Presence and production in the world’s markets

As one of the market leaders in industrial sensor technology and explosion protection, Pepperl+Fuchs has long been one of the most internationalized companies in electrical automation technology. CEO Dr.-Ing. Gunther Kegel is also 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, are we now actually experiencing the geopolitically induced beginning of the end of globalization?

We are indeed hearing, especially from political leaders, that they see an end to globalization. On the industrial side, however, we cannot understand this. We see that many medium-sized companies are successful in the Chinese market, but are also very committed in America. For these companies, it is hard to imagine giving up one of these markets. Globalization is an old hat for the electrical engineering industry. Made in Hong Kong, Made in Japan – these were the labels on consumer products in the 70s and 80s of the last century. There is hardly any other product that can be globalized as well as an electrical engineering product. At Pepperl+Fuchs, for example, we could no longer build a product if we were allowed to use raw materials and components from only one trading area. We need international suppliers – from the USA, from China, from Europe. Our industry is very closely intertwined, unlike the mechanical engineering industry, unlike the software industry. To turn this process backward, you would have to turn back not just 20 years, but 50 years of globalization. We lack the understanding of why we should now anticipate things that may not happen politically for another 10 or 15 years, or even at all.

Pepperl+Fuchs does not produce in China…

Our company has never produced in China because we were already successfully established in the region with our Asian production sites in Singapore, Indonesia, and Vietnam. Since we already generate a very large share of sales of almost 20 percent in China, we do not want to allocate large parts of our production there as well. As a company manager, you have to be careful not to become too dependent. Other companies produce in China primarily for the Chinese market. But there are also German companies that successfully serve the Chinese market and at the same time serve the global market from their production sites there.

It is difficult to decouple from China today already because of a negative premonition. If politics forces companies to do so, they are generally quicker and more creative to find a solution.

” As a business leader, you already have to be careful not to become too dependent.”

The so-called “diversification” of markets, the global distribution of risks – what kind of time horizon does such a strategy need?

Medium-sized companies do 15 to 25 percent of their business in China and purchase raw materials on the same scale – unbundling this would be a real Herculean task that is almost impossible to accomplish. It takes a lot of time to do that. We set up our first manufacturing facility in Asia in 1979. That was 43 years ago, and I won’t be able to decouple that overnight. If we produce in Singapore, Indonesia, and Vietnam, that gives us access to the Chinese market. So in the event of an escalation, we only lose market access and not production capacity in China. This is not the case for all companies that are heavily invested in production and generate a very large share of their earnings there. Unbundling will become dramatically more difficult.

But can’t globalization be simpler? Aren’t supply chains far too complex today?

Yes, you can see a clear change in thinking here. What you can do first of all is reduce the internal complexity if you have too many transport operations between individual production sites. But not in the sense that we have just heard at Covid: “We are now bringing the products back to Germany or Europe”. That hasn’t happened at all in electrical engineering, and it doesn’t make any sense at all. If I bring my products from Vietnam or Singapore back to Germany, then I’m dragging my supply chains behind me like rubber bands. If I source 30 percent each of my raw materials from Europe, the USA and Asia, I can’t manufacture anywhere in such a way that my supply chains are shortened. They are just aligned differently. There are reasons why we manufacture in many countries! First, we have become too expensive in Germany to produce internationally competitive electronics. The second reason was the proximity to the really fast-developing markets. And for years, those markets were in China, and they are still in Southeast Asia. So you have to bring some of your structures and value creation to these countries as well. 20 percent of the world’s population lives in China, so we also want to do 20 percent of our business there in the medium term. What’s wrong with that?

“There are reasons why we manufacture in many countries! First, we have become too expensive in Germany to produce competitively. The second reason was proximity to rapidly developing markets.”

On the subject of the supply chain at Pepperl+Fuchs, what has the situation been like in recent months?

We have had to make significant cuts in delivery reliability over the last year and a half. But not because of the supply chains. The real pain point is the chips, the microcontrollers. There, capacities have not grown nearly as fast as the purchase volumes. So for many μ-controller semiconductors, we’re still living in what’s called allocation: we’re told by the manufacturer how much we can get. That seems to be easing a bit, but we’re still a long way from normalization. This is an effect that was only indirectly initiated by Corona. Covid briefly caused a drop in orders in the industry, including the automotive industry. The semiconductor manufacturers used the capacity thus freed up to absorb the dramatic growth in information, communications, and consumer electronics. Then, at the end of 2020, the industry and the auto industry jumped back on at the same time. The automotive industry needs many more chips for electric cars, and we need the same power semiconductors once again in the charging infrastructure. In industry, according to Corona, digitalization has advanced dramatically in our devices. So we came back with significant growth aspirations. But our capacities were fully occupied, and in the semiconductor sector, it unfortunately takes two to three years before an investment decision leads to a productive foundry for chips. And this quickly costs 10 or 20 billion U.S. dollars. You don’t do that overnight. So by 2021, everything has piled up. The quantities we were supplied with were nowhere near enough to cover our growth. In the case of microcontrollers, it will probably take until the end of 2023 before we are back to normal.

Rising energy prices – how serious is the situation in the industry?

Of course, the situation depends first of all on the energy intensity of the company. For companies like us that have about one percent energy intensity, it’s very annoying, but not existential. For companies that have an energy intensity of 10 to 15 percent, it means that there is no more profit, there is no more EBITDA. For the basic industries, which now have to contend with American competitors, for example, who pay only one-third of the local energy costs, the situation is threatening to their very existence. For the energy-intensive companies, even subsidies will come too late. A number of them will move to other countries or have already done so. Smaller companies will disappear from the market. This is not yet the end of the world for industry, but if the basic industry is no longer there as an inspiration for innovation and efficiency, a whole part of business will also disappear for us. Our system is highly interconnected. Taking out one building block triggers major disruptions in the overall structure. This reduces innovative strength and negatively impacts the conditions in which we operate. Nevertheless, this is not a sudden deindustrialization, but a slow, probably irreversible process. For the rest of industry, the high price of energy is encouraging efficiency and automation projects. That’s an advantage for mechanical engineering, for electrical engineers.

“Our system is highly interconnected. Taking out one building block triggers disruptions in the overall structure. That reduces innovation and negatively changes the location conditions.”

How do you see international competitiveness against this background?

The question is not: Are we competitive with Spain, France or Italy? We have to deal with Korea, Japan and China, with Indonesia and perhaps soon with the countries of Africa. We will lose ground if we do not improve our own location factors, such as energy and labor costs. We need, as the Singaporeans always put it, more “ease of doing business. Much of what the EU comes up with in terms of requirements, specifications and regulations is not manageable. Regulation in the area of supply chains, the Cyber Security Act, the Data Act will require a great deal of documentary effort from us, for which we will have to deploy the best people. What beautiful products they could develop instead!

Do we even need to continue to grow as we have in the past?

We live in an affluent society that many simply take for granted. In the rich countries of Europe, but especially in Germany, there is a growing idea that climate change can be counteracted in a targeted manner primarily by foregoing prosperity – by solving problems through a decline in prosperity and by foregoing consumption. That’s a narrative that doesn’t work out there in the world. You cannot convey to an Indian or Chinese that we have claimed prosperity and mobility for ourselves as a matter of course for more than 50 years, but that their desire for individual prosperity, consumption and mobility can no longer be fulfilled. The narrative must therefore be: How do I manage to provide prosperity and individual mobility for all people without plundering the planet? With general electrification, the expansion of renewable energies, a consistent increase in energy efficiency and the development of circular economies, we have the greatest levers. Consuming something that is not renewable can no longer be an economic form for eleven billion people in the future. We can only truly achieve circular economies through innovation and investment, not by saving and cutting consumption. Only growing economies will be able to finance this urgently needed transformation.

“In the rich countries of Europe, there is a growing idea that climate change can be countered primarily by foregoing prosperity. That’s a narrative that doesn’t work out there in the world.”

Energy efficiency – in demand worldwide Solutions for a sustainable and future-proof industry are in demand at all production sites around the world

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