Starting in 2023, the two-year-long disruption by the pandemic may have ended, but other disruptions are mounting, economical, ecological, but more prominently geopolitically. The conflict on unfair trade practices between the United States and China has transformed into an all-out systemic rivalry and led to a verbal redefinition of “globalization”: de-globalization, regionalization, new cold war, reshoring, and probably a bunch of other terms that more or less say the same thing: reducing the dependence on China.
One of the most prominent examples of decoupling is the semi-declared “semiconductor war” between the US and China, largely based on the mounting conflict around Taiwan. The significance of Taiwan’s semiconductor industry for the global economy cannot be exaggerated, whether in actual semiconductor production or backend manufacturing. The current culmination can be read in nearly every social media, newspaper, and tech magazine: the “West” is withholding key technology from China, especially high-end semiconductors and semiconductor manufacturing equipment. China blocks western companies to sell their products (for example memories) for security reasons. And all regions and major economies – Europe, US, South Korea, Japan, India – create giant “Chips Acts” to strive for strategic independence on semiconductors.
Further down in the value stream, namely the electronics manufacturing industry, similar considerations have happened for some time now. In the last two years, a lot of companies have reconsidered their production strategy in order to reduce the dependence of the once production “EL Dorado” China. Various aspects feed this rethinking: the geopolitical tension, the complexity and therefore vulnerability of the electronics supply chain, the permanent threat to intellectual property and last but not least, ESG (Environment, Social, Governance) rules and responsibilities, which are turning increasingly from nice to have to legally binding. And not to forget, some governments like the French are supporting the trend to reshoring (to France, of course) with money, subsidies and advice.
If you look at the European electronics industry and its market figures – a good representation would be the European components distribution, which is by far the largest and furthest-reaching channel – the trend to reshoring has not yet materialized. In the last two years, when the considerations started, the industry was too engaged in solving availability issues, finding skilled workers and production capacity for the existing business, and trying to reshore business from China on a large scale.
But make no mistake, it will happen, to which extent needs to be seen. Especially industrial customers take concerns seriously and weigh the many opportunities that the future electronics market offers (IoT, factory automation, e-mobility, renewable energy, smart grid and many others) against mounting security concerns like IP-theft, cyber-risks, and, of course, the political climate. In addition, being closer to European end customers and using the means of digitalization both in manufacturing efficiency and supply-chain-management could become a game changer also on the cost side.
The big question is: is it possible? I mean, is it possible on a larger scale, to lead to a renaissance of electronics manufacturing in Europe? Over the last 20 years, the European market has grown more slowly than Asia and China, and even than the United Stated, leading to an erosion of Europe’s global market share. This erosion has also led to a shift of supply chains and raw material production. China is by far the largest producer of PCBs, plastics, and many other raw materials needed for electronics production. What sense will it make to build a factory in Europe if 90% of raw materials still are procured in China? The entire ecosystem reorientation, if taken seriously, will take years and will come at a price.
The most probable scenario to reduce dependence from China will lay in a mix of strategies, from complete divestment to a strengthening of the Chinese operations. Kamala Raman, Vice President at Gartner and prominent researcher of global supply chains, calls it the 4D: Divesting, Decoupling, Diversifying, and Doubling Down.
While divesting has either commercial or regulatory aspects (like in the case of semiconductors) and according to Mrs. Raman is only for those who can live without China, decoupling would also consider regaining strategic control over the business (or IP, for example), but first and foremost it would be a giant reorganization exercise, timely and costly, when continuation would mean risk significant aspects of your business.
The most like scenarios are certainly diversification, a.k.a. China plus one or Nearshoring. 95% of companies that Gartner asked across all industries, stated to have plans of diversifying, the majority of them already in some form of execution. It can reach from low-cost diversification to complete new additions into a production network (many electronics companies are pursuing this), or the aforementioned nearshoring. All three options mentioned have built-in time aspects: short-term, they may seem costly and near impossible to executive, medium-term, says Mrs. Raman, supply chains may still be tied closely to China (think of PCBs, for example), long-term, strategic control over business and particularly supply chain need to be sound and sustainable.
An interesting course of action is doubling down: if you move 20% of your production from China and leave 80% there, it means you strengthen your China policy, full stop. Many companies are doing this, not the least Apple who is moving a huge share of its production, yes, also to India and Vietnam, but from Foxconn (Taiwan) to Luxshare (China). German companies, first and foremost Siemens, BASF and car companies are still investing in their Chinese manufacturing, which is a clear sign that China remains important and near impossible to isolate. The critical mass to run a global business can rarely be achieved without China.
So, where is Europe’s place in this game, specifically in our little electronics business? It can’t be defined via the political alley or via price-competition. Whoever wants to produce profitably in Europe, has to do it via, quality, speed, efficiency, customer intimacy and flexibility (in production cells, for example). Politics can help by governance and standards, so can customers by putting values (like ESG or sustainability) over price only. In a nutshell, the whole discussion is certainly healthy, as it makes responsible people turn their heads just in many directions to find the right way, not just in one, like the last 30 years.