Editorial note: On 19 October, Jürgen Prumetz published a report entitled “Crisis-proof supply chains An article on supply chain diversification through innovation was published. In the analysis, the author discusses the advantages and disadvantages of building up warehouse capacity in the supply chain.
Regionalization of the supply chain
Will the recognition of varying dependencies in European industry's supply chains in the 21st century lead to the de-globalization of the international economic system? This is doubtful. Bringing production from countries like China closer to their sales markets may certainly be a productive strategy. Automated production processes in a fourth-generation industry could make this possible in some sectors. The focus is no longer on reducing labor costs, but rather on stable data and reliable power grids, as well as low logistics costs. Stricter framework conditions for a sustainable supply chain, increased expectations for fair working conditions, and the consideration of emissions throughout the entire supply chain could support re-shoring efforts in the long term. Through the expansion of renewable energies and the development of innovative storage methods, the currently high energy costs could return to a reasonable level in the medium term, thus promoting the regionalization of supply chains. However, the regionalization of production only solves part of the dependency problem. On the one hand, scalability plays a decisive role for cost-effective production; on the other hand, the development of an efficient, modern production facility is CAPEX intensive and requires corresponding lead times.
The final production of modern products is ultimately nothing more than the merging of a series of intermediate products, which in turn are often composed of further components manufactured in different regions. The production facilities required for this, in turn, consist of products composed of a series of individual components, some of which are produced and supplied by only a few manufacturers. The necessary access to the raw materials required for this, which – as is particularly the case with electronic components – are often mined and processed in very few regions of the world, must also be guaranteed. Re-shoring of production is ultimately nothing more than a shift in dependence on the respective upstream products. Nevertheless, the regionalization of industrial production can, in certain situations, be a sensible solution for sustainable supply chains. This is all the more true if you want to ensure sustainability in production along the entire supply chain.
Excursus: From a linear economy to a circular economy
The most efficient way to strengthen the resilience of domestic industry is to reduce dependence on certain resources. This involves not only extending the lifespan of individual components but also developing ways to recycle the raw materials used.
OMV is working on technical options to make plastic recycling economically attractive. However, this requires an "ecosystem" that covers the entire cycle—from product design to collection and recycling.
Jürgen Prumetz
To enable such recycling in a resource-efficient manner, scalable solutions are required. For example, OMV is working on technical options to make the recycling of plastic economically attractive. However, this requires an "ecosystem" that covers the entire cycle – from product design to collection and recycling. In addition to recycling-promoting logistics, circular economy-oriented business models to make it more attractive for investors.
Far-sighted access to essential raw materials using hydrogen as an example
Not all raw materials can be recycled and returned to the economic cycle. Gas, for example, must be continuously extracted and procured. This raw material in particular currently highlights the problem of access to resources. Although Austria has no gas reserves, a highly gas-intensive industry has developed here. What is painful is that this risk was recognized decades ago and proactively addressed in Austria, for example, as part of the Nabucco project. Nabucco was primarily driven by OMV and aimed to create an alternative infrastructure to diversify gas supplies. A lack of political will, geostrategic pressure, and a lack of foresight in dealing with key partner countries brought this project, so central to energy security, to a standstill in 2013.
This leads to two key lessons for a resilient industrial structure:
- Focus on transformation rather than structural preservation. (This should be considered independently of the issue of resilient supply chains and is therefore ultimately open to a separate discussion.)
- Strategic safeguarding of access to essential raw materials – embedded in a pan-European industrial strategy.
The very fact that resilient supply chains also necessitate regionalized production processes necessitates supra-regional, Europe-wide solutions for (i) procuring essential raw materials reliably and at economically viable costs in a diversified manner. It is also important to (ii) avoid critical raw materials and unacceptable dependencies as far as possible, and (iii) enable sustainable production processes. The prerequisite for this is that current macroeconomic challenges are not addressed with structural maintenance measures, but rather that industrial partners are accompanied into a new era with transformative support measures. Regulatory measures for the energy transition would still need to be created, even if this means future import dependencies. These require an early consideration of security of supply, as the hydrogen example below demonstrates.
The energy required for energy transformation Demand for hydrogen will not be able to be covered by domestic production. Import options are crucial, and production markets should be sustainable. The supply of CO₂-free or low-CO₂ hydrogen to the business location should be ensured at reasonable costs without jeopardizing sustainability. A sustainable supply must also consider the long-term effects of any investments. After all, a hydrogen-exporting economy in water-scarce countries without significant economic added value for them forces the consideration of social consequences. Furthermore, the effects of intensified desalination and/or water abstraction on biodiversity in the affected regions should not be ignored when assessing potential production markets. In the medium term, this will also have a negative impact on current financial models, as a pricing of biodiversity can be assumed in the future (i.e., a price for water similar to that for CO₂).
Supply chain resilience is more than just hype
Delays, disappointed expectations, high costs, and narrow margins are forcing us to rethink modern, resilient supply chains. While the recognition of the fragility of modern supply chains has not marked the end of globalization, it has rather opened up new opportunities for European businesses.
To harness this potential, it is necessary to identify dependencies, develop possible solutions, and create the necessary framework. The various solution models, including the relocation of production processes, must be promoted (and supported through regulatory measures) where this makes sense and is feasible for the European business location. While strengthening the resilience of supply chains also requires supra-regional, European solutions, individual nation states can also make their contribution to strengthening their domestic business location. This support is not limited to legislative and tax measures, but can also include the willingness to provide equity capital and financial instruments.
Jürgen Prumetz oversees Verbund and OMV at ÖBAG and has extensive cross-sector transaction and financing experience. Prior to joining ÖBAG, Jürgen Prumetz worked for almost 14 years at Erste Group Bank AG, including more than two years as Head of the Corporate Finance Team in Poland. Jürgen Prumetz recently published the article "Crisis-proof supply chains” and discussed the diversification of supply chains through innovation. Further articles on the topic Hydrogen economy in Austria and circular economy.
