EU companies say China poses biggest risk as supplier

According to an ECB study published this Monday, European Union companies consider China to be the country that poses the greatest risk to both their own supply chains and those working in their sector of activity.

This is the conclusion of a study carried out by ECB (European Central Bank) economists among 65 very large EU companies, which is included in the organization’s next economic bulletin and published this Monday.

“China was the dominant source of critical inputs and also the most frequently cited country in terms of perceived risks to both a company’s supply chain and its industry,” ECB economists said.

Critical production factors are those items without which a company would be unable to complete its operations, suffer significant delays, or degrade the quality of the product or service it produces.

About 55% of companies indicated that their company sources critical inputs (wholly or largely) from a specific country or countries.

The vast majority of companies noted that sourcing critical inputs from China poses a high risk.

Already 40% of companies surveyed by the ECB said that their companies source critical inputs from China and that this entails high risks, while almost 65% highlighted that China is creating or could create bottlenecks in their sector’s supply chain.

The ECB’s questionnaire for companies takes into account that these risks may include the risk of a sudden escalation of economic or political tensions between countries (for example, between China and the US).

And that it would lead to bans on the import or export of specific products, to stricter local content requirements, “in the context of the EU-UK trade agreement, to supplies to countries at (risk of) conflict.” , in the risks of climate change, etc.”

The study also said that 8% of companies said their company sources critical inputs from the US, while only 5% considered this a risk.

Other countries that pose or may pose a risk to EU companies are Taiwan, India, Turkey and Russia.

Most EU companies believe that it will be very difficult to replace critical production factors from high-risk countries such as China.

However, most companies are now pursuing “strategies to reduce their exposure” to China.

Changes in the location of production and cross-border purchasing of inputs initially pushed up prices, but ECB economists expect the impact to subside over the next five years.

The ECB says these changes are cheaper if they are carefully planned, but some of them had to be introduced unforeseenly and suddenly, such as in response to the pandemic or Russia’s invasion of Ukraine, and so have been more costly in the ECB’s view.

Almost 40% of EU companies plan to move their production outside the EU and locate it close to the final production site or country of sale.

At the same time, other companies are considering moving their production to the EU due to geopolitical risks in other countries.

Demand and costs are motivating companies to expand beyond the EU.