Round-table discussion, moderated by Mag. (FH) Dieter Aigner, Managing Director of Raiffeisen KAG, with the experts

• Dr Klaus Friesenbichler, Senior Researcher in Industrial Economics & Competitiveness, WIFO Austrian Institute of Economic Research

• Mag. Alexander Toth, Fund Manager, Raiffeisen Capital Management

• Mag. Peter Vanek, Head of the Steel/Energy/Automotive/Agriculture Business Unit, ÖBB Rail Cargo Group

• Mag. Valentin Wedl, Head of the EU and International Affairs Department, Vienna Chamber of Labour

Mr Friesenbichler, current geopolitical tensions, such as the conflicts surrounding the Strait of Hormuz, clearly demonstrate just how vulnerable global trade routes are. Against this backdrop, the question arises as to how Austria, as an export-oriented economy, can safeguard its supply chains and make them more resilient. Could you give us a rough overview of the current situation?

Klaus Friesenbichler: We are living in a time often described as an era of multiple crises – and I think we’ve all had enough of these numerous challenges. Fewer crises would do us all good, allowing us to return to calmer waters. What we are currently witnessing has built up over many years – even before the pandemic. For a long time, globalisation and internationalisation led to a more efficient distribution and use of means of production. Product diversity has grown, and we have been able to shop internationally with good value for money. What is often overlooked, however, is that globalisation has stalled since shortly before the 2008 financial crisis. Structurally, little has changed since then. A few years ago, The Economist described this state of affairs as ‘slowbalisation’. At the same time, products that were then still regarded as medium-tech – such as simpler mobile phones – have, through digitalisation, evolved into high-tech products that play a central role today. Today, trade dependencies are increasingly being used as an instrument of power to advance political interests. The previous picture of fair competition based on WTO rules no longer exists in this form. For small, open economies such as Austria, or a rules-based system such as the EU, this poses a major challenge, particularly as the global order is currently dominated by two centres – Beijing and Washington.

How can Europe defend its interests in this tense situation?

Klaus Friesenbichler: The EU continues to try to enforce its rules, even vis-à-vis China, but China is increasingly refusing to recognise them – for example, regarding supply chain regulations – and is thereby creating new realities. Strategic behaviour, particularly on China’s part, is also evident in the control of raw materials and the problems in the automotive industry. These developments have been a long time coming and are based on a comprehensive plan that is even publicly known. The challenges relating to semiconductors, competitiveness and access to raw materials are part of this geopolitical power struggle. China is employing a mix of technology policy, financial support and other instruments to this end. Our rules-based systems were not sufficiently prepared for this and remain limited to this day.

Mr Wedl, are we even still able to properly grasp this crisis and act accordingly?

Valentin Wedl: Yes, I think so. Take the climate crisis, for example, which is not currently at the centre of the political agenda. The superpower, the US, has a president in Trump who, amongst other things, is a climate crisis denier. He denies man-made climate change and pursues his policies with great determination. The impact of this is so massive that one can only watch in disbelief. Nevertheless, until recently there was still a consensus that we are facing a climate crisis – in the US, Europe and also in China. China recognises the urgency of the climate crisis and is investing heavily in technological advancements, with the country now being a global market leader in many sectors. However, this can also pose problems in terms of industrial policy. Europe, too, has a Green Deal, which, regrettably, is increasingly being dismantled by the current political majorities. One element of the Green Deal is the due diligence requirements for supply chains, which have caused quite a stir.

Could you elaborate on that?

Valentin Wedl: There has been a great deal of discussion about due diligence obligations in supply chains, though unfortunately not in a truly open manner. Instead, the response was often simply: “The EU regulates too much!” Yet this was a lengthy process involving many stakeholders, including those from industry. Nevertheless, a consensus emerged that was also important for investment and the capital market: we must operate and invest more sustainably. To achieve this, it is essential to make supply chains transparent – it simply won’t work without that. From a labour law perspective, we were also able to successfully emphasise that sustainability regulations must take into account not only environmental but also social aspects. Basic standards, as defined by the International Labour Organisation (ILO), should therefore be integrated into supply chains. Of course, there are contradictions and challenges involved, but the consensus was clear: this is the only way we can tackle the major challenges of our time. This process was supported and driven forward by a majority in Europe, including countries traditionally oriented towards free trade and capitalism, such as the Netherlands. It was a path towards modernising European capitalism, with a view to promoting new technologies, tapping into new markets and improving quality. Yet this progress is currently being sidelined by economic interests that are more traditionally and fossil-fuel-oriented. For investors, this means a great deal of uncertainty, as it is not just a matter of operating more sustainably, but also of shaping the economic and profit model of the future.

Mr Vanek, you deal with supply chain issues on a daily basis. How are the events in the Persian Gulf affecting the ÖBB Rail Cargo Group’s logistics and transport strategies?

Peter Vanek: The impact of the blockade of the Strait of Hormuz, the war in Ukraine and customs policies is enormous. Around 80 per cent of our transport operations are international in nature – whether transit traffic, imports or exports. But even if none of these crises existed, we would still have more than enough challenges to tackle. Take, for example, infrastructure, which is lagging significantly behind in Europe. Whilst entire cities are springing up in China within five to ten years, negotiations here over rail network expansions often take decades – and frequently the projects are never even implemented.

What are these challenges?

Peter Vanek: They relate, for example, to the European rail network. Whether in Germany, Slovenia or Eastern Europe – construction is taking place everywhere, or at least plans are in the pipeline. However, there is a lack of coordinated planning. As a result, it can happen that a line is being upgraded in one country, for instance, without neighbouring countries being informed in good time. Even within Germany, there is no coordinated regional planning. Europe is therefore reliant on an infrastructure riddled with numerous bottlenecks. Some of these are dramatic, such as the impending closure of the Passau section – one of the most important routes to the North Sea ports – which begins in the middle of the year. Added to this are differing security systems and digitalisation initiatives, which are at various stages of development – ranging from initial ideas to workable solutions. Unfortunately, there is a lack of will, funding and willingness to tackle the necessary changes. Railway operators often think in a piecemeal manner. Our aim is to support our customers – particularly large Austrian industrial companies – as effectively as possible so that they can compete on the global market. This can only be achieved if raw materials arrive on time and finished products are delivered punctually. Often, it is not just quality and price that determine a product’s success, but also whether it is available at the right time. Effective logistics – particularly at an international level – is a decisive competitive advantage.

Speaking of global companies: Alex, how do you assess this issue from the perspective of investors and capital markets?

Alexander Toth: Over the last 20 to 25 years, we’ve essentially been moving in just one direction: globalisation, just-in-time management and supply chain optimisation. Goods and raw materials were transported cheaply and automatically across the globe. Companies that had a good grasp of their supply chains – such as digital natives like Amazon – had clear advantages here, even if they were not entirely unaffected by crises. Chronologically speaking, the first major upheaval from a capital markets perspective began with the Covid pandemic. Suddenly, people were no longer allowed to travel, and there was an unexpected oversupply of oil, as production could not be scaled back immediately. At times, the oil price even fell into negative territory because of a lack of storage capacity and the need to fulfil contracts. Shortly afterwards, the container ship ‘Ever Given’ blocked the Suez Canal, exposing the vulnerability of just-in-time supply chains. When key components such as server racks and graphics cards – as well as everyday goods like bicycle parts – are stuck in just a few containers, the entire system can be thrown into disarray. This shows that it is not only price but also availability at the right time that is crucial – one example of this is the chip crisis, which hit the automotive industry particularly hard.

Does the race for the best AI technology also depend heavily on the availability of modern chips?

Alexander Toth: Yes, but interestingly, this sector is dominated by just a few global players, with production concentrated almost exclusively at TSMC in Taiwan. Taiwan has secured this technological supremacy politically – the so-called ‘Silicon Shield’. The capital market rewards companies that have integrated and maintain tight control over their supply chains, both upstream and downstream. Those who know exactly where raw materials come from and how sustainably they are produced are considered more resilient to external shocks. In this context, sustainability also means minimising risks, ensuring production continues uninterrupted and maintaining stability throughout the value chain.

Do we need to rethink the entire transport system?

Klaus Friesenbichler: Yes. We need to become more resilient. For years, both the capital markets and the political sphere acted as if risk did not exist. For example, our dependence on oil and gas – particularly from Russia – has long been recognised. In the short term, however, we should have said: we are paying a risk premium for diversification, even though oil and gas were cheap and supplies seemed secure. That would have been difficult to push through politically. Naturally, it would have drawn criticism from investors and consumers – the international competitiveness of energy-intensive companies would have been called into question, and households would have been faced with rising electricity and gas prices. It is understandably difficult to demand such safeguards for an abstract risk. Against this backdrop, a lot is now happening. There are many companies that are making a serious effort to build more resilient supply networks and to diversify wherever possible. Many industrial firms do not source on a just-in-time basis. Lead times of half a year to three-quarters of a year tend to be the norm. This creates a small buffer in the event of supply bottlenecks. Recurring supply problems, such as those affecting antibiotics, must be resolved at a structural level.

What can be done about it?

Klaus Friesenbichler: The standard answers are: build up stock levels in the short term, seek alternative suppliers from other regions – and aim for technological substitution in the long term. If we were less dependent on oil and gas and relied instead on renewable energies, we would have far fewer problems, because demand would be met in a different way. However, we are heavily dependent not only on energy but also on many raw materials. Substitution is often technically impossible, and even when it is possible, it creates new dependencies that are often hidden deeper within the production network. Particularly when it comes to so-called key technologies, we are heavily dependent on raw materials in the vast majority of cases. This applies not only to the extraction of raw materials but also to their processing. Even if we try to reduce our dependence on China and recover raw materials through a circular economy and recycling, we cannot process all of them ourselves. Thus, we slip from one dependency into the next. A genuine solution therefore requires a comprehensive mix of policy measures that tackles the issue at the heart of the production network and resolves hidden dependencies.

Mr Vanek, how does your company tackle these challenges? How can resilience and efficiency be improved?

Peter Vanek: For us, resilience certainly does not mean simply sitting back and watching. Our main focus is on actively supporting our customers in increasing their resilience. Although building up stock levels may sound sensible in theory, it is often not feasible in practice. Stockpiling is very expensive, and many of our customers’ sites simply do not have the space for it. For example, the stock coverage for key raw materials in Austrian industry is often just a few weeks. In other words, we’re not talking about months during which large quantities of raw materials could be stockpiled. The average stock level is more like two to three weeks – so things can quickly become tight. The idea of simply setting up large warehouses is therefore not a realistic option for many companies. In the natural gas sector, of course, the situation is different, as storage is possible there. But for the materials we mainly transport, there are clear limitations.

How do you build resilience?

Peter Vanek: Primarily through partnerships. In the past, many customers had just one or two suppliers; today, there are often ten or more, supplying from different regions and via various routes. One example is the transport of raw materials for the mining and steel industry: a large proportion still comes across the Ukrainian-Hungarian border, but ports such as Vlissingen, Rostock and Monfalcone are now also being used. Austrian industry is therefore adopting a highly flexible approach and spreading its supply chains across multiple channels – a situation that was quite different 20 years ago. This diversification is also recognised by investors. It makes a huge difference whether a company sources 60 per cent of its raw materials from a single supplier or whether the largest supplier accounts for just 15 per cent. This is precisely where we come in and actively support our customers. If Europe cannot meet certain requirements – such as ‘Green Steel’, which some customers in America import – the steel is imported from countries such as India. The notion that Europe supplies high-quality products whilst other countries produce cheap, inferior goods is long outdated. We are competing with manufacturers who often have lower standards of health and safety and environmental protection. We urgently need levers – for example, in relation to energy costs – to remain competitive. If energy prices rise, traction current becomes more expensive too, and with it our product. The railways must take action here, but the regulatory framework must also be adapted. At the moment, we often find ourselves in free fall.

What does this development mean for the world of work – are we even competitive with our regulations, Mr Wedl?

Valentin Wedl: I am convinced that the framework provided by labour law does indeed help to reduce dependencies. Unlike countries such as the United Kingdom, Austria has remained an industrial nation despite its strong services sector. Our industrial sector has continued to develop well in close coordination with Germany. This deliberate decision, taken some 20 or 30 years ago, to maintain our position as an industrial nation was very important – particularly with a view to reducing dependencies. There is still much to be done in this regard, but the key objective remains that we continue to develop as a strong industrial nation.

In your opinion, what adjustments would be necessary to strengthen this industrial resilience in Austria?

Valentin Wedl: We must also consider measures that do not strictly adhere to traditional free-trade thinking. After all, we can only keep our industry in Europe if it can hold its own against unfair competition and dumping from other countries. Without this protection, we will not succeed in becoming more strategically independent. This is a key focus area that is linked to many other factors. Our industry is also successful and productive because it is able to operate within a stable legal and labour law framework, as well as within a welfare state environment. This also applies to other highly developed countries such as Sweden, Denmark and Switzerland. There, too, industry faces the challenge of adapting and further developing its business models. This requires capital.

What sort of sums are we talking about here?

Valentin Wedl: Mario Draghi, the former ECB President, highlighted in his widely acclaimed report that Europe would need to invest an additional 700 to 800 billion euros annually to catch up with other regions – and there is now even talk of a trillion or more. Yet so far, little is happening in this regard. Many countries, including Austria, are currently unable to make large-scale public investments. At the same time, we are failing to set up a European fund or to discuss Eurobonds openly and honestly. These topics are often taboo, out of fear of Europe’s supposed excessive debt. Yet with such funds, we could carry out urgently needed infrastructure projects – such as the expansion of railway lines or, above all, the rapid expansion of energy networks.

Alex, you’re in regular contact with many companies – how are they dealing with this issue?

Alexander Toth: One clear trend is the shift towards reshoring or nearshoring – in other words, moving production closer to the sales market in order to better control supply chains. We’re seeing this particularly strongly in North America, for example between the US and Mexico, where goods can be transported within 24 hours. However, working conditions and regulatory standards there are not always comparable to those in Europe. Global transport is undergoing change, but raw materials remain a major problem. Copper, for example, is essential for the energy infrastructure that we urgently need. The US has been able to expand its fossil fuel resources through fracking and the reactivation of old oil fields, but this remains a finite and controversial resource.

What must Austria do to strengthen its resilience?

Klaus Friesenbichler: As a small, open economy, Austria cannot pursue an isolated resilience strategy – that would be neither sensible nor realistic. The European division of labour across various sectors is particularly important. In the consumer goods sector or with regard to medicines, individual measures can be taken, but overall, a purely national strategy is hardly feasible. The first thing we can do is to strengthen the single market. This has been discussed for years, yet time and again it falls short when it comes to concrete measures. Where, for example, is the banking union? We encounter regulatory and financial hurdles, particularly when it comes to promoting and scaling up innovative companies in high-tech sectors. New legal forms such as the ‘EU GmbH’ (Note: ‘EU Inc.’) are also being discussed. The exact details remain to be seen. At national level, the Austrian Federal Government has taken an important step with its industrial strategy. The focus now is on implementation, particularly in the area of funding. The aim should be the transformation of the economy. However, simply handing out grants is not enough to become a frontrunner in a new industrial ecosystem.

What else is needed, Mr Wedl?

Valentin Wedl: We are part of the European Union, with around 450 million residents, most of whom have strong purchasing power – this is an enormous opportunity that we must capitalise on. Alongside other levers such as stockpiling, diversification and subsidies, which are also well summarised in the Austrian industrial strategy, it would be a major step to re-examine our traditional model of being the world’s leading exporter. This model makes us highly dependent and, from the current perspective, is also taking its toll. It won’t work without a public sector that plans ahead and thinks beyond a five-year timeframe. This applies above all to the financing and expansion of infrastructure. Europe has major shortcomings in this area, particularly in rail transport. We must overcome these taboos and recognise that the public sector has learnt a great deal and can drive new projects forward in partnership with private companies. And we should not make bureaucracy the scapegoat for all our problems. That is too simplistic and does not help.

Mr Vanek, what do you believe needs to be done?

Peter Vanek: If Europe wants to become more resilient and ensure that its major industrial centres remain attractive to investors, we must create the conditions to handle as much freight as possible by rail. The Koralm Tunnel is an important step, but we need further flagship projects, even if their impact will only become apparent in five or ten years’ time. What is absolutely essential is better coordination of infrastructure development at European level. Although such projects do receive funding, it is incomprehensible that this funding is not tied to alignment with the trans-European corridors. There need to be clear incentives that only apply if projects are coordinated within a European context.

Alex, a brief closing remark from you.

Alexander Toth: We need to refocus on our strengths: innovation, diversity and a wide range of input factors. We must work together to harness this potential. If we can capitalise on these synergies, we have enormous potential. As for the European capital market, I hope it recognises and promotes these opportunities. At present, growth is taking place primarily in other markets – in the US, with its high-tech hubs, and in China, which is securing many key technologies for itself and becoming a leading driver of innovation.