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Geopolitical crises, raw material shortages and sustainability regulation - these are just some of the challenges currently facing the manufacturing industry. In this situation, companies whose business models rely on large quantities of conventional energy sources more than almost any other industry must master not only the digital transformation, but also the sustainable transformation. 

The extensive renunciation of fossil fuels represents one of the most important goals for the manufacturing industry. In order to be able to cover the entire energy demand from sustainable sources such as wind, sun or geothermal energy, high investments are still necessary, especially in storage technologies. Only in this way can a sustainable energy supply also become a secure energy supply.   

The manufacturing industry has a crucial role to play in achieving the NetZero goal: it has a duty not only as an equipment supplier to the energy sector, but to industry as a whole to develop the appropriate technological solutions for decarbonisation.

Evolving into data-driven organisations and building a transparent and sustainable supply chain network are other challenges that manufacturing companies are currently dealing with. In doing so, they are confronted with an increasing shortage of skilled workers and a changing global competition policy (keyword: decoupling), which makes a reorientation necessary for many business models.

Read more about the six key challenges facing the manufacturing industry below:

The challenges for the manufacturing industry

A secure and sustainable energy supply is an existential task for the German economy. The energy-intensive manufacturing industry is particularly affected by this.

A sustainable energy supply is based on resources that are sufficiently available and, as far as possible, do not contribute to the destruction of the environment. This means an ideally complete renunciation of fossil fuels in favour of the use of renewable energies. Conventional energy sources such as coal, natural gas or oil must be extracted or mined at great expense and are finite. Even the uranium ore needed for nuclear energy will eventually be consumed.

Diversify energy sources, accelerate energy transition

The move away from fossil fuels is generally referred to as the energy transition. For manufacturing companies, the energy transition consists of the major challenge that energy must undergo a new form of production and use. In the process, the benefits should be significantly higher than the effort required to produce the energy. Long-term security of energy supply for manufacturing companies will only be possible through diversification of sustainable energy sources and an accelerated energy transition. 

Securing energy supply

Recent geopolitical events such as the Russia-Ukraine war and its impact on the global economy have triggered an energy crisis in many countries. With Germany sourcing a large part of its oil and gas needs from Russia and - like other EU countries - seeking a complete shift away from Russian energy imports, there is currently a high price increase for all energy sources. Manufacturing companies are aware of the importance of securing energy supplies for the German economy, but are facing a completely different market situation in the face of high energy prices and shortages of raw materials.

The plan for the future is clear: the entire energy demand is to be covered by sustainable energy sources such as wind, sun or geothermal energy. To realise this, a lot of money must be invested in the development of new technologies so that renewable energies can be better stored.

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To limit global warming, Germany aims to reduce its CO2 emissions by 2030 and to be climate neutral by 2045. The energy sector is one of the key industries to achieve the so-called 1.5 degree target as an essential marker on the way to climate neutrality. As an equipment supplier to the energy sector, the manufacturing industry has a responsibility to develop the appropriate and technologically necessary solutions.

Goals of the European Green Deal

The postulate for climate-neutral energy production is inevitably accompanied by a change in the processes of all sectors of the economy, since at least the source of the required energy is subject to sustainable change. With the package of measures known as the European Green Deal, the EU Commission aims to combine economic growth with ecologically sustainable economic activity. The most important goals are to develop a modern, resource-efficient and competitive economy, to stop releasing net greenhouse emissions by 2050 and to decouple growth from resource consumption. With this plan, the EU is the only major economy in the world that is in line with the Paris climate agreement.

In December 2019, EU leaders committed to the European Green Deal and the goal of climate neutrality by 2050. By 2050, all greenhouse gas emissions in the European Union are to be avoided as far as possible. In April 2021, an adaptation to this target definition took place: the EU Parliament and the Council of the European Union agreed to raise the EU climate target for 2030 from at least 40 percent to at least 55 percent less greenhouse gas emissions compared to 1990.

Reducing pollutant emissions through the circular economy

The manufacture of products by industry and commerce always uses environmental resources such as raw materials or land and also releases pollutants into the soil, air and water. The aim is to avoid pollutant emissions as far as possible through production-integrated measures, to reduce unavoidable pollutant emissions and to minimise the use of resources. This is to be achieved, among other things, through advanced approaches of the circular economy. 

Transport transition and decarbonisation

In addition to investing in new, environmentally friendly technologies and supporting industry in innovations, the introduction of climate-friendly and cost-effective forms of private and public transport is also essential. In addition, decarbonisation of the energy sector and increasing the energy efficiency of buildings plays an essential role. In order to push cooperation with international partners and achieve an improvement in global environmental standards, it is necessary to act beyond the borders of the EU.

Here, too, the manufacturing industry plays a decisive role, as it significantly supports the implementation of the set goals with technologies, product solutions and innovations - for example, by providing mobility solutions, sustainable building materials and innovative manufacturing processes.

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The field of tension of global supply chains is increasingly intensifying. The reasons for this are geopolitical events and stricter legal requirements and regulations in environmental protection and human rights compliance (Supply Chain Due Diligence Act). 

Both the Corona pandemic and the war in Ukraine have shown the West the impact that single-supplier dependency and unstable supply chains can have. Manufacturing companies in particular are aware of the need to strengthen supply chain resilience. Accordingly, resilient supply chains are a top priority in strategic decision-making. Companies want and need to be more agile and capable of quick decisions in the future.

The development of a transparent and sustainable supply chain network is becoming a decisive factor for future competitiveness. A comprehensive risk management of involved partners helps to identify internal and external risks and warns in case of deviations, anomalies as well as changed framework conditions. In this way, resilience and competitiveness of the company can be ensured as well as compliance with due diligence obligations. 

Advantages of the transparent supply chain

Digitalisation makes a decisive contribution to achieving full supply chain transparency in terms of the data basis for decision-making processes. For example, digital tools can be used to set up an automated and networked supplier risk management system that makes it possible to also integrate third parties into one's own network and to identify, assess and manage the associated risks. This can be supported, for example, by tracking tools that map the entire supply chain in real time and enable the localisation of components. The intelligent networking of tracking tools with incoming orders and production planning also leads to an increase in flexibility and efficiency.

Due to regulatory requirements, but above all due to increasing demands from investors, stakeholders and financial institutions, sustainability and transparency in the supply chain have increasingly established themselves as a decisive factor for the continued existence of companies. The success of managers and board members is also often measured by their contribution to the fulfilment of sustainability goals. 

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While the term "labour shortage" assumes a permanent shortage of labour without taking into account the skill structure, the term "skills shortage" takes into account the skill requirements of employers and employees and looks at a longer period of time. There cannot be a permanent shortage of skilled workers in adaptable markets, as employers would otherwise meet their needs in other ways (e.g. by increasing working hours) or reducing production. This is why we often speak of a skills shortage or a skills gap. This is understood as the temporary qualitative mismatch of regional and/or skill-specific labour demand with the available labour supply.

The noticeable shortage of skilled workers in Germany does not stop at companies in the manufacturing industry: in almost all sectors, occupations and regions there are serious bottlenecks in filling skilled worker positions. Companies are under increasing pressure to recruit qualified skilled workers for vacant positions.

Causes and consequences of the shortage of skilled workers:

  • Demographic change
  • Global competition
  • Lack of attractiveness of training
  • Technological advances and digitalisation

After the USA, Germany is now the country with the highest global activity and the most extensive international investments. The business model of the German economy is based on global supply chains and sales markets as well as the availability of cheap international resources and production locations. China and the USA are by far the largest production locations and sales markets for the German economy.

This business model is increasingly threatened by decoupling - the decoupling of the global economy, especially of the two major economic blocs, the USA and China - and by geopolitical disruptions. Decoupling is not a short-term phenomenon, but a long-term trend that has been fuelled by "America First" and China's strategy of "dual circulation" in recent years.

Consequences of decoupling

Decoupling of the global economy is not only accompanied by increasing import and export bans, such as on chips, network equipment and basic materials like rare earths and certain chemicals. Bans on the use of business-relevant software and limits on data transfer are also side effects. Decoupling can also lead to divergent industry and technology standards through regulatory initiatives. This could result in technology disruptions and reverse the synchronisation of increasingly networked, interacting, global systems across national borders. Separation in this context is synonymous with compartmentalisation. For German manufacturing companies operating internationally, this can in turn lead to higher costs and a loss of flexibility in supply chains and production locations.

Reorientation of business models

The changes in economic cooperation are particularly evident in Russia's war against Ukraine. Decades of economic relations are abruptly interrupted, and complex sanctions management, supply bottlenecks and price increases reveal the weaknesses of globalised value networks. But despite all the political discussions, German manufacturing companies will not be able or willing to reduce their dependence on international supply chains in the short term - even though the realisation is maturing that the risk of geopolitical disruptions has grown and requires an adjustment of business models. The localisation of the value chain in the target markets, the establishment of redundant supply structures and buffer stocks as well as the diversification of global sales and procurement markets can be possible answers to the changed geopolitical situation.

Cheaper, faster, more: digitalisation helps companies to make structures and processes more agile and to develop and implement new innovative business models. With the help of digital tools, companies can interact more easily with their customers and reach new target groups. Digitalisation also helps to increase transparency, minimise risks for business models and optimise compliance.

Digitisation as part of the corporate strategy

As beautiful as the promises are, the implementation is complex. In a digitisation process, many different topics have to be considered and countless individual questions arise. This creates the risk of approaching digitisation in an unstructured way or getting lost in details. For the success of the digital transformation, it is essential to take a holistic perspective, to identify the concrete potentials for one's own company and to proceed according to a customised, goal-oriented implementation plan, as well as to ensure the acceptance of the employees through early involvement.

Digitisation should be part of the corporate strategy in order to sustainably secure the development of the company and to make the organisation more efficient and competitive. It follows from this: Digitisation is a cross-cutting issue that affects all areas of the company and not just a project of the IT department. For the different digitisation measures, it is important to choose the appropriate processes and applications in each case, with which the identified potentials can be raised in the best possible way.

Critical to success: resilience, transparency and agility

Digital transformation is a process that continues to evolve with technological development. The pace of change has increased noticeably in recent years due to the introduction of more and more new digital technologies. It has also become apparent that the Corona pandemic has acted like a catalyst in many places. The progress of digitalisation that one would normally have expected in two years is now seen within a few months.

In addition to digitalisation, resilience, transparency and agility are becoming increasingly critical to the success of the manufacturing industry. This means that those who do not have their data and processes under control and do not streamline their business processes will not be successful in the long run. This also applies to suppliers, who are facing new challenges in the course of the change to e-mobility. Data strategy and data management are considered a basic prerequisite for new (digital) business models.

All industries are investing in the collection and analysis of data. This gives an impression of the importance the topic will have in the future. Data-driven companies are thus becoming the "new normal".

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