More national instead of global supply chains?

Not only since the corona pandemic have calls been made to bring production at least partially back into the country. The current pandemic has posed major challenges for many supply chains. Broken supply chains not only mean that the delivery will arrive a few days later – machines that are at a standstill cause high economic damage. Would the relocation of production back to Germany be the solution to the problem? What consequences would that have for the logistics industry?

The Ifo Institute for Economic Research has analyzed the consequences of the pandemic for the German economy. The researchers also asked what consequences a renationalization of production would have. The German economy is to a large extent integrated into global supply chains – 17 percent of German value creation takes place here. The global networking of value chains is a long and ongoing process. A changeover at short notice is therefore not possible. Which production steps in the supply chain can be relocated back to Germany depends heavily on the individual products. Consequently, this means a different amount of effort to set up production steps and the necessary systems in Germany.

Effects on logistics

In the longer term it would of course be possible to relocate supply chains and thus many production and processing steps back to Germany. Such a restructuring would have far-reaching consequences for many industries. But logistics would also face new challenges.

One thing is certain: the transport routes would be shorter. Instead of between countries and continents, parts would now be transported between states and cities. At first glance, the transport would be much more sustainable. Air traffic would also be greatly reduced, because there would be far fewer cargo planes on the move within Germany.

In addition, certain individual parts would be available more quickly. Just-in-time production would thus possibly be even more punctual, and urgent requirements could be met quickly. If a specific part is required for a batch, this could be ordered at short notice from the supplier in the neighboring town and would be there a few hours later.

“What happens when supply chains are brought back to Germany? Not only the logistics would have to be rescheduled.“

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Increase in production costs

Even if delivery costs for certain products might go down, production costs would definitely go up. First of all, the infrastructure for the production of intermediate goods would have to be expanded. If more workers were tied up in other parts of the production process, that would come at the expense of specialization. And it is precisely this that often creates an advantage over the competition. The study by the Ifo Institute simulated the effects of the corona crisis on globalized and regional value chains. It turned out that the renationalization of supply chains leads to higher income losses. A global crisis like the COVID-19 pandemic hits globalized economies harder than protectionist ones. Real incomes in Germany are falling by nine percent, with the automotive and mechanical engineering sectors being particularly hard hit. On the other hand, if the economy were renationalized, it would be at a significantly lower level than it is now, so that comparatively higher losses in real income would result.

A reversal of globalization therefore brings some advantages for logistics. In macroeconomic terms, however, this does not seem to be a solution to a global crisis like the current pandemic. The global networking and interweaving of value chains creates great potential for innovations and it is precisely these innovations that are necessary to find solutions in a crisis.

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