Globalisation How internationalisation can affect your business
Is globalisation a blessing or a curse? During the last year, everything pointed towards the latter. The influence of politics on the European economy has been particularly strong in 2016. The future impact on European tool and mould makers is uncertain.
In the thirteenth century, Marco Polo needed years for his journey to China. Legend says that 500 kg of silk were confiscated before he could return back to Italy. Today, the world has grown together. In times of Twitter, Facebook and Youtube, the world has indeed become a village. And travelling to China takes a little bit under 10 hours.
It is not a surprise then that internationalisation has become a major topic in the industry as well. Companies that want to be successful in the long term need to extend their customer base to foreign countries, which often means opening facilities on different continents to fulfill customer requests quickly.
But it is not as simple as that: With European companies cleaving their way to Asia and America, Asian and American companies enter their respective domestic markets. Last year, the Chinese acquisition of German robotic specialist Kuka was followed by great public interest and, at the same time, anxiety.
Moreover, the last year exposed another shocking truth: The political status is not a stable condition and can be changed drastically. Brexit was the first shock for the industry in July 2016, followed by the election of Donald Trump in the United States.
Made in China: from manufacturer of quantity to quality
There is a plus side of emerging markets in Asia: China is trying to get rid of its image as a supplier of cheap products. The slogan is to get away fom quantity and be a manufacturer of quality. As a result investments in high-quality machines and automisation made in Europe are increasing. German machine tool manufacturers reported an increase in orders from China of 30 % in the first nine months of 2016. China is clearly trying to become internationally competitive.
On the other hand, there are stories like Kuka's acquisition by Chinese company Midea. China, going from a country mostly famous for cheap labour to a country with highly innovative products, could become a danger to long-established companies from Europe. One possible future scenario is that in the long term China does not need to purchase high-quality machines in Europe, but is able to manufacture them on their own.
By purchasing manufacturers like Kuka, they do not only get a successful company, but also a very innovative one, leading in automation and excelling in preparation for Industry 4.0. Naturally, competition grows with internationalisation. Moreover, competitors can also change their location, and thus, become more attractive to customers abroad.
The insecurities European tool and mould makers have to face do not only come from Far Eastern economies. The European Union is deeply shaken inside its own borders. Even a day before the vote, hardly anyone expected Great Britain to leave the EU. As a first reaction, the stock market crashed. In the meantime, Europe has recovered from the shock, but we are far from a predictable European situation.
Stuart Hall, sales director at Epicor Software UK and Ireland, sees the biggest threat of the UK leaving the UK in the resulting incertitude: "Nothing kills you like uncertainty. It is true in business as it is in life - you're not going to hit targets by shooting in the dark. The UK's exit from the European Union brings great uncertainty. Europe is entering unchartered waters, and neither the European fleet, nor the breakaway British flotilla, has a map."
During the last weeks and months, the British future has become a little bit clearer. At the same time, the UK will not leave the EU for at least another two years. According to a recent survey by the Institute for Economic Research Ifo, German economists are not convinced that the schedule of the British government is realistic. They do not believe that the next two years will be sufficient for negotiating free trade agreements. According to the survey, only 21% considered it to be possible, the rest was uncertain.
Europe is shaken by political changes in the UK and US
Moreover, 2017 is an election year in some European countries, which could bring a wave of populism to the ruling parties in France, Germany and the Netherlands.
Speaking after the Prime Minister’s speech on her approach to Brexit negotiations, James Selka, the CEO of the British Manufacturing Technologies Association MTA, said: “While it is useful to have some clarity as to the future, we urgently need more details as to what our trading relationship with the EU might look like. We welcome the recognition that we need a comprehensive customs agreement and that trade should be as frictionless as possible. Advanced manufacturing, in the UK and Europe, depends on highly internationalised supply chains and leaving the Single Market raises many questions for our members. Any agreement must include the components and technologies that make up complex products and systems. We stand ready to help Government achieve those aims.” On the other hand, 63% of German economists believe that the future EU trade policy will be protectionist, the survey conducted by Ifo says.
One crucial factor in this insecurity does not only concern exports and imports but also the freedom of movement of employees. Many companies with subsidiaries in foreign countries employ specialists from their home countries in their foreign branches. For the employees, the freedom of movement is crucial, and thus it is crucial for their employers as well. Restricting entry and exit regulations can bring foreign subsidiaries to question.
Another great fear of European manufacturers is the influence of the recent US election on European companies. The biggest fear refers to Trump’s announcements during his election campaign. He is very skeptical of free trade agreements. If Trump continues with his protectionist proposals in 2017, effects will be felt in Europe, too.
VDMA Executive Director Thilo Brodtmann stated: “We wish the new president all the best for a good start in his new role. But since he was elected, there is growing uncertainty about the future economic direction of the USA – and insecurity ultimately results in reluctance to invest. The first sign of this could be machine deliveries to the USA, whose decline accelerated in the fall of 2016.”
Protectionist plans influence all trading companies
“If Donald Trump goes through with introducing punitive tariffs to force domestic and foreign companies into keeping their production sites in the USA or building new ones there, this may very well result in the preservation of some company sites in the short term," commented Ulrich Ackermann, Head of the VDMA's Foreign Trade department. "In the medium and long term, however, such coercive state policies will lead to investors looking for opportunities elsewhere – which ultimately translates into losses in economic prosperity.”
Asked about his perspective on the influence of Trump on German machine tool manufacturers, Heinz-Jürgen Prokop, chairman of the VDW (German Machine Tool Builders’ Association) said: "We see the greater danger in Mexico. If import restrictions really are established for products from Mexico, this would affect us directly." This is another consequence of internationalisation: Many markets feel the effect of changes in another market because it influences not only itself but all countries that are economically dependent on it.
Regardless of concurrent political changes, many European associations are rather optimistic about the future. They are certain about their place in the global economy. And while they admit to doubts concerning the political future, they are quite self-assured about their prospects: Europe is leading in manufacturing, which means that European products are essential for foreign markets. This is not going to change due to political changes.
European associations feel confident about 2017
In concluding his report on the perspective of German machine tool manufacturers, Heinz-Jürgen Prokop affirms that the German machine tool industry is well equipped to meet the challenges of the future: "It is doing intensive work on weather-proofing itself for the storms of international competition."
According to Cecimo, the European Association of Machine Tool Industries, the latest economic indicators show that the business cycle is in a rather stable phase. The forecast for 2017 also points towards growing demand in 2017.
In conclusion, one thing can be said about internationalisation in tool and mould making: There will be winners and losers. Companies that want to succeed, need to find their own niche, where they can clearly stand out against other companies. They have to concentrate on customer service and consultation to distinguish themselves from their competitors abroad. Last but not least, they have to adapt to the changes of Industry 4.0 to stay one step ahead.