In the current landscape of global manufacturing, there have been three major regions playing the most vital roles, namely Western Europe (European Union), North America, and East Asia. These regions jointly dominate the industrial and value chains of the global manufacturing industry.
In 2005, the added value of manufacturing in North America, the EU, and East Asia-Pacific accounted for 23.8%, 24.3%, and 31.5% of the world respectively. By 2017, the proportion of North America dropped to 17.8% and the EU fell to 16.8%, while that of the East Asia-Pacific increased to 45.6% in 2019. This also reflects that since the beginning of the new century, the most significant changes in the global manufacturing industry are the rise of emerging market countries and the relative decline of developed countries. The global manufacturing pattern is still evolving, and Europe, which is now mired in an energy crisis, undoubtedly adds more variables to this shift.
Since the outbreak of the Russia-Ukraine war, energy costs in Europe have continued to soar, and some European factories that have long relied on cheap Russian energy have been shut down, especially in fertilizer, steel, and other energy-intensive industries. For instance, in 2020, the sales of chemical products in Europe were EUR 628 billion, ranking second in the world after China. More than 40% of the raw materials of the European chemical industry come from natural gas, and the sharp reduction in the supply of Russian gas has a huge impact on it. According to statistics from Germany for September, among energy-intensive industries, the steel industry has reduced production by about 5%, the chemical industry reduced by 8%, and the fertilizer industry has even shut down 70% of its production capacity. However, reducing production is not a long-term solution. Faced with the energy dilemma in Europe, many companies have begun to actively adjust their production and business locations. Recently, some European manufacturing companies have begun to plan to relocate their production lines.
As energy price in the United States is much lower than that of Europe, the cost of using natural gas for instance is estimated to be only one-eighth of Europe's. This makes the U.S. one of the important destinations for European companies to relocate their production lines. Some media, as things stand, see that the major winner of the European energy crisis is the U.S. economy, and high natural gas prices are pushing European manufacturers to turn to the U.S. A growing number of European companies that produce steel, fertilizers, and other basic commodities are also relocating their operations to the U.S., where energy prices are more stable.
The development of the current situation indicates that China may also become benefitted from the adjustment of the layout of European enterprises. China not only has a complete industrial chain system, a huge market, and gradually accumulated technical capabilities, but also possesses energy cost advantages and stable supply. However, the stance of some European countries towards China is deteriorating. To cite an example, German Chancellor Olaf Scholz has publicly pledged to reduce the dependence on China and cancel relevant subsidies and financial support for German companies to invest in China. That being said, it should be noted that compared with the political prejudice against China held by the government, local European companies are more rational, and many companies are still insisting on increasing their investment in China. Volkswagen Group, for instance, has built a new factory in Xinjiang, while BMW has invested billions of dollars to open a new factory in Shenyang. In addition, Audi has opened its first electric vehicle factory in China, and AstraZeneca’s global R&D China center will be set up in Shanghai.
The current tendency of European manufacturing to relocate has aroused local concerns about the "de-industrialization" of Europe, and such a concern is certainly not unreasonable. In recent years, Western Europe has obtained large-scale, low-cost oil and gas resources from Russia, which also constitutes one of the core competitive elements of the European industry. German manufacturing becomes renowned throughout the world, not only because of its sophistication but also because of Russia's cheap natural gas. However, Europe's days of cheap energy are over. What follows will be a substantial structural adjustment of the European manufacturing industry. Such an adjustment may not be limited to the relocation of many energy-intensive industries. With the relocation of the supply chain, upstream and downstream enterprises will also be affected. The question is not if European "de-industrialization" will take place, but how long it will last.
The most crucial element in Europe’s "de-industrialization" is energy. In comparison with other parts of the world, Europe is relatively scarce in fossil energy. According to BP energy statistics, as of 2020, the total reserves of the three major fossil energy sources of coal, oil, and natural gas in Europe were 141.247 billion tons, accounting for less than 10% of the world's total. Even with an energy decoupling from Russia, Europe is unlikely to restart fossil energy development on a large scale. Now the EU plans to increase natural gas imports from Qatar, the United States, Egypt, West Africa, and other countries and regions. At the same time, many countries have begun to reboot or extend coal and nuclear power projects. Some of these countries also plan to speed up the development of clean energy and expand the promotion and application of renewable energy in key fields such as power, industry, construction, and transportation. The EU has previously declared that it will completely get rid of its dependence on Russian fossil fuels by 2027, expressing that it will vigorously subsidize the development of green and renewable resources like hydrogen energy. These measures range from short-term emergency adjustments when faced with the tightening of energy supply, to medium- and long-term structural strategies aimed at strengthening European energy independence. On the whole, there is a long adjustment period for these supply-side strategies, and their effect is also constrained by multiple factors. Some analysis points out that such a painful adjustment period of Europe's energy transition may last 5-7 years. During this period, high local energy prices and unstable supply in Europe will be the norm.
Under such a backdrop, the European energy problem tends to be long-term. In addition to adding pressure on the Europeans, the hard days of the regional manufacturing industry will linger. In the face of high production costs, companies will either halt production or seek another way out through industrial transfer. It would not be long before the great exodus of European manufacturing companies became increasingly common, and eventually cause structural damage to the European industrial system. When this happens, the European manufacturing industry may even be at risk of a complete decline.
Final analysis conclusion:
The energy shortage issue facing Europe will not be solved in the short term, making the trend of the relocation of European manufacturing companies more apparent. This may eventually change the landscape of the global manufacturing industry. If China can seize this opportunity, it could prove to be advantageous for the country.
