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How Do Production Relocations Abroad Affect Credit Management?

Currently, there is an intense debate about the danger to Germany from relocating production abroad and the accompanying deindustrialisation. But which consequences does this trend have for credit management? Learn more in SCHUMANN Insights.
Blog Post, Schumann Insights
16.08.2023, Prof. Dr. Matthias Schumann

Relocation of Production Abroad

Energy-intensive industrial companies are relocating production capacities abroad due to high energy prices. As energy is cheaper there, product costs remain competitive on a global scale. However, this is not the only reason for such relocations:

Relocations or production expansions take place in places with sufficient skilled labour. In many industries we have a shortage of qualified workers, or the potential of existing workers cannot be exploited. Lastly, the excessive bureaucracy plays a not insignificant role. If new locations or site expansions are planned, then approval processes lead to long and thus also cost-intensive construction times. This bears the risk that demand on the international market is satisfied too late; competitors from other regions do the business then.

Consequences for Sectors and Companies

So, what are the consequences for the performance and thus the economic situation of domestic companies? By investing abroad, companies are trying to maintain their competitiveness and thus also their financial stability. This will lead to consequences in other sectors. Equipment suppliers and subcontractors are affected. In the medium term, industrial building construction, for example, will suffer. But local suppliers of industrial equipment will also have to reckon with declining sales. However, suppliers will be affected overall. Local suppliers will no longer be needed to the same extent and will be replaced by regional suppliers in the new locations.

Special attention will also be given to the smaller energy-intensive medium-sized companies, which may not have the possibility to relocate their production capacities as large corporations are able to do. This causes a loss of competitiveness and a deterioration of company results. For these companies, it is important to closely monitor the development of the financial situation and the order situation. Some of them are at risk of exiting the market.

Yet another factor that should not be underestimated is the fundamentally increasing uncertainty about future developments and job security. In broad sections of the population, this will lead to a reluctance to consume. Consequently, private consumption of durable consumer goods and clothing will also decrease. The latter will be additionally supported by the development of e-commerce. Insolvencies have been on the rise in this sector recently, especially in traditional trade.

Without adequate countermeasures, such as the reduction of corporate taxes, performance incentives for potential employees, rapid bureaucracy reduction and other energy pricing models, negative economic contagion effects will thus occur.

Conclusion: Implications for Credit Management of Companies

The consequence for credit management is that practically the entire customer and supplier portfolio must be closely monitored regarding economic stability. In the case of recognisable deviations or signs of imbalances, it is important to adjust the behaviour in one's own company in time, to seek coordination with these companies and to take countermeasures.

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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