German companies are turning to offshore production as energy prices skyrocket

Germany’s €200 billion ($197 billion) energy aid package will provide limited relief for companies and little to dissuade companies already looking to shift to cheaper manufacturing facilities abroad.

The federal government last month unveiled its energy relief package, which includes a gas price brake and a reduction in VAT on fuel to help households and small and medium-sized enterprises (SMEs) cope with rising prices.

“The proposed energy relief package will not change anything on the agenda for the time being. We still have to find alternatives,” Mads Ryder, managing director of Bavarian porcelain manufacturer Rosenthal, told Reuters.

The company, founded 143 years ago in Germany, has sought to move some of its production out of Germany to cut costs, and Ryder said the gas brake plan is still too vague to convince Rosenthal to reconsider its plans .

This week the federal government will unveil details on the gas brake and other aspects of the aid package, which is due to run until spring 2024.

High labor and other costs in Germany have prompted many companies to relocate, or consider relocating, some or all of their operations to more convenient locations in emerging European economies and elsewhere.

Lars Feld, economic adviser to German Finance Minister Christian Lindner, said the energy crisis – which has pushed up gas prices following the collapse of Russian gas supplies to Europe since Russia invaded Ukraine – is bringing such decisions to a head.

“The industry that is thinking of moving will now wait and see how the energy price brake works. It is an important psychological boost. But we will not be able to return to the energy prices that were before the (Ukraine) war,” Feld said.

As manufacturers in Germany face energy costs up to 10 times higher than two years ago, one in five engineering firms saw the risk of moving at least part of their business abroad, a survey by Germany’s IG Metall trade union showed last month .

High energy prices helped push consumer inflation in Germany to 10.9 percent in September, the highest level in more than a quarter century, which in turn is putting upward pressure on wages and increasing labor costs.

The energy relief package, which also includes a temporary electricity price brake to subsidize basic consumption for consumers and SMEs, was initially welcomed by industry associations and optimistic by some companies.

Textile maker Wülfing said it would shelve plans to shift production from Germany to Portugal or Pakistan if the government caps energy prices to levels just double what they will be in 2020.

“It will help, but we don’t yet know exactly what to expect,” said Wülfing Managing Director Johannes Dowe.

The Federal Association of Small and Medium-Sized Businesses sees no concrete signs of increased outsourcing of production abroad, since the energy price crisis is affecting all European countries.

“The situation is different with expansion plans that are currently under review,” DMB chief executive Marc Tenbieg told Reuters.

According to a study by Deutsche Bank, production in Germany will shrink by 2.5 percent this year and by 5 percent in 2023 due to rising energy prices.

“If we look back at the current energy crisis in about 10 years, we could see this time as the starting point for accelerated deindustrialization in Germany,” the study says.

Germany’s large industrial companies may relocate production elsewhere depending on costs and customers, but small and medium-sized enterprises, the backbone of German industry, will be hit harder by the crisis.

“For German medium-sized companies … adapting to a new energy world will be a major challenge that some companies will fail at,” the study continues.

The auto parts supplier Boegra from near Düsseldorf reduced production last month due to rising energy prices. The company, which has already outsourced part of its production to the Czech Republic, is now looking for a plan B.

“I’m going to the Czech Republic next week to review the possibilities of expanding our business there,” Boegra CEO Tobias Linser told Reuters on Friday. German companies are turning to offshore production as energy prices skyrocket

Fry Electronics Team

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