Supply chains are of the utmost importance in mechanical engineering. This primarily involves international supply movements. 26% of all preliminary products in mechanical engineering alone come from abroad. This is why the industry continues to suffer from the consequences of the coronavirus pandemic. Supply bottlenecks and transportation difficulties still dominate everyday life in the industry.
If anything, the trend seems to be getting worse this year. The shortage of skilled workers is also having an increasing impact. Where are the supply chains in mechanical engineering heading and what does this mean for the general outlook for this key industry?
HOW SUPPLY CHAINS IN MECHANICAL ENGINEERING ARE MADE UP
In general, mechanical and plant engineering involves complex products. Germany is the world’s third largest producer of machinery. This makes mechanical and plant engineering the export and innovation sector par excellence in our country. The value chain in mechanical engineering has partly shifted to other countries. This does not always make it easy to set up a resilient supply chain.
Mechanical engineers – often medium-sized companies – manufacture machines and systems that are needed throughout the economy. This requires technological preliminary products that are further processed and refined. It is not only in the age of Industry 4.0 and digitalization that the associated supply chain is globally oriented.
German machinery and plant manufacturers purchase the following abroad, among other things:
- Raw materials
- Primary products
- Tools
- Technical services
In the other direction, machinery and systems manufactured in Germany are exported abroad. In 2019, machines worth almost 200 billion euros were exported. This is according to the short report “Supply chains in the post-coronavirus era” by the Kiel Institute for the World Economy (IfW).
SUPPLY CHAINS IN THE TIME AFTER CORONA
As a rule, a purchasing supply chain will therefore consist of several suppliers and participants.
In addition to the direct procurement of technological intermediate products from abroad, for example, there is also intensive internal integration in the supplier industry as a whole. If this is taken into account when considering the supply chains in the mechanical engineering sector, it must be assumed that over 40 percent of the intermediate products required in mechanical engineering come from abroad.
Indirect interdependence plays a role because further upstream services are often required within the supplier group before a directly sourced primary product can be purchased. In this case, the relevant procurement markets are interwoven.
A CLOSER LOOK AT THE FOREIGN SUPPLY CHAIN IN MECHANICAL ENGINEERING
In terms of value, mechanical engineering companies in Germany purchase primary products from abroad with an annual value of around 160 to 200 billion US dollars. Reliable figures of 158 billion US dollars are currently available for 2015. The respective supplier countries are divided between Europe and the rest of the world. Eight of the major suppliers are European countries. However, China is the largest supplier to the German mechanical engineering industry overall.
Dependence on foreign suppliers varies in different sectors of mechanical engineering. Metal production and processing is particularly dependent on foreign suppliers. The proportion of intermediate products from abroad here is 40 percent. In mining, it is even over 90 percent in some cases. This also emerges from the IfW report.
A superficial glance reveals a great deal of diversification in mechanical engineering supply chains. To conclude from this that the German mechanical and plant engineering industry is well protected against supply bottlenecks and other disruptions can be misleading. In some areas and sectors, the availability of primary products and other goods required for production can be reduced to a few or just one supplier.
WHAT ARE THE GENERAL CHALLENGES?
Overall, the mechanical engineering sector is integrated into a network of European and global supply chains. Here, 90 percent of all preliminary products in mechanical engineering come from the European economic area. Although the proportion of directly used primary products from China is only 2.7 percent, there is a high dependency on imports from Asia due to the further integration of all suppliers involved.
Mechanical engineering companies need supplies from abroad. As an export-dependent industry, they are also dependent on functioning supply routes abroad. Disruptions in supply chains always have an impact on imports and exports.
They also have potential effects on demand for German products abroad. The mechanical engineering industry wants and needs to export worldwide. The production capacities, the number of employees and the entire equipment are geared towards a strong export business.
WHAT HAS CHANGED IN RECENT YEARS?
Mechanical engineering is a driver of innovation and innovation-driven. The developments of recent decades and years in the field of digitalization are having an impact on the mechanical engineering industry. Many companies have modernized and positioned themselves digitally. Industry 4.0 has a particularly strong presence in mechanical engineering.
CHANGED CONDITIONS
Digitalization has also changed the conditions for supply chains. Among other things, real-time models and just-in-time processes have become important. Many companies have invested in order to maintain the high standards of mechanical engineering technology. Automation processes are becoming increasingly common.
The value chain is becoming more agile, but can also become more susceptible to disruption. Those who reduce storage capacity are dependent on the constant supply of primary products and raw materials.
Data is playing an increasingly important role in mechanical engineering. The aim here is to make the entire manufacturing and production process data-based. This requires the processing of a large amount of data within a data strategy, particularly in the context of automation.
SUSTAINABILITY AND GREEN TRANSFORMATION
Sustainability and green transformation requirements are also being added. However, these are often not yet focused on in the supply chain. Experts are convinced that a lot of potential remains untapped in the area of sustainability in mechanical engineering supply chains. This was also revealed by the study “Green transformation in mechanical and plant engineering”.
New legal requirements such as the Supply Chain Act affect mechanical engineering companies. Mechanical engineering companies must take responsibility for working conditions in the supply chain. Many stakeholders from the mechanical engineering industry consider the design of the law to be difficult to implement. Among other things, this has led to a partial relocation of supplier relationships within the global supplier network. It may have restricted diversification in the supply chain.
KI AND OTHER TECHNIQUES
The demands on the resilience of mechanical engineering value creation are becoming ever greater. Investments in AI (artificial intelligence) are necessary to enable alternative planning in the event of disruptions in supply chains using mathematical models. The coronavirus pandemic, with its many disruptions to supply chains, has shown just how important this development is.
Technologies such as the emergence of 3D printing are bringing a shift in value creation back to Germany and Europe into the discussion. This is also a development whose sense and benefits are worth considering further in light of the consequences of the coronavirus pandemic.
POSSIBLE LOSS OF SALES
Overall, one of the biggest general challenges in the mechanical engineering industry is to maintain a balance between returns and costs. The industry is constantly on the move and very dynamic. As a rule, it does not forgive hesitation. On the customer side, competition from China in particular is causing problems for the German mechanical engineering industry.
Trade barriers have an impact on mechanical engineering. In recent years, isolationist tendencies have been observed in various countries and markets. Discussions have been held with the USA, among others. Depending on their extent, market foreclosures by Germany and the EU always lead to sales losses in the mechanical engineering sector. They have an impact on supply chains and sales. Mechanical engineering companies are therefore interested in permeable global markets.
WHAT ARE THE CURRENT CHALLENGES FOR THE MECHANICAL ENGINEERING INDUSTRY?
The coronavirus pandemic has created various current problems in the mechanical engineering industry.
DELIVERY PASSES
Corona has completely interrupted individual supply chains for some time. As a result of these interruptions, a problematic situation can be observed in the transportation sector, primarily with containers. The shortage of containers and difficulties in handling led to persistent supply bottlenecks from 2020 onwards.
These are still continuing today because the entire system has not yet fully recovered. In addition, demand has skyrocketed following the first coronavirus shock and a sharp drop in demand. Hardly manageable for the key players in the supply chains.
In addition, lockdowns at the transshipment hubs in China in particular have repeatedly caused periods of complete standstill until 2022. Containers are backed up, processed with delays and therefore do not reach the companies or customers in the scheduled time.
SLUMP IN ORDER FIGURES, INCREASED DEMAND
The crisis surrounding Covid-19 is affecting exports and imports in the mechanical engineering sector. The German mechanical engineering industry had to cope with a slump in order figures, but then immediately satisfied increased demand.
MATERIAL SHORTAGES
Since 2022, the procurement of raw materials and primary products has been affected by other crises that are linked to the ongoing consequences of the pandemic.
The war in Ukraine, together with pandemic-related production and mining stoppages in Asia, is now having an impact in a wide variety of areas, primarily with material shortages. There are now shortages of products and goods that were always available at other times. Wood, electronic components and tools are just a few examples.
In April of this year, 78% of the mechanical engineering companies surveyed confirmed serious material bottlenecks in a recent survey by the VDMA (German Engineering Federation).
SHORTAGE OF SKILLED WORKERS
The skills shortage that has been predicted for decades is now becoming a reality, especially for mechanical engineering companies. In the aforementioned survey, 78 percent of the companies surveyed in the mechanical engineering industry described a serious shortage of personnel. There is a shortage of skilled workers everywhere. The problem of young talent is pressing.
INFLATION
The global trend towards inflation is primarily affecting the mechanical engineering industry on the cost side. Prices and cost structures have to be calculated differently.
CHANGES IN SUPPLIER NETWORKS
Many companies are having to implement changes to their supplier networks in the face of this acute crisis. Many are expanding their supplier network, increasing stock levels and trying to switch to alternative raw materials and primary products.
These measures tie up personnel, time and money. They therefore create further challenges for the mechanical engineering industry in a situation of thinning human resources.
In the survey cited, 87 percent of companies see their supply chains under intense pressure and severely impaired.
HOW MUST THE INDUSTRY RESPOND TO MASTER THESE CHALLENGES?
The mechanical engineering industry has already started to take measures in response to the recent crisis. One focus is likely to be on making supply chains even more resilient. A distinction must be made between short-term measures and medium-term technological adjustments.
Initially, most companies will focus on securing the supply of supplier products such as primary products in the last quarter of 2022 and for the first half of 2023.
Increased efforts are needed here to tap into alternative sources of supply where necessary. Planning must become more forward-looking in order to deal with the ongoing disruptions to container transportation.
In the supply chains themselves, companies will focus more intensively on automation and digitalization digitization. AI and data-driven processes make it possible to respond to disruptions in the supply chain in the shortest possible time. This will require further investment in automation technology.
One problem that is difficult to solve is the shortage of skilled workers. It is not yet clear whether the industry will succeed in recruiting more skilled workers from abroad. Other countries also have a high demand for skilled workers. Above all, the mechanical engineering industry also has to deal with the political conditions for immigration in Germany.
CONCLUSION: INVESTMENTS OUTLOOK FOR THE NEAR FUTURE
Almost 80% of mechanical engineering companies expect sales growth in 2022. It is important to analyze whether this growth is not predominantly driven by inflation.
The relative optimism in the sector continues to be reflected in the willingness to invest. Over 80% of companies intend to increase their investments this year compared to the previous year.
The challenges and requirements facing the mechanical engineering industry will not diminish in the short to medium term. If the industry wants to maintain its high standards and export strength, constant adjustments to the supply chain are necessary. The trend here is likely to be towards further diversification. There is also a trend towards shifting value creation back to Germany and Europe.
Overall, mechanical engineering must become even more crisis-proof and the supply chain even more resilient. This can only be achieved with even more automation.
The competitive situation with China is expected to intensify further in the coming years. China is pushing to participate massively in value creation and to sell its own products worldwide. In the mechanical engineering sector, it will also be important to remain competitive in terms of price.
The next few years could be decisive in determining whether the mechanical engineering industry in Germany can build on its previous export performance and its high share of overall economic output. Supply chain management will play a decisive role in this.
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