How Do Production Relocations Abroad Affect Credit Management?

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.

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.

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.