dealers need to fix. Nevertheless, demand is booming, also because many Germans switched to cycling as an alternative to local public transport during the pandemic or decided to take a cycling holiday near their home instead of flying to a beach in Spain.

“All things on the world market hit us at the same time,” says Tobias Hempelmann, owner of a bicycle shop in Lage. “High demand, no containers and people want to ride bicycles.”

One of his employees only rummages for components, combs eBay or Amazon for scarce items or haggles with other retailers, said Hempelmann.

Loads in the system were already evident before the pandemic. The tensions between China and the USA and the increasing protectionism had already caused many companies to reconsider their dependence on widely dispersed suppliers.

To make matters more difficult for German companies is a new law that is due to come into force in 2023 and obliges them to ensure that they do not buy from suppliers who use child or slave labor.

“We knew that global supply chains were risky before we had Covid,” said Mr. Ohmayer, Voith’s Head of Purchasing. “The Covid crisis is an accelerator, but not a new trend.”

Companies are now trying to find out what lessons they can learn and how they should reorganize their supply networks so that they are less vulnerable to crises.

As politicians hope, Voith buys from suppliers near its plants in Germany and the USA. China’s cost advantage has waned as wages have risen, and sometimes a small machine shop in Wisconsin is cheaper, Ohmayer said.

But what works for Voith, which buys small numbers of special components, may not work for a car company that buys millions of identical parts. You still have a strong incentive to buy from suppliers who can mass-produce a part of reasonable quality at the lowest possible price. Of the German companies surveyed by the German Chamber of Commerce and Industry in August, only 8 percent said they were planning to relocate production.

“You can try to bring production back, but you have to expect that these products can only be produced at higher prices,” said Sandkamp from the Kiel Institute. “We will lose competitiveness.”

Supply bottlenecks should ease as suppliers expand their factories to meet demand. Last month, the German chip manufacturer Infineon, which specializes in the automotive industry, opened a factory planned before the pandemic. The plant in Villach, Austria, could produce enough chips to equip 20 million electric vehicles, said Peter Schiefer, President of the Infineon automotive division.

Numerous other chip manufacturers have announced plans to expand production. But noting that it would take a year and a half just to procure the necessary machines, Mr. Schiefer said: “That will not happen immediately.”