Is Europe losing its factories?

The energy crisis, a result of the boycott of Russian gas in the wake of the war in Ukraine, forced companies to drastically rework their business models and, in some cases forced businesses to temporarily cease production. Take industry stalwart Duralex, a major French glass producer, which only reignited its furnaces in early April.

Whilst there has been a significant fall in energy prices since last winter, this still-reeling sector now has to contend with higher refinancing costs and a weaker global demand picture, as recession fears linger. The Eurozone Manufacturing PMI Index, a wide measure of industrial and manufacturing activity, has shown activity contracting at an increasing pace for eleven months straight, signalling a decline in industrial activity and demand across the continent.

This, in conjunction with Europe’s typically slow, bureaucratic policy and overregulation, which were criticised by Chairman of the Board of Executive Directors at BASF, Dr. Martin Brudermüller for hindering business growth in 2022, has proved too much for some businesses. This includes the chemical production giant, which is set to close a number of its manufacturing plants in Germany, in favour of China, where a new €10bn plastics engineering plant is being constructed.

China is proving to be a serious threat to the European manufacturing industry. In particular, the shift towards electric vehicles is proving to be a boom for Chinese automakers, who have invested heavily in battery-powered electric vehicle technology. This is of major concern to European carmakers, who remain a vital part of the European economy and could collectively stand to lose €7bn in annual profit by 2030 according to Allianz, thanks to China’s ever increasing market share.

And it’s not just China that is proving to be a threat. As part of a wider trend of deglobalisation and protectionism, the US has adopted the approach of onshoring its economy by providing massive stimulus to companies willing to set up shop on American soil. The $369bn Inflation Reduction Act includes generous tax incentives for renewable energy projects, threatening to entice some of Europe’s most valuable renewable energy technologies and derail progress towards an ambitious 2030 Climate Target Plan, which aims to cut European greenhouse gas emissions by at least 55%.

It’s not all a one-way street however, European policymakers have recognised the potential for widespread capital flight and are offering their subsidies to remain competitive. The European Chips Act, a stimulus package of approximately €43 billion aims to develop the European semiconductor industry and those heavily dependent on chips, ranging from healthcare to technology.

But these proposals have sparked a wider debate, surrounding one of Europe’s key economic flaws, an incomplete and dysfunctional monetary and thus political and trade union. Proponents of the plan highlight its importance to the European economy and its sovereignty, as emphasised by French President Emmanuel Macron’s recent article in the Financial Times, which paints a patriotic picture of a Europe, united through leading-edge industrial technology and visionary policymaking.

However, the subsidy programmes approved by Brussels in the wake of the war in Ukraine (subtly amended in March 2023 to the Temporary Crisis and Transition Framework to help unlock additional funding for the manufacturing sector), have disproportionately supported the domestic French and German economies, winning the lion’s share of 77% available funding under the program. European periphery nations have often felt short-changed in their bid to win economic support from Brussels, and political instability is rarely seen as an effective method of encouraging business investment. 

While Europe’s manufacturing industry will not disappear, it is certainly facing significant challenges. Europe’s focus on becoming a leader in green innovation technology, proposing policies such as the Net Zero Industry Act (which aims to cut through some of the bureaucratic red tape for companies involved in the manufacture of net-zero technologies) means that the European manufacturing industry is likely to adopt a more specialist approach and European policymakers are keen to ensure that Europe remains well-placed to benefit from the transition.

Adam Fisher, Investment Analyst