Europe faces multiple challenges (global hotspots), revitalizing manufacturing industry in the United States | Europe | hotspots
The China Federation of Logistics and Purchasing recently released the Global Manufacturing Purchasing Managers Index for June. From regional data, the European manufacturing PMI for the month was 45.4%, a decrease of 0.8 percentage points from the previous month. It has been continuously declining for 5 months and below 50% for 11 consecutive months, reaching a new low since June 2020.
Starting from July 1st, Spain will assume the rotating presidency of the European Union. Spanish Prime Minister Sanchez recently introduced the country's priorities during his tenure, making revitalizing European industry and promoting "re industrialization" one of the important goals. Experts point out that relevant data shows that the downside risk of the European manufacturing industry is increasing. Revitalizing the manufacturing industry, Europe faces multiple challenges such as high energy cost pressures, US industrial policy shocks, and intensified international industrial competition.
Energy crisis: damaging competitiveness
On July 4th local time, the latest data released by the Eurostat showed that in terms of oil, Russia was the largest supplier to the European Union in the first quarter of 2022, with a share of 26.0%; By the first quarter of 2023, Russia's share was only 3.2%. In terms of gaseous natural gas, in the first quarter of 2022, Russia was the largest supplier to the European Union with a share of 38.8%; By the first quarter of 2023, Russia's share was only 17.4%.
Since the comprehensive escalation of the Ukrainian crisis, the EU has followed the US in imposing embargoes or price limits on Russian natural gas and oil products, causing a series of backlash effects such as energy supply shortages and intensified inflation. At the same time, the United States took the opportunity to export high priced natural gas to Europe, further increasing Europe's energy costs. For a period of time, the energy crisis has spread to the manufacturing sector, and discussions about "deindustrialization" in Europe have been increasing.
The Economist think tank in the UK believes that the persistent disadvantage of energy costs will reduce the competitiveness of European products, and companies promoting the import substitution of some intermediate products will cause a "de Europeanization" of the global industrial chain, damaging Europe's competitiveness.
Liu Mingli, a researcher at the China Institute of Modern International Relations, analyzed in an interview with our reporter that the manufacturing industry is highly dependent on energy, and energy shortages and price increases will affect the competitiveness of related enterprises and products. In the past few decades, Europeans have chosen Russian energy, which is geographically close, relatively inexpensive, and has a stable supply. When Europe seeks to decouple from Russian energy, the manufacturing industry inevitably faces a huge impact. Taking Germany as an example, its manufacturing industry is developed and highly dependent on Russian energy. In this round of energy crisis, Germany's manufacturing industry has suffered significant damage, and the economy has shown signs of recession earlier, making it less attractive to foreign investment.
According to data released by S&P Global on July 3rd, the German manufacturing PMI in June was 40.6, the lowest in over three years. The German Institute of Economics recently released a research report stating that the net outflow of foreign direct investment from Germany in 2022 reached 125 billion euros, ranking first among the 46 countries focused on in the report. This is also the highest net outflow of foreign direct investment from Germany in history. Experts suggest that this phenomenon to some extent indicates that Germany has initiated a process of "de industrialization".
Sun Yanhong, a researcher at the European Research Institute of the Chinese Academy of Social Sciences and director of the European Economic Research Office, pointed out to our reporter that in 2012, the European Union released a "re industrialization" strategy, proposing the goal of increasing the proportion of manufacturing added value to GDP to 20% by 2020. However, due to the impact of the European debt crisis and Brexit, the investment and output value of the EU's manufacturing industry have not significantly increased, and the proportion of its added value to GDP has not increased. In 2020, it was significantly reduced to less than 15% due to the impact of the epidemic, and slightly rebounded in 2021, but still lower than the level in 2012.
"If the outbreak of the COVID-19 in 2020 has disrupted the pace of Europe's're industrialization ', then the Ukrainian crisis in 2022 and the European energy crisis triggered by it will directly make Europe face a new round of' de industrialization 'threats." Sun Yanhong believes that European manufacturing faces many difficulties at the moment: first, energy intensive manufacturing is severely impacted. By the end of September 2022, the production capacity of high energy consuming industries such as aluminum, zinc, steel, and chemicals within the European Union had shrunk by nearly half due to production shutdowns or relocation. Secondly, a group of small and medium-sized manufacturing enterprises known as "hidden champions" have gone bankrupt, weakening Europe's overall innovation capability. Thirdly, the current inflation rate in Europe is still high and facing a new round of rising labor costs pressure. The European Central Bank has raised interest rates eight times in a row, further pushing up borrowing and production costs for businesses, which will force manufacturing companies to further reduce investment.
"Made in America": "A Sharp Blade"
Since the comprehensive escalation of the Ukraine crisis and the deep energy crisis in Europe, the United States has attracted many European companies to transfer industries or increase investment with relatively low energy prices.
In October 2022, French President Macron accused the United States of selling natural gas to Europe at a price three to four times higher than the domestic market price after the EU summit, claiming that the United States has gained excess profits from geopolitical struggles. Related data also shows that in December 2022, the price difference per barrel between Texas crude oil in the United States and Ural crude oil in Russia has increased from $2.97 in February 2022 to $36.7.
A European Commission document disclosed by German newspaper Bild shows that high energy prices impose a heavy burden on small and medium-sized enterprises in Germany. 1/4 of the surveyed German small and medium-sized enterprises are considering relocating their production lines overseas, especially in energy intensive industries. According to the German Business Daily, Oklahoma alone in the United States has attracted more than 60 German companies to invest and expand their business.
The unilateralist industrial policy launched by the United States has also added insult to injury to European manufacturing. Sun Yanhong stated that the US Inflation Reduction Act, which came into effect on January 1, 2023, introduced a large number of measures, including high subsidies, to promote the development of electric vehicles and other green industries in the United States. After the bill was introduced, many European companies shifted their investment plans to the United States, further damaging the European manufacturing industry and intensifying the pressure of "deindustrialization" in Europe.
The French newspaper Express recently published an article describing the US Inflation Reduction Act as a "sharp edge" facing the French manufacturing industry, stating that the bill will attract many large European manufacturing companies to invest in the US, which is "very detrimental to Europe.".
Some analysts believe that the current industrial transfer in Europe is different from the historical situation of surplus or backward industries leaving. Many companies that transfer production capacity to the United States are the core competitiveness of European manufacturing, and some green emerging industries have also moved away from Europe due to cost considerations under strong interventions such as the US Inflation Reduction Act. As pointed out by the Executive Vice President of the European Commission, Vystag, the US Inflation Reduction Act poses a serious threat to the EU in many key industries.
In fact, recent administrations in the United States have been tirelessly promoting "Made in America", posing challenges to Europe's "re industrialization" process. The Obama administration launched the "Advanced Manufacturing Partnership" program, proposing the slogan "Buy American", which has caused resistance from European countries. During the Trump administration, the United States imposed high tariffs on European products such as automobiles and steel and aluminum, creating significant trade barriers. During the Biden administration, the Infrastructure Investment Act, Chip and Science Act, and Inflation Reduction Act introduced by the United States further increased support for the country's manufacturing industry.
"The revitalization of manufacturing in Europe has always faced challenges and pressures from the United States." Liu Mingli analyzed that from a traditional perspective, the Biden administration in the United States has been vigorously promoting "re industrialization" and developing domestic industrial enterprises after taking office. Against the backdrop of a relative decline in the competitiveness of traditional industries in Europe, the policy of the United States supporting its own manufacturing industry has impacted Europe. From the perspective of emerging fields, the inflation reduction bill introduced by the United States will create a siphon effect on European green industries, attracting more European companies to invest in the United States; In the digital field, high-tech enterprises and Internet enterprises in the United States have obvious competitive advantages compared with European enterprises, which also pose challenges to Europe.
Internal issue: Important constraints
Currently, global manufacturing competition is becoming increasingly fierce, and Europe is also making efforts. For example, the European Union proposed the Green Agreement Industrial Plan to enhance the competitiveness of Europe's net zero industry. Germany's National Industrial Strategy 2030 proposes to deepen the Industry 4.0 strategy and promote the comprehensive upgrading of German industry. France has announced its "Reindustrialization" plan, proposing a series of measures to support green industries and the European automotive and battery manufacturing industries. Italy has launched the "Made in Italy" bill, aimed at promoting the development of the manufacturing industry and improving relevant systems.
Sun Yanhong pointed out that the current value-added of manufacturing accounts for nearly 16% of the GDP of the 27 EU countries. Although its proportion is not high, it plays an irreplaceable role in the EU economy. Firstly, manufacturing is the source of technological innovation and a key sector for improving labor productivity. Secondly, the proportion of manufacturing product exports to the total export volume of the EU is about 3/4, which directly determines the EU's ability to import energy and other raw materials. Thirdly, the manufacturing industry is an important support for the development of modern service industries. The added value of the "broad manufacturing industry" composed of the two has remained above 65% of the EU GDP for a long time, and the rise and fall of the manufacturing industry directly determines the development prospects of high-end service industries.
"At present, Europe's manufacturing industry has both advantages and disadvantages." Sun Yanhong said that in terms of advantages, chemistry, motor vehicles, machinery, and other traditional advantageous industries of the European Union. Most European countries are particularly skilled in specialized production and expanding into segmented markets, with outstanding abilities to gradually improve existing industrial technologies and combine them with traditional handicrafts and cultural elements. In terms of disadvantages, the European Commission clearly stated in its new industry strategy released in May 2021 that the EU has gradually lost its leading position in important fields such as artificial intelligence, semiconductors, and lithium batteries, and its development in the electric vehicle sector is lagging behind. The European market is becoming a target of fierce competition in other economies.
"Revitalizing the manufacturing industry, Europe faces some internal challenges." Liu Mingli believes that one is the cost issue. In addition to energy costs, labor costs in Europe are also relatively high, and the problem of aging population is severe. There is a relative shortage of young labor force, and the welfare system is facing serious pressure. In the medium to long term, this factor will limit the competitiveness of European manufacturing enterprises. Secondly, there is a lack of innovation capability. Compared to the United States, European financial markets operate relatively steadily, but policies on innovation incentives are insufficient, and manufacturing innovation investment and achievements are significantly lagging behind the United States. "In the future, the European Union and European countries should introduce clearer industrial policies, strengthen the leadership of the're industrialization 'process, and at the same time, it is necessary to carry out welfare system reforms to provide necessary guarantees for the development of the manufacturing industry."
"Overall, the prospects for the EU to promote're industrialization 'are not optimistic." Sun Yanhong believes that given the widespread problems of high labor and energy costs in European countries, and the continuously rising interest rates since last year, it has also increased the borrowing costs of enterprises. It is very difficult to promote the return of labor-intensive and capital intensive manufacturing industries in the future. In addition, an aging population and a lack of highly skilled labor force are also important limiting factors. In the future, Europe will continue to promote "re industrialization". It is not realistic to increase the proportion of manufacturing and industry based on the existing industrial structure. We should promote the development of emerging industries and strengthen the reconstruction of high value-added links in existing industries. This requires the EU to invest more funds in research and development innovation, especially to strengthen the guidance and incentive role of public sector research and development investment in the corporate sector, especially to encourage enterprises to achieve more breakthroughs in technological innovation in digital and green transformation.
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