Raw materials partnerships prepare SMEs for crises

Global trade conflicts, geopolitical tensions and competition for critical raw materials are forcing small and medium-sized enterprises in particular to find new supply partners. Dr Axel Dreher, professor of development economics, explains why raw materials partnerships in the Global South are set to increase in strategic importance in future – and how SMEs can successfully establish them.

Editorial team: Dr Dreher, which sectors in Germany are especially important and most severely affected by shortages in raw materials?

Axel Dreher: The key sectors involved in the energy transition are particularly dependent on imported raw materials: electromobility and battery production require lithium, nickel, cobalt and graphite. Wind power and electronics require rare earth, germanium and magnesium. Mechanical engineering relies on materials such as tungsten and copper.

Editorial team: China secured access to these raw materials early on. What options does Germany have left?

Dreher: China has consistently expanded its position on the global raw materials markets through its state-affiliated companies over many years and controls a large part of the processing sector. Germany has a market economy, so it is up to companies to take the initiative. But they have long relied on a functioning global trade system — as have policy-makers. Resilience arises not only in crisis management, but also through forward-looking planning. It is now becoming clear that structures like this cannot be corrected in the short term: new mines or refineries do not spring up overnight and without funding. The state can set the framework for required investments, for example through export credit guarantees, international trade agreements, the establishment of strategic raw material reserves, or default guarantees. But there has often been a lack of political will to do so thus far.

Editorial team: Many companies have failed in the past to make their supply chains more resilient. Why?

Dreher: For decades, companies have prioritised efficiency and cost reduction over robust processes. Just-in-time was seen as the standard process, while stockpiling was regarded as wasteful. To make matters worse, Germany has relied too heavily on a small number of partners, such as Russia or China. Now we are paying the price for that.

Editorial team: What do resilient partnerships and supply chains actually look like for small and medium-sized enterprises?

Alex Dreher: Essentially, the goal is to identify and reduce dependence on individual suppliers, materials or locations – that is the best protection against the next crisis. The first step is transparency: companies have to know where their materials are coming from, all the way back to the source of the raw materials. The second step is diversification: it is not just a matter of having several suppliers. Companies also have to ensure that the suppliers are from different regions – and this applies to every single processing step. Companies also need to know where critical bottlenecks may arise. Stockpiling and access to alternative materials are key components here. Long-term supply contracts are also playing an increasingly strategic role. While they do tie in companies even when demand declines, without contractual commitments, large customers are generally supplied first if there are bottlenecks.

 ‘It is not about cheap raw materials, but about creating value together.’

Editorial team: In your view, what is the key to a strong partnership between companies and stakeholders in the Global South?

Dreher: Companies must not reduce these partnerships to the procurement of cheap raw materials. They should aim for joint value creation and long-term gains for both parties. Companies benefit because they have secured their supply, and partner countries benefit from planning security, financing opportunities and development prospects, for example through training, knowledge sharing or participation in infrastructure projects. Successful partnerships are best established through small pilot projects that test quality and cooperation.

Editorial team: Are there any partner countries that are particularly suitable for building up strategic reserves of raw materials?

Dreher: This depends on the raw materials required and on local factors, such as political stability, legal certainty, energy supply and infrastructure. The cooperation between Germany and Namibia provides a successful example in the fields of rare earth and hydrogen. Chile, Indonesia and Brazil are also of interest for partnerships.

Editorial team: How can companies implement social and environmental responsibility in partnerships?

Dreher: From an economic perspective, this is a balancing act. High standards incur costs and can lead to competitive disadvantages in the short term. Policy-makers should therefore provide targeted support to companies that achieve sustainable production. Child labour and forced labour are, of course, unacceptable – yet it is important to acknowledge local realities. Development happens step by step: as the economy and production grow, more jobs and higher incomes are created – and with them the financial and institutional means to improve labour standards, environmental regulations and education. In the long term, responsible partnerships pay off – they help build reputations, ensure market stability and provide better financing opportunities. Companies that have proof of sustainable supply chains also have advantages with banks and customers.