Manufacturing

We shouldn’t have to rely on others for COVID-19 masks and respirators; we should have strategic manufacturing capabilities based right here in Europe.

Europe was the home to the industrial revolution, and continues to be a major manufacturing power. However, the European manufacturing industry is no longer the world leader, with half of global manufacturing output, by value add, coming from Asia, most of that being from China.

Utilising the increased demand for geopolitical gains, China embarked on a long term strategy to secure knowledge transfer and move up the value chain into R&D and value adding activities, conditioning access to its manufacturing capabilities and market through forced knowledge transfers and massive copyright infringement. As a result of disciplined execution of this strategy, China has now reached a share of 28% of global manufacturing output, and controls the largest manufacturing ecosystem in the world. Globally, Japan, Taiwan, South Korea and the United States, while representing a smaller share of manufacturing output, are major competitors and suppliers to Europe’s high tech sectors.

More fundamental competition comes from the emerging economies, where manufacturing is focused on core manufactured goods, and intermediate components relied on by European manufacturers. In recent decades, most global corporations have exacerbated this problem by offshoring manufacturing capabilities to countries like China, India and Mexico, leveraging the resulting labour cost arbitrage to increase profitability and competitiveness.

While offshoring remains a viable business strategy, events of recent years have revealed the weaknesses of relying on foreign manufacturing.

The disruption caused by the COVID-19 pandemic put into perspective the vulnerability of relying on a single point of failure in the national supply chain, without any domestic control. At the beginning of 2020, Europe faced a severe and immediate crisis of respirators, masks, and basic medical supplies, which cost tens of thousands of European lives.

The ongoing backlogs in ports worldwide, and the lodging of the Evergiven in the Suez Canal, showed how much just in time supply chains could collapse in the face of global shocks. When these supply chains travel across the globe, and through places like the South China Sea and the Middle East, they can never truly be considered secure. Europe needs to have the capability to provide for itself from domestic manufacturing, and to direct international aid and investment to create sources of imports that remain more within Europe’s sphere of influence and ability to be protected from instability elsewhere in the world.

European support for Ukraine following the 2022 Russian invasion has been hampered by a lack of munitions production lines. In a world where high tech semiconductor supply lines were the recognised strategic vulnerability, it was revealed that Europe could not keep up with the demand for the humble 155mm artillery shell. This has obvious implications for continental security and defence.

The availability of a strong domestic manufacturing ecosystem capable of rapid production of military equipment in case of necessity is a critical aspect of military planning and national security. If the new technology cannot be produced on-demand and at requisite scale, this directly impacts military strategy. Dual-use technologies both are impacted by these manufacturing limitations, and represent a potential solution. Military advances (such as weapons systems, transport or communications) often align with dual-use domestic technologies; co-opting advanced domestic technologies for military purposes is a key lever for technological advances. Investment in civilian production lines for dual-use technologies can keep lines open and ready in cases of military necessity.

Industrialisation and manufacturing are sources of highly skilled, high paying jobs. Within Europe, high-tech manufacturing is currently concentrated in the “Blue Banana”, an area stretching from Lombardy in Italy through the Rhineland up to Liverpool in the United Kingdom. The natural cycle of business and infrastructure investment largely keeps industrialisation in this area. In turn, this drives migration within the European Union, as engineering, technician and manufacturing jobs are concentrated with the northwest of the continent, depriving other parts of Europe of a major driver of economic development.

Unfortunately, Europe is currently over-relying on foreign partners for manufacturing. China has shown its intent to utilise its control over the world’s largest manufacturing base as a strategic weapon. Europe cannot allow its prosperity and security to be held hostage by other countries for political gains, and nor can it allow itself to keep its prosperity concentrated in a small portion of the continent, with the political and economic challenges this creates.

As a result, Europe should immediately develop a cohesive manufacturing strategy, recognizing the unreliability of the current global geopolitical landscape and the inherent risks in a single point of failure in its supply chain.

To address this situation, Europe should establish a long-term strategy considering the following needed actions:

• Reshore advanced and/or critical manufacturing capabilities from countries that are strategic competitors or vulnerable to global insecurity
• Create special investment zones and lending regimes for Regional Development Zones (RDZ) and Strategic Development Areas (SDA).
• Regional Development Zones should be implemented to provide European level investment and promote private investment in Southern, Central and Eastern Europe as new bases for European manufacturing. These should be across national borders, including for example a Danube River RDZ, where regulations and standards are established to promote the development of industrial clusters.
• Strategic Development Areas similarly should encourage private and public investment in vital technologies, such as telecommunications, defence and healthcare, especially where necessary to reshore intermediate production stages, where earlier and later processing, manufacturing and finishing work is already conducted in Europe.
• Increase investment in infrastructure, education, and vocational training to support the logistics and skilled labour needs of the RDZ and SDA.
• Help emerging countries in Africa and Western Asia build competitive manufacturing ecosystems which can be integrated into the European supply chain without the same vulnerabilities in dealing with countries in the Far East.

By acting on the policies and priorities outlined above, we can achieve multiple beneficial outcomes for the world, including creating jobs, supporting emerging nations to improve their economies, and helping build resilience in the global supply chain.