Pepperl+Fuchs, a prominent player in industrial sensor technology and explosion protection, has established a significant global presence and holds a strong position in the world’s markets.
Dr.-Ing. Gunther Kegel, the CEO, is not only an esteemed leader within the company but also serves as the honorary president of the German Electrical and Digital Manufacturers’ Association (ZVEI).
Dr. Gunther Kegel sees no alternative to globalization for electrical engineering – and calls for a positive narrative for industrial investment.
Dr. Kegel, is the current geopolitical situation signaling the start of the end of globalization?
There are growing discussions about the potential decline of globalization, particularly among political leaders. However, from an industrial standpoint, this perspective is difficult to comprehend. We observe that many medium-sized companies are achieving success in both the Chinese and American markets, demonstrating their strong commitment to both regions. For these companies, it is challenging to envision abandoning either of these markets. Globalization has long been ingrained in the electrical engineering industry. In the 1970s and 1980s, consumer products were labeled “Made in Hong Kong” or “Made in Japan,” showcasing the global nature of the industry. Electrical engineering products have been at the forefront of globalization, and at Pepperl+Fuchs, for instance, it would be impossible to manufacture a product using raw materials and components from only one trade area. We rely on international suppliers from the USA, China, and Europe. Our industry is deeply interconnected, unlike mechanical engineering or software industries. Reversing this process would mean undoing not just 20 years but 50 years of globalization. We struggle to comprehend why we should anticipate developments that may not occur politically for another 10 or 15 years, or perhaps not at all.
Pepperl+Fuchs does not produce in China…
Our company has already established successful production sites in Singapore, Indonesia, and Vietnam, making China an unnecessary production location for us. With almost 20 percent of our sales generated in China, we do not intend to allocate a significant portion of our production there. As responsible managers, we understand the importance of avoiding excessive dependence on a single market. While some companies produce in China primarily for the domestic market, there are also German companies that effectively serve the Chinese market while maintaining global operations from their production sites in China.
In the current landscape, it is challenging to detach from China due to apprehensive sentiments. However, if political circumstances necessitate such a shift, companies are generally quick and resourceful in finding alternative solutions.
“As a business leader, you already have to be careful not to become too dependent.”
What is the typical time horizon required for implementing a strategy involving the “diversification” of markets and the global distribution of risks?
Unraveling the interdependence between medium-sized companies and China presents an immensely challenging task, bordering on the impossible. These companies conduct 15 to 25 percent of their business in China and rely on procuring raw materials on a similar scale. Untangling this intricate relationship requires a significant amount of time. Since we established our initial manufacturing facility in Asia back in 1979, a span of 43 years, it is unrealistic to expect an immediate decoupling. By operating manufacturing sites in Singapore, Indonesia, and Vietnam, we maintain access to the Chinese market. Consequently, in the event of a worsening situation, we may lose market access but retain our production capacity outside of China. However, this is not the case for companies heavily reliant on production in China, which would face dramatically increased difficulties in unbundling their operations.
But can’t globalization be simpler? Aren’t supply chains far too complex today?
There is a noticeable shift in thinking when it comes to manufacturing strategies. While it is important to streamline internal operations and reduce complexities, bringing products back to Germany or Europe from countries like Vietnam or Singapore doesn’t make sense in the field of electrical engineering. Such a move would only result in elongated supply chains.
The decision to manufacture in multiple countries is driven by various factors. Firstly, Germany has become relatively expensive for producing competitive electronics. Secondly, being close to rapidly developing markets, particularly in China and Southeast Asia, has its advantages. It is crucial to establish structures and value creation in these countries. With around 20 percent of the world’s population residing in China, aiming for 20 percent of business there in the medium term is a reasonable goal.
How has the supply chain situation at Pepperl+Fuchs been in recent months?
In recent months, Pepperl+Fuchs has faced challenges in maintaining delivery reliability, primarily due to the shortage of chips, especially microcontrollers. This shortage has led to allocation, where manufacturers dictate the available quantities. While the situation is gradually improving, it is expected to take until the end of 2023 to return to normalcy in terms of microcontrollers. This chip shortage was indirectly triggered by the COVID-19 pandemic, as the initial decline in orders allowed semiconductor manufacturers to redirect their capacity to meet the increased demand in other sectors, such as information technology and consumer electronics.
“We have valid reasons for manufacturing in multiple countries. Firstly, production costs in Germany have become too high to remain competitive. Secondly, being close to rapidly developing markets has been another significant factor.”
How serious is the situation with the rising energy prices in the industry?
The seriousness of the situation with rising energy prices in the industry varies depending on the energy intensity of each company. For companies like ours with approximately one percent energy intensity, it is frustrating but not existential. However, for companies with an energy intensity of 10 to 15 percent, it means eroding profits and diminished EBITDA. Basic industries, which now face competition from American counterparts paying only a third of the local energy costs, are at risk of jeopardizing their very existence. Even subsidies may come too late for energy-intensive companies, leading some to relocate to other countries or cease operations altogether. Smaller companies may also face market extinction. While this may not be the end of the world for the industry, the absence of basic industries as a source of inspiration for innovation and efficiency will have a ripple effect throughout the business ecosystem. Our interconnected system will experience significant disruptions, resulting in reduced innovative strength and unfavorable operating conditions. Nonetheless, this is not an abrupt deindustrialization but rather a slow, likely irreversible process. On the other hand, for the remaining sectors of the industry, high energy prices encourage efficiency and automation projects, providing advantages for mechanical and electrical engineering.
How do you view international competitiveness in light of this situation?
The question isn’t about our competitiveness compared to specific countries like Spain, France, or Italy. We need to consider our competition with countries like Korea, Japan, China, Indonesia, and potentially African nations. To stay competitive, we must improve our own factors like energy and labor costs. We need more “ease of doing business,” as the Singaporeans say. The requirements, specifications, and regulations imposed by the EU are often overwhelming and hard to manage. The regulations surrounding supply chains, the Cyber Security Act, and the Data Act require a lot of documentation, which means deploying our best people. Just imagine the amazing products they could develop if they weren’t burdened with excessive paperwork!
“Our system operates in a highly interconnected manner. Disrupting one building block has a ripple effect on the overall structure, leading to reduced innovation and negative changes in the local conditions.”
Is it necessary for us to continue growing at the same pace as we have in the past?
We live in a wealthy society that many people take for granted. Some in Europe, especially in Germany, believe that we can tackle climate change by sacrificing our prosperity and reducing consumption. However, this narrative doesn’t work globally. We can’t tell people in countries like India or China that they can’t achieve the same level of prosperity and mobility that we have enjoyed for decades. Instead, we need to focus on providing prosperity and individual mobility for all while also protecting the planet. This can be achieved through widespread adoption of renewable energy, improving energy efficiency, and embracing circular economies. We need innovative solutions and investments to create sustainable economic growth, rather than relying solely on cutting consumption. Only by fostering growing economies can we finance the necessary transformation for a better future.
Energy efficiency is a global priority, with a growing demand for sustainable and future-proof solutions across all production sites worldwide.
