Euro area firms strategize global production relocation in response to geopolitical risks
2023.11.06 06:55
An escalating geopolitical climate, marked by disruptions from the COVID-19 pandemic and Russia’s conflict in Ukraine, is leading multinational corporations to reconsider their global production strategies, according to a European Central Bank (ECB) survey. The study, which included 65 major global firms contributing to 5% of the euro zone’s economic output, revealed that companies are shifting their focus towards resilience, alongside cost and efficiency.
The survey found 40% of multinational corporations contemplating relocating production to politically amicable countries due to major risks associated with China, identified as the “dominant source of critical inputs” and a frequent point of risk due to strained EU-US relations. Two-thirds of respondents recognized China as a potential supply chain risk. Most firms source critical materials from specific countries, notably China, and admit an elevated risk with these supplies.
In addition to these shifts, the survey indicated that 49% of firms are interested in “near-shoring”, or transferring production closer to points of sale. This move has been prevalent among firms aiming for efficiency and cost-cutting. However, a newer strategy is gaining traction, with 42% of companies aiming for “friend-shoring”, or moving operations to friendlier territories. Only 11% of firms have pursued this strategy in the last five years.
Such changes in production strategies could have significant economic implications. Approximately half of the firms anticipate these shifts to trigger inflation via higher prices. Moreover, substantial employment impacts could arise in the European Union as more companies plan to exit than enter.
While these shifts pose challenges, they also represent a strategic response from companies aiming to diversify sourcing locations amid heightened uncertainty. The survey anticipates increased activity over the next five years as firms continue to adapt their global production strategies in response to geopolitical risks.
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