Companies are flying back to home markets. Will it be enough to stop deindustrialisation?
The European industrial sector has sent out mixed signals over the past couple of years. Mega investment projects with a strong reshoring and strategic angle hit the headlines, promising to bring along new investment and create thousands of jobs. In the background, the deindustrialisation of European legacy industries has stubbornly continued.
The net effect of these two forces is hard to gauge. Aggregate figures point to a protracted weakening of European industrial activity. But the wave of mega projects cannot be dismissed either.
It certainly remains a pretty scattered phenomenon. It is an early phenomenon too, with most of these projects just moving their first steps. Because of that, their impact on official statistics has yet to fully manifest.
However, greenfield foreign direct investment (FDI) figures based on investment announcements can already provide some insight over their impact on the trajectory of the European industry.
Decades of decline
The deindustrialisation of advanced European economies has happened over decades. The narrative is, in large part, driven by European multinationals deciding to offshore their production to lower labour cost locations — particularly after China joined the World Trade Organization in 2001.
The manufacturing share of the EU-27 countries’ gross value added bottomed out in the wake of the global financial crisis (GFC) in 2009, when it fell to only 13.2%, according to Eurostat. Not without hiccups, it has started a slow recovery since then, bouncing back to 15% in 2022 — which remains below the levels touched in the mid-1990s, when the data series started, but still the highest value since 2004.
Deindustrialisation has been most pronounced in Europe’s legacy sectors. While the spike in energy prices caused by Russia’s full-scale invasion of Ukraine in 2022 has subsided, executives in energy-intensive industries such as chemicals, steel and aluminium argue Europe is less competitive than elsewhere. In 2023, electricity prices for energy-intensive industries were almost double those in the US and China, according to the International Energy Agency.
In terms of employment, the European manufacturing sector lost three million jobs between 2008 and 2023, Eurostat figures show.
The FDI signal
The data is consistent with this narrative. The number of cross-border investment projects across the EU in the manufacturing sector peaked before the GFC and never fully recovered, fDi Markets figures show.
However, the Covid-19 pandemic marks a watershed moment in FDI figures that has only partially been reflected in aggregate production statistics. If the total number of announced cross-border investment projects in European manufacturing has remained subdued when compared to the boom years leading up to the GFC, it’s a different story for capital expenditure (capex) figures. FDI capex in the sector has skyrocketed since 2021 and exceeded the $100bn mark for the first time in 2022, before doing it again in 2023 – even in the pre-GFC bonanza, they never exceeded $63.4bn, fDi Markets figures show.
In other words, fewer projects with a much higher capital intensity. That outlines the traits of the wave of mega projects that has been mounting since 2021.
In particular, FDI data shows there are plans to reshore production to Europe, particularly in strategic sectors where governments have offered incentives to companies to build factories, such as semiconductors, electric vehicles (EVs) and pharmaceuticals. This reflects how the Covid-19 pandemic highlighted vulnerabilities in globally spread supply chains and the need for companies to have facilities closer to end consumer markets in Europe.
It’s worth noting, though, that this data from fDi Markets tracks investment announcements. The long-term impact of these investments on the European industrial trajectory will depend on two main factors: installing and ramping up production according to plans, and their real power as anchors for the development of whole industrial clusters. Both present many challenges.
The development of these facilities requires large quantities of raw materials, water and power, and often deep pools of highly skilled workers that are not necessarily readily available in their geographies. They are also industrial behemoths that may be hard to incorporate into local economies.
Among others, Intel is finding it difficult to hire for its new €30bn fabrication plant (fab) in Magdeburg, Germany; STMicroelectronics and Global Foundries are facing local opposition for the water uses of their new fab in Crolles, France; and the Irish are up in arms against the development of new data centres — another key piece for the regional security of the European digital economy — which already consume a third of the national electricity production.
Besides, regardless of public incentives, the capex-intensive nature of these investments also means their technology and business case has to be rock-solid. In June, carmaker BMW scrapped a €2bn contract with European battery sensation Northvolt. The Swedish company is reviewing its aggressive expansion plans across Europe accordingly, its CEO told the Financial Times a few weeks later.
The second factor regards the gravitational pull that these mega projects will be able to exert on local industrial ecosystems. If they want to serve regional strategic interests, they can’t exist in a vacuum. In this regard, they face an uphill battle as the know-how and industrial footprint of these strategic industries is currently limited in Europe after decades of offshoring. Their role in partnering with education institutions to train the local workforce, as well as nurture and grow local suppliers, will be vital.
Ultimately, these mega projects have the potential to be game-changers for local and regional economies. They can turn the tide on deindustrialisation, provided they become anchors for the development of new industrial clusters, and help pivot existing skills and companies. But the transition will not be smooth as legacy industries continue to struggle and new industries face the typical challenges of fledgling markets — see the recent dip in EV demand.
In terms of outlook, it’s day and night from 10 years ago, when offshoring seemed to have sealed the fate of European industry. But in terms of the short-term transition, things may get worse before they get better.
fDi
