Globalization Scenarios – Challenges and responses from the perspective of German business

As the study shows, all companies are very aware that geopolitical shifts are changing the foundation on which they do business. Many companies are prepared for the fact that under certain global conditions they will have to move at least part of their business operations from Germany to other world regions. However, the business models used in some industries require major investments in production facilities, which must then operate for decades to be profitable. This applies, for example, to primary industries and the chemicals sector. Yet making major investments abroad is especially risky if sales can only take place locally due to production processes or market conditions.

German companies that are quality and innovation leaders are generally confident that they can continue operating on a sound economic footing, even if a crisis occurs or blocs form. These include pharmaceutical manufacturers that are internationally oriented and highly innovative. This is particularly true for market segments in which production costs of supplier products only account for a small share of total costs.

The EU can make a crucial contribution to ensuring European companies remain competitive in the future, thus also contributing to European prosperity. The companies interviewed agree: Europe’s biggest trump card is its single market, the world’s largest economic area.

Against this background, Europe’s goal must be to compete with the US and China as an equal. Otherwise, Europe could well be reduced to the role of technology enabler in foreign markets, only playing a leading role there for a limited time before being displaced by companies from China or the US.  

In addition to the Green Deal, a very important point for the companies is the focus on future technologies. Europe must remain technologically attractive and must pave the way for research, development and value creation within the EU. That is the only way that European companies can go up against the international competition over time. Cutting-edge technologies “made in Europe” could substantially mitigate the fallout from isolationist tendencies around the world.

Background

The global political situation is increasingly being determined by the rivalry between the US and China. During the Trump administration, this rivalry became an open conflict for the first time in the form of a trade war. The rivalry seems to be continuing under the Biden administration. Although the superpowers are well aware of the dangers that would accompany an escalation, cooperation in the sense of multilateralism or a G2 scenario does not currently seem to align with the internal logic of the systems involved. The US’s self-image as a global economic, political and military power is being fundamentally challenged by China’s rise.

China and the US are major markets for German companies, yet are in many respects different and complementary. Many companies have complex ties to the US that have developed over decades. The US is a sales market, production site and research hub. Especially in the area of digitalization, the US is taking on a leading global role. Through its financial markets and the dominance of the US dollar as a reserve currency, the country influences the global economy like no other player. And while the Americans always use their political clout to promote their own economy, the country’s legal system also creates a very reliable market there for German companies. If one looks at trade in both goods and services, the US is Germany’s largest economic partner.

China has developed into a market of similar importance for many German players in recent decades. Growth is much higher than in the US and is forecast to remain so in coming years. Yet this sizeable potential is offset by a more difficult market environment. Lack of legal certainty, discrimination against foreign companies in the form of major restrictions on market access, forced technology transfers, and unfair subsidies coupled with government support for Chinese companies are all leading many German businesses to re-evaluate the role of the Chinese market. In the past, firms produced in China largely for the domestic market there. These days, German companies have a more critical view of their engagement in China. Many German players also fear becoming overdependent on the Chinese market. The trend is therefore once more towards producing in China for China. Outside the country, however, the companies would like to establish structures that can prevent China from exerting influence on their business operations. Currently, no company is seriously planning to leave the Chinese or US markets. They are looking instead for strategies that will enable them to remain active in both.

What companies expect from policy makers

1. Most frequently, the companies said they want the EU to be united and capable of taking action, to be strong so that it can assert itself and European business interests on a global scale.
2. Not only is greater unity important to the companies, so is giving European politics a more strategic orientation, something that would require a general debate on how the EU is positioned. The goal must be to make decisions more quickly and to develop more clout beyond Europe.
3. Many companies hope that Europe will succeed in preserving its political leeway in light of the confrontation between the US and China, thereby maintaining its industrial standards.
4. The companies view peace and security based on a strong transatlantic partnership as the basis for successful business operations.

About the study

In light of current global developments, the Bertelsmann Stiftung partnered with the Federation of German Industries (Bundesverband der Deutschen Industrie, BDI) to organize a series of workshops whose discussions focused on various possible future developments and their impact on the German business community. In cooperation with the Fraunhofer Institute for Systems and Innovation Research (ISI) and representatives from business and politics, five scenarios were developed on what the future of globalization might look like. The scenarios served as the basis for some 30 discussions involving over 70 participants from business organizations, trade associations and political institutions. The key questions were the impact the individual scenarios would have on German companies, along with potential responses and strategic conclusions.

The scenarios

Two of the scenarios depict a world in which the EU is a forceful player – in one case, against the background of a revived multilateralism (Reformed Multilateralism); in the other, within the shifting tensions caused by the superpowers taking a confrontative approach (World with Multiple Blocs). A third scenario describes a world in which China and the US engage in a protracted conflict, with the EU caught in the middle (World in Permanent Crisis). The possibility was also discussed of both superpowers standing side by side, dominating the globe as they develop shared interests (G2). The fifth scenario (Cold Peace) was treated during the discussions as the continuation of today’s status quo.

The participants used these models to consider in concrete terms what the individual scenarios imply for German and European companies, and to develop informed strategies and longer-term responses that the business community can take. The focus here was on practical considerations: How might German firms react to a world that fragments into different blocs, or one in which the US and China resist (at least in part) the trend towards globalization? How would German players and industries adjust to these new framework conditions? The timeframe for the thought experiment focused on the year 2030. Two factors were defined as particularly relevant: On the one hand, the relationship between the US and China was considered, along with the question of whether the two superpowers would gravitate towards confrontation or cooperation. On the other, consideration was given to the future role of the European Union – as a potent shaper of world events or a pawn of the major powers.

The scenarios merely suggest events that might occur; they do not provide definitive predictions of the future. They describe which happenings are conceivable and which are probable, and illustrate how policy makers and businesses could potentially respond under the various conditions. The study reflects the content of the discussions and offers possible strategies for those grappling with such challenges within their organization.