If you are a European investment promotion agency (IPA), or are otherwise active in European inward-FDI, and are not seeing Covid-19 as the chance of a life-time, you need to think again.
Despite – or maybe because of – the economic upheaval we are currently experiencing on account of the coronavirus pandemic, Europe is set to experience a significant inflow of FDI in the medium term. In the 1990s and 2000s, the key driver that determined the thinking of corporate managers was to lower the labour cost element in overall manufacturing costs. It therefore made sense to offshore production to Asia. But this business model has come to an end.
Today, corporate managers are increasingly focused on the fragility of global value chains and how to de-risk – that is, shorten – their supply chain. In a recent survey, three quarters of German companies reported that they had experienced some – or even a total – breakdown of their supply chain. Due to missing parts, production ground to a halt and entire industries were paralysed. Unsurprisingly, corporate managers now wonder whether production closer to home might not be a good idea.
These thought processes had, however, started well before the pandemic. Increasing levels of protectionism made operating across borders difficult. Local content requirements, non-tariff barriers and deliberately opaque import procedures, investment regulations and transfer pricing were often used to keep foreigners out (or exploit them financially).
With the increasing weaponisation of trade policy and wildly erratic exchange rates, internationalisation now resembles more of a gamble than a business model. And with downside risks more pronounced, and the upside evaporating (that is, automation increasingly makes manufacturing in Europe cost competitive compared to producing in China, not least due to the recent wage hikes in its coastal regions) managers became cautious.
And now has come the Covid effect: the sudden realisation just how dependent Europe has become (for instance, protective equipment) and an upheaval in the supply chain that has brought manufacturing to a standstill. The Fukushima disaster of 2011 should have taught us about supply chains, but certainly now, everyone got the message.
Corporate managers are viewing location decisions in a new light. They seek countries with stable regulatory frameworks and good infrastructure; locations with high levels of general education and technical expertise (to make automated factories possible), and looking for manufacturing locations close to core markets. And with 500 million high purchasing power customers, Europe clearly is a core market. IPAs will need to adjust their game to be ready for the renaissance of Europe as a manufacturing hub.
Martin G Kaspar is head of business development at a German mittelstand company within the automotive industry. E-mail: firstname.lastname@example.org