Interconnected biz: Breaking globalisation is easier said than done

Compressed air is a versatile product because it can be used to control machines, move postal packages, form plastic bottles — and, during the COVID-19 scare, safe lives. The global outbreak of the coronavirus has led to a huge rise in demand for ventilators and brisk business for compressor makers such as Boge. The German mid-size company, situated in Bielefeld, is manufactures specialised compressors for medical applications and is a main parts supplier for German ventilator maker Dragerwerke.

In the past two months, assembly lines at Boge have been operating virtually around the clock to make the key ventilator component, says Oliver Peters, Boge’s chief financial officer. And so have the company’s own suppliers in Asia, who are delivering vital motors for its compressors.

In the chaotic days when the virus broke out in China and quickly spread to other countries in the Far East, the company was lucky enough to be able to fall back on some domestic stockpiles, says Boge’s purchasing manager, Olaf Kuhlmann, because “deliveries from Asia completely broke down.” “And while we were trying to secure supplies from other parts makers, we were realising that the whole market in Europe was quickly drying up,” he adds. Boge gets the piping and frames for its compressors from manufacturers in Eastern Europe, while the cooling system is made in China as it involves a lot of manual work. Other components are manufactured in Italy, the first country in Europe that has completely shut down its industries amid the outbreak.

Cutting global reliance

While Boge sells its specialised medical compressors to the whole world, the globe is also the market from which it sources most of its components — a dependence the company is now rethinking.

Purchasing Manager Kuhlmann believes that it’s becoming increasingly important for the company to “spread” supply chain risks by cutting its strong reliance on a single supplier, or one world region currently. Although the prices for its upstream products may be rising as a result, Kuhlmann says that “costs are not everything, availability is often more important.”

Kuhlmann however cautions the strategy revamp isn’t intended to throw the firm’s long-lasting partnerships with suppliers overboard, and says stable business ties have their advantages, too. “We’re realising that perceptions among the customers we are selling to are also changing. They’re now putting a greater emphasis on quality and supply security, for which they are willing to pay more,” he says. The outbreak, like no single incident before, has highlighted the need for lowering supply-side risks among German businesses. According to the country’s machine-builders’ association, VDMA, almost half of companies in the sector experienced significant or even grave production difficulties in April due to supply bottlenecks.

The Institute of the German Economy (IW) has recently made a calculation showing the extent to which the country’s machine-building industry is intertwined with global supply chains and manufacturers abroad. The value added by foreign suppliers to Euro 100,000 ($109,000) worth of German machinery is Euro 28,200 on average, IW found. Although more and more factories in China are reopening and production is rebounding, Michael Holz believes the genie of stronger diversification is out of the bottle in all industrialised countries. An economist with the Research Institute for Small and Medium-Sized Companies in Germany (IfM), he says production costs will rise as a result of the trend, which however mustn’t necessarily mean companies are less competitive. “This is because all competitors are facing similar challenges at the moment, and will have to come up with viable solutions,” Holz argues.