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Globalization: Wilo CEO Hermes on decoupling and geopolitics

Oliver Hermes is chairman of the board and CEO of the Wilo Group, chairman of the board of trustees of the Wilo Foundation and chairman of the Eastern Committee of German Business. He gives his own opinion.

More and more German and European companies are getting caught between the fronts of geopolitical disputes. As a result, the global economy is clearly inhibited in its development. Unfortunately, in the future it will be determined even more than before the pandemic by strivings for self-sufficiency and protectionism. In this context, people speak of “decoupling”, a - politically wanted - decoupling of global developments.

In all its forms, “decoupling” means that multinational cooperation is declining, alliances are crumbling, economic bridges between states and thus politically different systems are torn down. The biggest loser here would be European companies. You have to oppose that.

The business model of the EU, especially that of the Federal Republic of Germany, and thus the prosperity of all of us, are based on multilateralism. In Germany, after all, every fourth job depends on exports, and in industry even every second.

However, entrepreneurs now have to prepare for the various forms of rampant "decoupling" and strategically counter it with forward-looking entrepreneurship.
The value chains must not become the plaything of politics. They cannot be switched off, changed or redistributed overnight.

The global power competition between the USA and China is the central geostrategic conflict. Trade sanctions, extra-territorial sanctions, technology embargoes and a decoupling of supply chains initiated for political reasons have devastating consequences for the hyperglobalized world economy - and especially for Europe's companies.

The geographical dimension of "decoupling" firstly describes the respective regional effects of isolation and decoupling. Second, the technological dimension includes the phenomenon that different standards for products, systems and solutions may apply in different markets. This is especially true for smart and intelligent products, when they are used, data is de facto or potentially exchanged. The third dimension describes the financial decoupling as a reduction of the dependencies on global financial and capital markets, currency and payment systems.

An exchange of blows in Alaska, sanctions battles between Brussels and Beijing, revenge on western fashion companies: there has rarely been so much tension between the USA, the EU and China. It is pulling a geopolitical test of strength.
by Max Haerder, Julian Heissler, Jörn Petring, Silke Wettach

Regional investments represent a way out of the geographical “decoupling” dilemma for companies. Instead of withdrawing from individual regions and practicing “near shoring” or “re-shoring”, global players should accelerate the regionalization of their activities. This means diversifying the company's own value chains and strengthening them regionally as well as shifting more responsibility from central organizational functional areas to local units. This transfer of responsibility in turn strengthens local entrepreneurship.

The attempt by the USA in particular to isolate China geo-economically has already failed. Because in Asia the world's largest free trade agreement (RCEP) was concluded with 14 Asia-Pacific countries at the end of last year. It sounds paradoxical, but the US's unsuccessful attempt to isolate China has resulted in a stronger decoupling of the US from Asia via the pan-Asian integration project RCEP. Here the German economy has to “stay on the ball” in order to be part of this developing dynamic in Asia.

In order to be able to stand up to technological “decoupling” and not to innovate “past” the regional standards for products, systems and solutions that are sure to emerge, companies should also diversify their research and development areas and, if possible, position them more regionally.

Some countries are also preparing for a financial “decoupling”. In doing so, they intend to position themselves more independently of international financial and capital markets of western character and dominance. This also includes systems for operational payment processing.

Globally active companies depend on functioning and secure payment systems to handle their international movement of goods and goods. Companies have to create structures that enable them to continue to pay their suppliers and employees in the respective countries or to be able to collect the money from their customers. It will also be necessary to diversify the financial value chain of companies regionally and to decentralize it accordingly. A first step would be to set up regional treasury functions.

It is all the more astonishing that the European Union and Germany have not yet developed a real geo-strategy from which foreign trade guard rails could then be mapped. Guard rails that globally operating companies need more than ever. Europe's symbol and sanction policy does not replace geostrategy.

It is an illusion and bypasses reality to believe that the world can be organized in a bipolar manner. It is more realistic to develop a responsible coexistence of the various political systems on our globe. In any case, the economic interdependencies are so diverse that “decoupling” only causes damage and destroys wealth.

To be clear: “Decoupling” is an invention of the political elite. The economy is predominantly extremely critical of these activities, as they lead to economic inefficiencies and destroy tangible and intangible assets. Unfortunately, companies are still forced to align their strategies with the different dimensions of “decoupling”, which is associated with significantly higher costs.

Excluding, sanctioning and isolating as well as tearing down bridges have never generated added value in world history. In contrast, economic dependencies and interdependencies, especially in geopolitical conflict situations, increase the willingness to compromise and thus potentially contribute to de-escalation. “Change through trade” is the order of the day and especially not in this time of increasing geopolitical tensions outdated

More on the subject: An exchange of blows in Alaska, sanctions battles between Brussels and Beijing, revenge on western fashion companies: there has rarely been so much tension between the USA, the EU and China. A new geopolitical test of power is looming behind the Cold War mentality.

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