One in three SMEs expect businesses to withdraw from global value chains as a consequence of the coronavirus crisis

• Above all, companies with disrupted supply chains see global value chains under pressure
• 38% of enterprises expect more protectionism and isolationism in the long term
• Diversified international trade helps to lower country-specific risks

The coronavirus pandemic has hit the global economy hard and caused international trade to plummet. As a link in global value chains, the German SME sector has also been affected by decreased demand and disruptions in production abroad. Businesses have experienced the crisis as a call to review and adapt their sales and procurement strategies. One in three small and medium-sized enterprises (32%) anticipate that many companies will withdraw from global value chains as a consequence of the coronavirus crisis. Of those that have been affected by disrupted value chains themselves, a notable one in two expect greater regionalisation of production and service provision. These are the representative findings of a current special survey conducted by KfW Research among more than 2,000 SMEs.

Around one fourth of all SMEs, on the other hand, do not expect global value chains to become less relevant as a consequence of the coronavirus crisis. This reflects the conviction that the benefits of an international division of labour will continue and an excessive focus on national or European value chains would make them more vulnerable to regional shocks.

Disruption of international trade reduces options for diversifying country-specific risks. Thus, while global recessions are rare, around the world there will almost always be a country that is experiencing an economic slowdown. However, globalisation had lost momentum even before the coronavirus crisis. This trend could intensify if political actors in many countries continue to increase their focus on national interests in response to the global recession. Among Germany’s SMEs, 38% expect more protectionism and isolationism as a result of the coronavirus pandemic. On the other hand, around one in four enterprises have adopted an optimistic stance and do not expect a long-term deterioration in trading conditions because of the coronavirus crisis.

“Enterprises that can or must focus on only a few markets are particularly vulnerable”, said KfW’s Chief Economist Fritzi Köhler-Geib. “SMEs are therefore well advised to tap into new sales and procurement markets. More than half of small and medium-sized SME exporters in Germany do business in not more than two target regions.”

But enterprises must also be able to afford to increase their resilience against future shocks. The expected short-term efficiency losses may prevent enterprises from reconfiguring their value chains if they are under high competitive pressure. After enterprises borrowed capital to bridge liquidity bottlenecks during the coronavirus crisis, they may now have difficulty accessing financial resources they need to realign supplier relationships or tap into new sales markets. “New digital technologies facilitate integration into global value chains and can help enterprises better manage risks in their supply relationships. That makes the decision to build up resilience easier for SMEs and prepares them better for the next crisis”, said KfW’s Chief Economist Fritzi Köhler-Geib.

The current analysis by KfW Research can be retrieved from
www.kfw.de/fokus (available in German only).