Companies are involved in a global competition to diversify

Diversifying the supply chain

Editorial team: Dr Borchert, the geo-economic situation is tense, and security issues have moved to the top of companies’ agendas. Many companies are now looking for new partners and markets to make their supply relationships more diverse and therefore more stable. What strategic role can the Global South play for companies? 

Dr Borchert: Many companies are still finding it difficult to fully grasp the causes and correlations of the new security situation and to deal with them successfully. This is very clear in the debate on the diversification of supply chains. Building more diverse supply chains is logical in theory – but in practice it is a major challenge to assess which partner countries and players are secure and stable and to what extent, and then to actually build such lasting supply relationships and business partnerships. This is particularly true when companies first enter markets that are still largely unknown to them, which is often the case with markets in the Global South.

Building new partnerships

Editorial team: How can new partnerships still be developed successfully? 

Dr Borchert: Particularly when companies first enter a new region in the Global South, they should start with a thorough analysis of the various local interests. Decision-makers in our companies often think interests are obvious – developing countries are happy to have any investors at all, so I am in a strong negotiating position. This is a misunderstanding. 

Editorial team: How is it a misunderstanding? 

Dr Borchert: This overlooks two things. First, local actors certainly have different interests as well. The political and economic elite pursue their own agendas. This might be the economic development of the country. But it could also be very concrete economic or political interests of the individual actors.  

Editorial team: And the second aspect? 

Dr Borchert: Second, it is especially important to realise that in many places, we are late – perhaps too late. China and Russia have had a presence in many countries in the Global South for decades. You need to consider their interests, too, if you want to invest locally and build relationships yourself. This can result in contradictions: I might find myself in new, direct or indirect dependencies – but I actually want to diversify in order to reduce my existing dependencies. At the same time, it is not just German companies and the German economy that have an interest in diversifying business relationships. Many countries in the Global South also want to become less dependent on individual industrialised countries or their companies and are therefore pursuing a diversification strategy. The Gulf States, for example, are skilfully using both to expand their political and economic interests in the Global South.

‘Companies must realise that they are in a global geo-economic diversification competition’

Editorial team: But that’s good news for starters: everyone involved has an interest in building diverse, sustainable and stable business relationships –  the countries and companies in the Global South as well as ourselves in the West.

Dr Borchert: Yes, in principle. However, it only works if you are aware of the interests of all those involved and can specifically work to bring them together in a way that benefits everyone. Companies need to realise that, from a global perspective, they are in a geo-economic diversification competition. This means that German companies should ask themselves specific questions such as: what can I offer that appeals to this country, to this industry, to these companies that I want to work with? Am I a strategically attractive ‘diversification option’ for local actors? 

Dialogue between business and politics

Editorial team: You mention the political relationship-building involved. How important is it, and how political should companies be in how they think and act?
 
Dr Borchert: When a company enters this interwoven framework of intergovernmental relations and geo-economic interests, it is automatically on highly political terrain. At the same time, policy-makers are frequently unable to achieve their goals in development, infrastructure or security policy issues without cooperating closely with companies. We must recognise that the geo-economic changes that we have to cope with require a rethink of regulatory policy, and that this must redefine cooperation between companies and policymaking – not just at home, but along companies’ entire global value networks. 

Editorial team: How could companies and politicians work together even more effectively here? 

Dr Borchert: In my opinion, we need ongoing dialogue between business and policymakers, beyond crisis summits and ministerial visits. We need a reliable platform to discuss the various interests and strategies, where we can honestly ask what it is that we want to achieve. How should we deal with contradictions and conflicts of interest? What specific forms of government support are essential in order to successfully tap into markets in the Global South? 

Recommendations for companies

Editorial team: Do you have any recommendations for how companies, particularly SMEs, can prepare for this new role as international actors that you describe? A German ‘hidden champion’ SME from Swabia, say, would not have these skills inherently. 

Dr Borchert: First I have to know what my risk appetite is, so I need to find out which countries I can really venture into. How diversified must I be to continue to be successful? What do I know about the new markets that I need to tap into as a partner for raw materials or technology? How do I establish a presence? Is it financially feasible for me to build relationships, networks and business collaborations? Second, it is worthwhile exchanging ideas with local representatives of other German companies, the German Chamber of Commerce and Industry and contacts at the ministries. Third, in the medium term, a hidden champion SME should also invest in its own capacities that allow it to understand the new environment.