scorecardresearch
Follow Us:
Saturday, October 23, 2021

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

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

By: New York Times | Frankfurt |
Updated: October 6, 2021 11:18:00 am
A bicyclist pedals past the IAA Mobility trade show in Munich on Sept. 7, 2021. During the pandemic, Germans turned to cycling as an alternative to public transportation. (Felix Schmitt/The New York Times)

Written by Jack Ewing

In Germany, where 1 in 4 jobs depends on exports, the crisis gumming up the world’s supply chains is weighing heavily on the economy, which is Europe’s largest and a linchpin to global commerce.

Recent surveys and data point to a sharp slowdown of the German manufacturing powerhouse, 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 like cobalt, lithium, nickel and graphite, which are crucial ingredients of electric car batteries.

The auto industry has been hit the hardest. Opel, a unit of Stellantis, the company that owns Jeep and Fiat, said in September that it would shut down a factory in Eisenach until next year because of a shortage of semiconductors. The plant’s 1,300 workers will be furloughed.

More than 40% of German companies said they had lost sales because of supply problems in an August survey by the Association of German Chambers of Industry and Commerce. Europewide, exports would have been 7% higher in the first six months of the year if not for supply bottlenecks, according to the European Central Bank.

While every economy in the world is suffering from shortages, Germany is particularly sensitive because of its dependence on manufacturing and trade. Nearly half of Germany’s economic output depends on exports of cars, machine tools and other goods, compared with only 12% in the United States.

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

The country is also facing a period of political uncertainty. Elections last month left no party with a clear majority, and there is a risk that whatever coalition government emerges will lack enough cohesion to act decisively.

The slowdown has turned the German economy into a test case of how companies can become less vulnerable to power shortages in China or ships stuck in the Suez Canal.

A worker on the factory floor at Voith, a German company that has started buying from suppliers closer to its factories, in Heidenheim, Germany, on Sept. 22, 2021. Europe’s largest economy is particularly vulnerable to shortages of key parts and raw materials because of its dependence on exports. (Felix Schmitt/The New York Times)

Already many firms are increasing their inventories of parts, ordering raw materials further in advance and finding creative — some might say desperate — ways to keep products moving out the factory gates. Traton, Volkswagen’s truck unit, said last month that it was cannibalizing hard-to-find components from trucks that had been built but not sold and reinstalling them in trucks for which there were firm orders.

Longer term, companies have thought about ways to bulletproof their supply lines, for example by buying parts and raw materials closer to home 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, creating well-paying factory jobs.

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

The widespread assumption that suppliers close to home are more reliable has not always proved true. During the turmoil caused by the pandemic, some German companies had more trouble getting supplies from France or Italy, because of strict lockdowns, than they did from Asia.

“It’s not the case that if we were not dependent on China we would have gotten 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 shortages are depressing German growth. The Ifo Institute’s most recent survey of German business managers, considered a reliable predictor of the direction of the economy, pointed to a marked slowdown. More than three-quarters of German firms told the Munich institute that they were having trouble getting raw materials and parts.

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

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

Just as panicked consumers hoarded toilet paper at the beginning of the pandemic, companies fearful of running short of key materials are ordering more than they need and stashing them away in warehouses. That has created even more shortages.

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

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

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

Take bicycle shops. Malaysian factories that make gears, shock absorbers and other bicycle parts have been locked down because of the pandemic. In addition, shipping containers have been in short supply, and the movement of cargo ships has been disrupted by events such as the closure of Chinese ports because dockworkers tested positive for the virus.

The problems have choked off the supply of things, like brake pads, that bike shops need to make repairs. Yet demand is booming, in part because many Germans turned to cycling as an alternative to public transportation during the pandemic or decided to take a cycling vacation close to home rather than flying to a beach in Spain.

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

One of his employees does nothing but scavenge for components, combing eBay or Amazon for scarce items or bartering with other dealers, Hempelmann said.

Strains in the system were evident even before the pandemic. Tensions between China and the United States, as well as rising protectionism, had already prompted many companies to reexamine their dependence on far-flung suppliers.

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

“We knew that global supply chains are risky before we had COVID,” said Ohmayer, the Voith purchasing chief. “The COVID crisis is an accelerator, but it’s not a new trend.”

Companies are now trying to figure out what lessons they should draw and how they should revamp their supply networks so they are less susceptible to crises.

As political leaders hoped, Voith is buying from suppliers closer to its factories in Germany and the United States. China’s cost advantage has eroded because wages have increased, and sometimes a small machine shop in Wisconsin is more cost-effective, Ohmayer said.

But what may work for Voith, which buys small numbers of specialized components, may not work for a car company that buys millions of the same part. They still have a strong incentive to buy from suppliers that can mass-produce a component at decent quality for the lowest price. Of 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 production back, but you have to expect that these products can only be produced at higher prices,” Sandkamp of the Kiel Institute said. “We will lose competitiveness.”

📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines

For all the latest World News, download Indian Express App.

  • Newsguard
  • The Indian Express website has been rated GREEN for its credibility and trustworthiness by Newsguard, a global service that rates news sources for their journalistic standards.
  • Newsguard
0 Comment(s) *
* The moderation of comments is automated and not cleared manually by indianexpress.com.
Advertisement
Advertisement
Advertisement
Advertisement
X