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Consequences of Global Dependencies on Products and Services for the German Economy

Germany's economy is heavily dependent on global supply chains – whether for energy, rare earths, chips, cloud services or medicines. The current crises show how risky unilateral dependencies can be and how urgently Germany needs its own production capacities in key technologies. Those who identify risks early on and diversify not only strengthen their competitiveness but also their strategic independence.
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, Prof. Dr. Matthias Schumann

Consequences of global dependencies on products and services for the German economy

Germany's economy suffers from risky dependencies on global supply chains – from energy to chips to medicines. Domestic production capacities and smart diversification are crucial for competitiveness and strategic independence.

Energy and raw materials – costly dependencies

Germany is poor in raw materials. We are currently feeling the effects of this massively in our energy costs. Green energy is still too expensive, and the prices for importing gas and oil have risen massively due to the Ukraine conflict and the abandonment of Russian supplies. As a result, energy costs are high and many industries are suffering, especially the steel and chemical industries. This shows how economically dangerous unilateral dependencies are.

Future technologies and geopolitical risks

However, there are other dependencies, especially in future technologies, which make the economy more risky in geopolitical times. China is not only the main supplier of rare earths such as lithium, e.g. for battery production, it is also the main supplier of batteries on the world market. This currently creates major dependencies in the production of electric vehicles and also has a massive impact on production costs, as batteries are an important cost component. And batteries are also needed for many other technologies. Domestic production would therefore be particularly important strategically for the future market.

Taiwan is the largest chip producer for Western countries. Chips are now built into every modern electronically supported product, from washing machines to cars, computers and manufacturing machines.

Taiwan is the largest chip producer for Western countries. Chips are now built into every modern electronically supported product, from washing machines to cars, computers and manufacturing machines. If a conflict were to arise between China and Taiwan, our economy would also be severely affected. It is therefore good that Europe now has the Dutch company ASML as a major chip manufacturer and that corresponding factories are also being built here. In addition, Germany is strong in the production of equipment for chip manufacturing. This creates mutual dependency.

Cloud services such as Google, AWS and Microsoft also dominate in Europe when it comes to offering computing power and services such as AI with large language models. Here, too, there is a risk that American policy will lead to regulations for these service providers that violate European law. In addition, lock-in effects among providers could lead to drastic price increases. It is therefore important that there are also German offerings from Telekom, StackIT from the Schwarz Group and, in future, increasingly from SAP.

There are also high dependencies on other basic software services, such as operating systems, due to Microsoft's market share. In some areas, open source products, e.g. for databases, have a dampening effect here.

Industry, health and supply chain resilience

When we consider ecological change, we see that the solar industry has also become heavily dependent on Chinese suppliers. Due to price dumping, they have practically driven all manufacturers out of the market in Germany. Solar installations that are to be implemented further also create dependencies. In the case of heat pumps, care must be taken to ensure that, due to sluggish demand, no further German companies are taken over by foreign companies in order to avoid further dependencies.

After all, we know from the coronavirus pandemic, if nothing else, that it does not make sense for regions to relocate the production of basic medicines abroad to a large extent. In the event of pandemics or crises, these medicines are then needed where they are produced, and import locations are left behind.

These few examples show that, against this backdrop, it is very important to look closely at which supply chains are needed for which regions to produce precursors for specific sectors of the economy. If cluster risks arise here, e.g. due to single sourcing from individual regions, caution is advised in a volatile global situation. 

However, there are also positive examples where we in Germany remain the global market leader and must maintain this position, not least in order to be able to exert the necessary commercial leverage in cases of dependency. These aspects are now an important factor in assessing the risks for our companies in international competition, including for credit management. 

About the author
Prof. Dr. Matthias Schumann

Since 1991, Prof. Dr. Matthias Schumann has held a professorship in Business Administration and Information Systems (Chair of Application Systems and E-Business) at the University of Göttingen. He also heads the joint computing center of the Faculty of Economics and the Faculty of Social Sciences. He is a shareholder of Prof. Schumann GmbH.

Prof. Schumann's research interests include information systems at financial service providers and systems for credit management, as well as issues related to knowledge and education management. Prof. Schumann has a wide range of experience in consulting companies, extensive lecturing activities and more than 350 publications.

University of Göttingen

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