France Inc. Sticks With Supply Chains Despite Pandemic Fallout

(Bloomberg) -- The coronavirus pandemic may change many things about the way French car-parts maker Valeo SA operates, but its sprawling global supply chains won't be among them.

European leaders have talked of bringing manufacturing back to member countries to avoid the type of crises that quickly followed the initial outbreak in China. The shutdown of auto-parts factories there sent Europe's vehicle producers scrambling for replacements to feed assembly lines. Europe's dependence on foreign-made health-care protective gear like masks and gowns also became painfully clear.

Yet for corporate leaders like Valeo Chief Executive Officer Jacques Aschenbroich, shortening logistics routes isn't part of his plan to extricate the maker of 8 million components a day from the deep industry slump that has pushed European car sales to record lows.

“Our final customers and auto-parts clients aren't ready to pay more if our supply chains were relocated,” Aschenbroich said Sunday at the Aix-en-Seine economics conference in Paris. “So if neither of them put a value on the risk, there is no chance that supply chains will be relocated.”

Rather than put them under scrutiny, “we should pay homage to these supply chains that have showed extraordinary resilience after withstanding successive shocks like Fukushima, flooding in Thailand and now Covid-19,” Aschenbroich added.

In the wake of the global pandemic, which is causing the steepest recession in almost a century, the European Union has proposed a 750 billion-euro ($843 billion) recovery package that could aim to ensure “strategic autonomy” in key sectors and stronger value chains within the EU.

European Central Bank Executive Board Member Luis de Guindos and Dutch central bank Governor Klaas Knot have independently argued that companies should consider moving parts of their supply chains closer to home even if that meant higher costs.

At the weekend conference in Paris, ECB President Christine Lagarde said the crisis would lead to changes in manufacturing, with an estimated contraction of supply chains of about 35% and increase in industrial robotization of 70% to 75%.

Evidence on the ground suggests a massive shift back to Europe is unlikely in the near-term because of the ever-growing importance of China and the difference in manufacturing costs.

“I don't see a massive relocation,” Rodolphe Saade, CEO of CMA CGM SA, the world's third-largest container shipping company, told the conference. While the transporter is seeing greater “intra-regional” volumes within Asia and Europe, he said consumers will “continue to buy televisions and other goods made in China because they are much cheaper to build than in France and elsewhere in Europe.”

To counter Asian dominance, politicians may have to resort to hard-charging policies and subsidies to convince companies to get on board, as was the case with electric-car batteries. France and Germany have pooled efforts to kick-start a European industry.

“We've managed to build an agreement between governments -- France and Germany -- and companies to face the challenge together,” Patrick Pouyanne, head of Total SA, said Saturday at the conference. “It requires significant subsidies.”

“We've decided that it was worth taking that risk,” he said of the oil giant's participation in the project. “Why? Because one lesson for companies like us isn't relocation, but diversification of supply chains. We know about geopolitical risks, and the need to diversify.”

The political effort to bring industry home is particularly intense in France. New Prime Minister Jean Castex spent part of Saturday at a semiconductor company where he hammered home the need for more industries to relocate to safeguard jobs. French President Emmanuel Macron has tied roughly 8 billion euros in aid to the struggling auto industry to increasing domestic output.

“Industry has fled the country because we didn't take care of it,” said Eric Lombard, head of state-controlled financial institution Caisse des Dépôts et Consignations. “Last year, for the first time in 20 years, more factories opened than closed in France. This is the result of proactive measures.”

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