How Germany’s Economy Is Hurt by Supply Chain Shortages

Anas Siddiqui writes:
FRANKFURT — In Germany, where one in four jobs depends on exports, the crisis gumming up the world’s supply chains is weighing heavily on the economy, which is Europe’s largest and a linchpin to global commerce.

Recent surveys and data point to a sharp slowdown of the German manufacturing powerhouse, and economists have begun to predict a “bottleneck recession.”

Almost everything that German factories need to operate is in short supply, not just computer chips but also plywood, copper, aluminum, plastics and raw materials like cobalt, lithium, nickel and graphite, which are crucial ingredients of electric car batteries.

The auto industry has been hit the hardest. Opel, a unit of Stellantis, the company that owns Jeep and Fiat, said in September that it would shut down a factory in Eisenach until next year because of a shortage of semiconductors. The plant’s 1,300 workers will be furloughed.

More than 40 percent of German companies said they had lost sales because of supply problems in an August survey by the Association of German Chambers of Industry and Commerce. Europewide, exports would have been 7 percent higher in the first six months of the year if not for supply bottlenecks, according to the European Central Bank.

While every economy in the world is suffering from shortages, Germany is particularly sensitive because of its dependence on manufacturing and trade. Nearly half of Germany’s economic output depends on exports of cars, machine tools and other goods, compared with only 12 percent in the United States.

Because Germany is a nation of factories, “the impact is dramatic,” said Oliver Knapp, a senior partner at Roland Berger, a Munich-based consultancy.

The country is also facing a period of political uncertainty. Elections last month left no party with a clear majority, and there is a risk that whatever coalition government emerges will lack enough cohesion to act decisively.

The slowdown has turned the German economy into a test case of how companies can become less vulnerable to power shortages in China or ships stuck in the Suez Canal.

Already many firms are increasing their inventories of parts, ordering raw materials further in advance and finding creative — some might say desperate — ways to keep products moving out the factory gates. Traton, Volkswagen’s truck unit, said last month that it was cannibalizing hard-to-find components from trucks that had been built but not sold, and reinstalling them in trucks for which there were firm orders.

Longer term, companies have thought about ways to bulletproof their supply lines, for example by buying parts and raw materials closer to home rather than from subcontractors on the other side of the planet. Some political leaders have even suggested that the pandemic could have a silver lining, because it will inspire companies to bring manufacturing back to Europe and the United States, creating well-paying factory jobs.

But disentangling the networks that move products around the globe is not so easy, and maybe not even a good idea, some economists and business managers say.

The widespread assumption that suppliers close to home are more reliable has not always proved true. During the turmoil caused by the pandemic, some German companies had more trouble getting supplies from France or Italy, because of strict lockdowns, than they did from Asia.

“It’s not the case that if we were not dependent on China we would have gotten through the crisis without any problems,” said Alexander Sandkamp, an economist who studies supply chains at the Kiel Institute for the World Economy in Kiel, Germany.

Evidence is accumulating that shortages are depressing German growth. The Ifo Institute’s most recent survey of German business managers, considered a reliable predictor of the direction of the economy, pointed to a marked slowdown. More than three-quarters of German firms told the Munich institute that they were having trouble getting raw materials and parts.

Updated
Oct. 4, 2021, 10:18 p.m. ET