by Nada Welker | Dec 6, 2021 | Covid
The Corona pandemic hit the global economy hard and led to a slump in international trade. Global industrial production reached its low point in April and was around 15% lower than in December of the previous year. International trade was 16% lower in April and 17% lower in May than in December, which can be seen in the following graph:
Developments in the global economy are also having an impact on German SMEs. As part of global value chains, it can hardly escape declines in demand and interruptions in production abroad. And is therefore not only affected by the measures to contain the virus at home.
Foreign share of value added in German exports
According to a study by the Cologne-based Institut der deutschen Wirtschaft (IW), the USA is the most important supplier of imported value added, followed by China. China’s share of value added in German exports is 1.6 percent. This means that 7.8 percent of the imported products that flow into German exports come from China. Half of the value added imported for export comes from EU member states. France is the most important supplier here, with the Italian economy in second place as an input supplier for German exports.
It is true that the dependence of the German economy on individual countries appears to be rather low. Overall, however, more than one-fifth of the services for domestic consumers, companies, the public sector and the export economy come from abroad. Moreover, dependence on foreign value added is likely to be highly sector-dependent.
Of the total global services offered by the German economy, 76.6 percent come from domestic value added. By contrast, 23.4 percent comes from abroad. Of this, in turn, less than half (around 10 percent) comes from other EU countries. The USA accounts for 2.3 percent, China for 1.9 percent and the United Kingdom for 1.4 percent of the services provided, taking into account domestic value added:
As expected, dependence on foreign suppliers is particularly pronounced in mining, at 84.6 percent. Agriculture and forestry, including fishing, also obtain almost half of their value added from abroad, at 45.2 percent. In construction and services, dependence on foreign suppliers is below average at 16.8 and 15.7 percent, respectively, but still not negligible. If the domestic orientation of construction services is taken into account, the data show that a construction project worth 100 million euros purchases services worth around 1.6 million euros each from the USA and China.
Germany particularly integrated into global supply chains
Due to the current Corona crisis, domino effects with dramatic consequences for German prosperity are now expected. The reason for this are trade barriers, which have been erected above all for supplies and medical goods.
The extent to which the German economy is interwoven with global trade is made clear in a study by the Institute of the German Economy (IW). Among the major industrialized nations, Germany is more intensively integrated into international supply chains than any other country: If the openness of an economy is measured by the ratio of trade volume to gross domestic product (GDP), the Federal Republic of Germany’s degree of economic integration is 88 percent. One of the highest values in the world.
What we can learn from the crisis
The Corona crisis has had a massive impact on us. It also has significant consequences for corporations, their value chains and also on transfer pricing, which in some cases has to change very significantly in order to remain competitive.
Accordingly, in general, affected companies should consider the possible impact of adjustments in their value chains and take early action to minimize tax and compliance risks in order to best manage the crisis.
In general, one can only speculate at present about the extent and duration of the economic impact of this pandemic. German companies fear not only the loss of exports to China, but also a disruption of their own value chains: Because employees can no longer perform their work – due to illness, limited mobility or even fear. The lack of inputs from China or other countries is also an obstacle to production. The coronavirus is a demand and supply shock.
The internationalization of production and the accompanying division of labor have led to significant efficiency gains in the economies involved. Advance inputs in international value chains, the mutual transfer of technology or the exchange of knowledge via employees in multinational companies have also increased production possibilities and prosperity in Germany.
If, on the other hand, pandemics were to occur more frequently, this would sooner or later lead to permanent production shocks in the case of pronounced dependencies. Relocations back to domestic or other foreign locations would be the consequence. The partial renunciation of the advantages of the international division of labor would be justified by the associated minimization of risks from production dependencies. However, efficient internationalization leads to a diversification of risks – including the reduction of national dependencies. In this respect, international value chains should be examined primarily in terms of their sustainability and not per se.
Sustainable effects on the global economy are conceivable if economic crises of manageable duration are used as a pretext for a politically motivated dissolution of international cooperation. The argument of a restructuring of international production potentials as a result of epidemics or pandemics must also be placed in the current political framework. This is often characterized by protectionist and autarkic thinking. In many cases, the maxim of political action is not the interdependence of countries and the resulting benefits in terms of prosperity and cooperation, but the decoupling of national economies and the pursuit of economic and political independence. There is therefore a risk that COVID-19 will become another knock-out for globalization in the long run.
Supply chains need diversification – state intervention should remain limited
Structural change in value chains depends heavily on companies. One measure, for example, could be to diversify supply chains to increase resilience to production failures in upstream products.
According to Galina Kolev, an economist at IW and an expert on world trade, government intervention in market activity should only be considered in areas that are of great importance for the basic supply of the population with, for example, basic foodstuffs or medical products. National compartmentalization is not a way out, he said.
We at magility will continue to monitor the impact of the Corona crisis on value chains and the economy in general. We will be happy to keep you up to date on this.
Do you have any questions? Then feel free to contact us at any time. You are also welcome to follow us on LinkedIn to make sure you don’t miss any news.
by Nada Welker | Nov 29, 2021 | Market development & Trends
Streaming videos, shopping online or sending funny videos to friends – digital platforms are a natural part of our everyday lives. But there is much more behind these platforms: They embody the marketplaces of today and offer space for a variety of different business models. Digital platforms form the basis for social media providers, search engines, comparison and rating portals, and even online gaming. All these platforms pursue the same goal: they bring together providers and interested parties, or potential customers, in the digital marketplace and promote innovation and exchange. In short, supply and demand effectively meet. Digital platforms create new connections of customer groups, attractive markets, competitive advantages through better market development, and new sources of revenue. The platform economy creates added value and is an important building block for the convergence of industries.
Potential lies in growing market power
Digital platforms are often associated exclusively with social networks, including YouTube, Facebook or Instagram. However, the potential applications of digital platforms go much further. Consumer groups, companies and even government institutions are united there. Consequently, different platform segments established themselves. From business-to-business (B2B) to business-to-customer (B2C) to business-to-government (B2G) platforms, everything can be found on the World-Wide-Web today. Due to the increasingly steep growth figures, a wide variety of manufacturers and retailers are jumping on the platform economy bandwagon – and with good cause: Internet-based platforms take over important functions in business life and everyday life and offer enormous growth opportunities as a digital business model. The potential of digital platforms can be exploited either by setting up one’s own online platform or by simply using an already existing platform, e.g., as a sales channel. In 2020, 6 out of 10 companies in Germany were already using digital platforms or had already set one up by themselves.
Perceived risks of digital platforms
Despite the manifold advantages and opportunities, the platform economy also entails risks. A study on the importance of digital platforms for companies in Germany in 2020 found that some companies are still very reluctant to use digital platforms due to data protection and IT security requirements and a lack of qualified personnel.
There is also a perceived risk of excessive competition among platform users and operators as well as non-users. Due to the ease of market entry, competition among digital platform providers is increasing. Another risk factor is increased price pressure: In order to stand out from the competition, it is essential to offer attractive prices that are as favorable as possible compared with the competition.
The displayed statistics clearly show that it is predominantly non-users who still perceive many risks and disadvantages in the area of digital platforms.
“The winner takes it all”: One winner – many losers?
As already mentioned, the intensity of competition between digital platforms is enormous. Thus, it is not uncommon that in certain markets there can be a strong market concentration up to a monopoly position. This is also referred to as “the winner takes it all” markets. If one platform alone dominates a market, there is no longer any fair competition. Basically, 3 factors are responsible for the centralization of platform markets:
- The network effects characteristic of platforms: Platforms that already have many customers attract more and more new users due to their broad customer base. The value and also the attractiveness of a product or service therefore depends on how many other users also perceive the offer. Consequently, this platform dominates the market and can, for example, increase prices or turn previously free functions into paid ones.
- The scale effect: It describes the reduction in production costs due to a company’s economy of scale, which is reflected in falling unit costs of products or services. In terms of digital platforms, it is about collecting and analyzing data. Basically, providers who have a lot of data at their disposal have a decisive competitive advantage.
- Is the effort of a platform change worth it? – The lock-in effect: The time or financial effort required to switch from one platform to another is often perceived as an obstacle. For this reason, many users avoid switching.
These effects have an impact on the centralization of the market and have a negative impact on the intensity of competition. For small and medium-sized enterprises (SMEs), this makes it increasingly difficult to assert themselves in the market.
The basic rule in the world of platforms is: Grow so fast and strong that no one can compete against you, because size is the most important competitive advantage there.
Data collection and analysis is an essential part of the value chain of platforms. In the process, an almost unlimited amount of data is collected and further processed and made available with the help of algorithms. The more information that emerges from data analysis, the easier it is to determine the interests of the target group and thus develop a suitable advertising strategy. Accordingly, the extensive use of data enables continuous optimization and increased efficiency in product design, manufacturing, sales, marketing and other important areas of the value chain. Data – if it can be stored and meaningfully processed – therefore has an economic value. While individual data records do not yet represent a usable value, large data volumes, so-called Big Data, are becoming a resource. The need to provide usable data has not been a secret for a long time. For this reason, some service offerings are seemingly offered free of charge. In return, the user provides free access to his data. Accordingly, the competition of digital platforms in the product space is becoming less and less important and is increasingly focused on the data space. Consequently, the architecture of platforms is evolving into a data economy infrastructure.
[infobox headline=”Key points in a nutshell”]
- Digital platforms embody the marketplaces of today and provide a basis for the development of a wide variety of business models.
- Digital platforms pursue the goal of bringing providers and potential customers together in the digital marketplace.
- Internet-based platforms perform important functions in business and everyday life and offer enormous growth opportunities for digital business models.
- There are 3 factors responsible for the centralization of platform markets: Network effects, economies of scale and lock-in effects.
- The extensive use of data enables continuous optimization and increased efficiency in product design, manufacturing, sales, marketing and other key areas of the value chain.
[/infobox]
A look into the future of the platform economy
Currently, one can speak of an evolution of the platform economy: Existing platforms continue to develop and attract more and more users, others are being pushed out of the market, and new platforms are being established. Looking to the future, it is still possible and advisable for a company to enter the platform economy. However, it is important to always keep an eye on technological developments, as change is the only constant in the digital world market. Furthermore, 53% of the companies in the aforementioned study state that there should be uniform rules for digital platforms throughout Europe in order to promote their use. In addition, half of the companies would like to see increased legal certainty. Likewise, public funding and support for cooperations with other companies to build digital platforms are perceived as important.
In 2030, it will hardly be possible to do without digital platforms. These will be indispensable mainly in the business sector. However, companies should also act with an eye to the future – if they have not already done so – and jump on the platform economy bandwagon.
We at magility always keep an eye on the latest developments in the platform economy and keep you up to date. If you have any questions, feel free to contact us!
To make sure you don’t miss any news, be sure to follow us on LinkedIn.
