Relocation, reshoring, offshoring, and rebuilding: The geographical shifts of internationally producing companies resemble a busy puzzle. While BASF closes facilities at its German headquarters and invests $10 billion in constructing a mega factory off the coast of southern China, Tesla explores alternatives to production sites in China and Taiwan. Meanwhile, Stellantis plans to scale down its electric vehicle production in China, and Neura Robotics is returning to its German headquarters from China this year. The reasons for these production relocations vary by industry, from high factor costs and geopolitical risks to tariff avoidance.
Moving away from Germany, where are manufacturing companies heading? Will factory relocations increase? And what are the dos and don’ts in the relocation process itself? An expert discussion with Christian Zeller and Thorsten Holl.
Mr. Holl, you are an automotive expert who recently transitioned to consulting after 25 years at Bosch, where you served as Senior Vice President responsible for the global production site strategy in the mobility sector. Where were manufacturing relocations primarily heading 25 years ago compared to today?
Thorsten Holl: In the late 1990s and early 2000s, manufacturing relocations were largely directed towards Asia to leverage lower factor costs. It was about moving production there—think "extended workbench of Europe"—and then exporting products back to Europe for sale. The trend shifted significantly: it became more appealing to serve the Chinese market directly by establishing manufacturing in China, driven by China's growing prosperity.
Mr. Zeller, with over 30 years advising manufacturing and technology-oriented companies, you have a deep understanding of China's economy, including location scouting and production setup. Last summer, Markt und Mittelstand titled "Middle-sized enterprises fleeing to China." Do you see it that way too?
Christian Zeller: "Fleeing to China" certainly occurred and forced many suppliers in the industry to follow OEMs, as OEMs prefer or even demand suppliers to be located nearby. This proximity is sometimes planned and implemented infrastructurally with "supplier parks." Many middle-sized companies in the automotive sector have invested substantial amounts over the last 20 years to follow their OEM customers. However, if utilization rates decrease and the concept is no longer viable, it often leads to difficulties. This applies not only to automotive but also to high-end middle-sized companies in other industries, such as mechanical and plant engineering. Many middle-sized companies have had factories in China and other Asian countries for many years, but these also only make sense if utilization and productivity are optimal.
Geopolitical changes certainly play a significant role here.
CZ: Yes, China is now viewed more critically overall compared to five years ago. Its COVID-19 policies caused significant disruptions. The Taiwan situation is also being evaluated differently now than before the Ukraine crisis. Additionally, fragile supply chains—thinking of incidents like the Evergreen ship in the Suez Canal or Houthi attacks in the Red Sea—add to the challenges. Rising factor costs in China further complicate decisions for companies regarding their investments.
Are there alternatives to China? Are you noticing new favorites and trends?
CZ: Yes, I'm seeing a renewed focus on expanding production capacities, including in Turkey. Countries in North Africa, such as Egypt, are also benefiting. The United States offers advantages through the USMCA, with faster approval processes and fewer regulations. Within the EU, Portugal, for example, is experiencing a renaissance. Eastern and southeastern Europe remain popular. Unless conditions in Germany change significantly and quickly, I expect further production relocations away from Germany.
Mr. Holl, do you believe automotive production relocations will continue to increase? If so, will they continue to predominantly move towards China, or is there a shift in direction?
TH: I do believe production relocations will remain on the agenda, especially to low-cost locations. The automotive sector is also undergoing a transformation from internal combustion engines to electromobility. This means a decrease in volumes for combustion engine components and therefore, economically, existing plants may no longer be viable. Consequently, future locations could include those mentioned by Mr. Zeller. Southern Europe, I see as limited. Portugal is attractive due to lower personnel costs compared to Western Europe but logistically challenging for the automotive industry, being far from many OEM manufacturing sites. The same applies partially to Southeastern Europe. Turkey is a consideration due to factor costs, as is Romania. However, overall, it's crucial—something we collectively emphasize in Ukraine—to be aware of a country's risk profile before investing significant amounts in relocation. The question remains: Where are there cost advantages while maintaining political stability and ideally NATO protection?
You've overseen such manufacturing relocations within companies. In your view, what is often underestimated in the process?
TH: I think the perspective of the employees is often underestimated. Once relocation is officially announced and implementation begins, many employees become demotivated. Some may leave the company prematurely. This poses a critical challenge for companies: they lose necessary workforce at a crucial time for ramping up operations. Additionally, the loss of know-how from departing employees complicates matters, such as training staff at receiving plants. Thus, an important question arises: How do I keep my employees engaged throughout the relocation process? Solutions to this ultimately contribute to the economic viability of the relocation.
What is your recommendation in this regard? What keeps employees motivated and committed until the end?
TH: From my perspective, communication is key. Employees should be involved in the process from the outset. Timing is also crucial: Companies should consider early solutions for employees, potentially offering them other positions within the company. In the past, such processes have succeeded when the outgoing site received a new product line and production of older product generations was relocated to a low-cost location. However, this approach is declining as there may not be significant value creation with new generations in many areas. Therefore, retention bonuses are also a solution to keep employees motivated until the plant closure.
There are numerous hurdles companies must overcome in factory relocations. Mr. Zeller, what characteristics of the automotive industry make factory relocations particularly complex?
CZ: A significant characteristic is the strong interconnection of value creation across multiple stages. On the other hand, there are high demands for process and product quality. Complex supplier structures often pose challenges in factory relocations because products from a first-tier supplier, for example, often involve 30 to 50 second-tier suppliers. Therefore, a hurdle in the relocation process is planning, including pre-production to bridge production gaps, which are often unavoidable. In the automotive industry, series supply is crucial, often linked with concepts like Just-in-Time (JIT) and Just-in-Sequence (JIS): It must be ensured that new products arrive at OEMs daily. Additional complexities include all testing, validation, and approval processes: The degree of change plays a crucial role. Is the location new? Are the machines new? Perhaps even the suppliers? Finally, all logistical processes must be included in relocation planning.
That sounds complex but manageable. Have you encountered cases where plans completely fell apart during the relocation process due to unforeseen problems?
TH: Yes, an example was the earthquake in Taiwan: Many electronics factories could no longer operate, and supply chains were severely disrupted or severed. Or the flood disaster in the Ahr Valley: A major supplier base suddenly became unable to deliver overnight. Also, the sudden collapse of a supplier declaring bankruptcy in the midst of a relocation process is among the unforeseen cases.
CZ: Managing such supplier failures during the relocation process within the associated timeframe is the worst-case scenario. The solution ultimately hinges on the sourcing strategy: A single-source strategy and complex supplier contexts can lead to extremely dire situations.
How can companies prepare for such scenarios—specifically, the collapse of individual suppliers—ideally?
TH: Ideally, companies have a Trouble Management Team capable of handling such scenarios. Production of an ongoing series must be maintained. To avoid assembly line stoppages at OEMs, a solution may involve quickly transferring tools from one supplier to another.
CZ: Ideally, such specialized task forces also have knowledge of alternative sources. These alternative sources should have the capacity and be quickly accessible. Whether OEMs agree to this is another matter. However, except for natural disasters, proactive action is essential in a crisis. Building a robust sourcing strategy beforehand, maintaining good supplier management, and staying vigilant are all crucial. "Supplier Risk Management" is the key term. Companies should engage in risk detection and stay tuned to their supplier base.
Factory relocations are very costly—from retention bonuses to contingency costs, contract penalties, to complex logistical processes via sea routes, and much more. When can it be determined whether investments in the new location have truly paid off?
TH: Factory relocations involve very expensive elements, indeed. Therefore, decisions must be thoroughly evaluated and not taken lightly. However, if the conditions no longer favor the site's stakeholders, they must inevitably explore which scenario-based options they have and which are most advantageous. The question of profitability is a question of alternatives. Ultimately, there must be a significant impact on the P&L. If significant positive and sustainable effects are not expected, the risks of relocation are decidedly too high.
CZ: Whether a factory relocation pays off also depends on the concept. For a new location, it should consider the specific advantages of that location. For example, a manufacturing concept from a high-cost location—with highly automated manufacturing and logistics—cannot be economically transferred one-to-one to a low-cost location. If factor costs, such as labor costs, are lower at the new location, production and logistics concepts that tie production volumes, production processes, and other components closely to the advantages of the new location should be developed.
Do you understand companies continuing to relocate to China? BASF, for example, is investing $10 billion in building a mega factory off the coast of southern China despite partially closing facilities at its German headquarters.
TH: I think, initially, such a decision always lies within the discretion of each individual company. And such a decision is always sensible when companies establish their own business in the local market, rather than just using China as an extended workshop. China is inherently a very interesting market. From the perspective of the automotive industry, China is one of the largest markets worldwide where vehicles are sold, and automotive suppliers can supply OEMs locally.
Auto manufacturers like Tesla are seeking alternatives to production locations in China and Taiwan. Stellantis also intends to reduce its electric vehicle production in China. This is related to reducing geopolitical risks and imposing tariffs. Do you believe that relocations or reductions in activities from China will increase?
CZ: In terms of automobiles, I think this will largely depend on the market success of European and other non-Chinese car manufacturers in China. As it is well known, they have not been able to establish themselves in the Battery Electric Vehicle (BEV) sector so far. And if they continue to struggle in the future, German OEMs will also need to critically reassess their strategies. Essentially, VW has placed all its bets on one card. However, its dominant position from the combustion engine era, with up to 40 percent market share, currently translates to only two percent in BEVs - which is almost negligible.
What about other industries?
CZ: It varies. Take machinery and plant engineering, for example: if companies expand into a regional market from China - Asia or even the entire Asia-Pacific region - they may be able to operate economically in a future China without too much disruption. Contrary to all calls, my forecast is: China will do a lot to make this possible. Because developments in China depend not only on government subsidies but above all on enormous foreign direct investments.
There are also companies completely leaving China. NEURA Robotics is one of them: the high-tech manufacturer plans to relocate its production from China to Germany later this year. Do you know of other such cases in medium-sized businesses?
CZ: No.
TH: I'm not aware of any either. But I can certainly understand the motivation. Especially when companies possess critical know-how: how can they protect this know-how in the local market? This may not be a major concern for standard parts in the automotive industry. But considering the high turnover rates at Chinese sites, sometimes exceeding 20 percent, it becomes clear: on the one hand, it is repeatedly costly to train new employees. And on the other hand, the know-how that employees acquire can quickly spread widely in the market. Therefore, technology-leading companies must carefully consider whether they are willing to take on this risk.
Now, not only is the EU shifting: China is also expanding into new markets, including to circumvent US and EU tariffs on electric vehicles. Chinese companies are building factories in Eastern Europe and Mexico. For example, the private company BYD plans to establish a second factory in Hungary. What does this move mean for European business?
CZ: It certainly means that Chinese OEMs want to be closer to the European market. They want to minimize market barriers, reduce logistics costs, and benefit from stable supply chains. But it also clearly represents business potential for European suppliers: Chinese OEMs are a very relevant target group to tap into. The task and challenge for suppliers will be to offer innovative products at a competitive cost position.
TH: I think the establishment of manufacturing by Chinese manufacturers in other countries is initially welcome: it creates jobs and brings prosperity to these countries. German companies acted similarly in China over 20 years ago. However, this move is also a response to more challenging conditions in international trade. This includes the aforementioned tariffs. China is also considering tariffs on European products, putting pressure on individual countries. Spain politically supported tariffs on electric vehicles and could now face tariffs on pork as a major exporter. If this leads to a tariff spiral, the free trade flows, as we know them, could soon become a thing of the past.
What advice do you have for German and European companies in the current situation? How can they position themselves stably and sustainably for the future, especially regarding relocations?
TH: Generally, I think both German and European companies are well advised not to become too dependent on individual countries. It's better to build a broad portfolio of partners worldwide. Even smaller companies should ask themselves: "Do I fare better with economies of scale, trying to supply the world from one location? Or do I forego parts of it and pursue a global concept with multiple locations?" This way, they benefit from stable supply chains and increased supply security for their customers. I think "In der Triade für die Triade" is a very good approach. Companies could also consider streamlining their manufacturing at one location, for example through rental concepts rather than property purchase. What I caution against are short-term impulse reactions. We've discussed the high investments associated with relocating a plant and starting anew. Therefore, my urgent advice is to make such decisions very carefully.
Do you agree with 'In der Triade für die Triade', Mr. Zeller?
CZ: Yes. From my perspective, this will also be a lasting trend, driven by issues like de-risking and sustainability. Supply chains that are both stable and environmentally friendly will play a significant role. However, if companies wish to establish themselves at multiple locations, it certainly requires a certain scale and, above all, financial strength. Many medium-sized suppliers have painfully learned this in the past. If companies have the means, it also makes sense to engage in production at multiple sites. And also, if they have the resources - especially in management. This aspect is often underestimated. Companies will not only need new equipment and new partnerships at their new locations: They will also require strong local management.
Mr. Zeller, Mr. Holl, thank you very much for your insights.
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