A central aspect of globalization is that companies not only sell their products all
over the world, but the production of goods and services is divided into different
stages of added value at home and abroad. While direct (bilateral) supplier relations
can be understood reasonably well, the direct and indirect added value contributions
of domestic and foreign suppliers often remain hidden. Using the German automotive
industry as an example, we want to show the extent to which other countries
contribute directly and indirectly to added value in this industry’s production

Petersen, Thieß

Rausch, Thomas

Sachs, Andreas

English

A central aspect of globalization is that companies not only sell their products all

over the world, but the production of goods and services is divided into different

stages of added value at home and abroad. While direct (bilateral) supplier relations

can be understood reasonably well, the direct and indirect added value contributions

of domestic and foreign suppliers often remain hidden. Using the German automotive

industry as an example, we want to show the extent to which other countries

contribute directly and indirectly to added value in this industry’s production

Archive of European Integration

 Page 1 Future Social Market Economy  A central aspect of globalization is that companies not only sell their products all over the world, but the production of goods and services is divided into different stages of added value at home and abroad. While direct (bilateral) supplier relations can be understood reasonably well, the direct and indirect added value contributions of domestic and foreign suppliers often remain hidden. Using the German automotive industry as an example, we want to show the extent to which other countries contribute directly and indirectly to added value in this industry’s production.   Intermediate Goods versus Added Value In order to measure the foreign contribution to Germany's production, it is common practice to consider the intermediate goods that Germany purchases from the rest of the world. However, this does not correctly capture the added value contributions of the country from which interme-diate goods are purchased. If, for example, Ger-many’s automotive industry purchases car parts such as an aluminum rim with a value of USD 140 from Italy and then reprocesses them, this import of intermediate goods often also includes economic performances (added value) from other countries, for example aluminum that has been mined in China and reprocessed in Poland. The share of Italian added value in the car pro-duced in Germany is then lower than the value of the rim imported from Italy (see Figure 1). Figure 1 shows that the consideration of imports of intermediate goods does not correctly reflect the actual (indirect and direct) added value con-tributions of the suppliers. If only intermediate goods purchased from Italy are taken into ac-count, the contributions made by China and Po-land to the production of a German car are not taken into account, while Italy's contribution is overestimated. Imports of intermediate goods Policy Brief #2019/01 Thieß Petersen, Thomas Rausch and Andreas Sachs Globalization of the German Automotive In-dustry: Where Does Added Value Occur?   Page 2 Future Social Market Economy Policy Brief #2019/01 overvalue the direct supplier country’s contribu-tion to the added value of the German automo-tive industry and underestimate the contributions of all indirect suppliers. In order to correctly re-flect the actual added value contributions of all countries, the upstream suppliers and their added value performances must also be cap-tured. This can be done with so-called input-out-put tables, which show the entire global economy (see Box 1). Intermediate and Added Value Imports of the German Automotive Industry In 2014 the German automotive industry pro-duced goods worth around USD 445 billion. Products sold in Germany or abroad accounted for around USD 270 billion (hereinafter referred to as “final demand”). The remaining 175 billion in goods were intermediate goods that German automobile companies also sold at home and abroad. As described in Box 1, the added value contribu-tions from Germany and abroad can be calcu-lated for the final demand of the automotive in-dustry. An analysis of the added value contribu-tions of all the countries considered initially pro-vides information on the share of German added value in the goods produced for final demand in the automotive sector in Germany: At around 70 percent, the largest share of this added value is generated in Germany (see Figure 2). With regard to the significance of foreign coun-tries for the added value of the German automo-tive industry, a comparison with imports of inter-mediate goods shows that there are sometimes substantial differences in the significance of indi-vidual countries as suppliers of intermediate goods and services and as suppliers of added value. This concerns both the ranking of the Box 1: Calculation of added value contributions Added value contributions are calculated by using various calculation steps on the basis of global in-put-output tables, the so-called “World Input-Output Tables” (WIOT). They are provided in the “World Input-Output Database” (WIOD). The methodological details can be found in Los, Timmer and Vries (2015) and the Bertelsmann Stiftung (2018). The results of these calculations are the added value contributions of individual sectors and countries to final demand, in this case the final demand of the German automotive industry. The calculations are carried out for 56 sectors in 43 countries and the rest of the world. The currently available WIOD data are from 2014.  Page 3 Future Social Market Economy Policy Brief #2019/01 countries and their actual contribution to added value (see Figure 3). Hungary, for example, is the sixth-largest sup-plier of intermediate goods for the final demand of the German automotive industry. It purchases imports of intermediate goods from Hungary at an amount of around USD 6.6 billion. But Hun-gary’s added value contribution of only USD 1.9 billion means that it occupies only 16th place in the ranking of the most important added value suppliers. This difference is due to the fact that Hungary purchases many intermediate goods from other countries and then reprocesses them with a relatively low added value of its own. The ratio of a country’s own added value in the Ger-man automotive industry to exports of intermedi-ate goods for this industry is the lowest of all the countries analyzed here in the case of Hungary at 0.3. The situation is quite different for countries such as the US, China and Russia: The added value contribution of these countries relative to the manufactured and sold goods in the German au-tomotive industry is greater than the value of the intermediate goods that these countries supply to the German automotive industry (see Figure 4). This means that countries such as the US, China and Russia provide intermediate goods that are not exported directly to Germany, but imported from other countries, reprocessed there and then exported to Germany. In the case of Hungary mentioned above, the added value contribution is considerably lower  Page 4 Future Social Market Economy Policy Brief #2019/01 than the value of the intermediate goods export-ed to Germany for the automotive industry. The absolute difference is greater only in the Czech Republic (see Figure 5). Simulation of US Market Being Closed to German Cars On the basis of the individual added value shares, it is then also possible to estimate how great the economic damage will be for individual countries if production falls in one country. This is illustrated by the example of a complete clo-sure of the American market to products from the German automotive industry. Although such a radical development is unlikely, even in the case of 25 percent import duties on German cars in the US, this shock illustrates the added value at stake in the individual countries. As mentioned above, German au-tomakers sold prod-ucts worth around US 270 billion worldwide in 2014. Almost 28 percent of these sales were generated in Ger-many. The break-down of other sales is shown in Table 1. Should there be a complete collapse in German automo-bile exports to the US, automotive in-dustry production in Germany would fall by around USD 31.5 billion or 11.6 percent of final demand. The added value in the other countries would also decline in line with the added value contributions. The reduction in economic added value – i.e. production – in Germany and abroad is shown in Table 2. Since around 70 percent of the added value of pro-duction destined for final demand takes place in Germany itself, Germany would suffer most from the loss of ex-ports to the US. However, the pro-duction losses in European countries such as Poland, China, France and Italy would be be-tween USD 600 and 750 million, which also means noticeable economic losses.  Page 5 Future Social Market Economy Policy Brief #2019/01 In the US, too, added value would decline by around USD 600 million due to the lower demand of Ger-man automobile companies for in-termediate goods from abroad. This means that the US would have to accept the sixth-largest loss in added value of all countries in the world. A look at the US’s pure ex-ports of intermediate goods to the German automotive industry under-estimates this economic damage:  In 2014 US exports of intermedi-ate goods to the German auto-motive industry amounted to around USD 2.9 billion. This means that the US did not make it into the top ten suppliers of in-termediate goods (see Fig. 3, left).  If the 11.6 percent decline in German automobile production is applied to these exports of in-termediate goods, US exports to Germany will fall by around USD 336 million.  However, the actual losses in  added value in the US would be  much higher at around USD 600 million.                Page 6 Future Social Market Economy Policy Brief #2019/01 Conclusions Four central conclusions can be drawn from the fundamental considerations and simulated exam-ple: First: The importance of foreign countries for the economic added value in Germany cannot be sufficiently considered by solely looking at im-ports of intermediate goods. What is needed ra-ther is a calculation of the actual added value contained in the worldwide deliveries of interme-diate goods. Example of German automotive in-dustry: A mere look at imports of intermediate goods overestimates the importance of interme-diate goods from the Czech Republic, Hungary and Austria for added value in Germany. At the same time, it massively underestimates the role of the United States, the People’s Republic of China and Russia. In relative terms, the former are more transit countries for added value, while the latter are more countries in which added value originates. Second: The same logic can be applied to the appropriate significance of a sales market for the German economy or a German industry, which cannot be derived solely from German exports of intermediate goods abroad. Rather, added value exports must also be taken into account here in order to better determine the significance of the market. Example of German automotive industry: If additional trade barriers lead to less demand for German cars or car parts from the United States, an additional look at the added value share first shows that these trade barriers are likely to lead to a significant drop in sales at Ger-man automakers and manufacturers because their added value accounts for a significant share of exports to the United States. Third: The assessment of the critical depend-ence of an industry or an entire economy on an-other economy – understood as vulnerability in the event of a total or partial disappearance of supply – results from the joint consideration of trade in goods and services intended for final de-mand, trade in intermediate goods and trade in added value. The disappearance of imports of goods and services intended for final demand can have a significant impact on wages and prices, among other things. The disappearance of imports of intermediate goods would show up in the loss of government revenue from import customs; the disappearance of imports of inter-mediate goods and added value would show up in the loss of private sector sales and the result-ing loss of government tax revenue. Example of German automotive industry: If Germany can no longer import car parts from China, the corre-sponding customs revenue will be lost. At the same time, if the car parts cannot be substituted, sales will fall or employment figures at German companies that depend on these car parts will drop – as will the tax revenue or wages to be paid on this basis. These losses would be espe-cially high at companies where a particularly large amount of German added value depends on the availability of Chinese car parts. Fourth: The added value perspective makes it clear that the increasingly fragmented and com-plex international division of labor places ever higher demands on its political management. Not only the classical bilateral relations of large inter-mediate trading partners are important. In addi-tion, bilateral relations with large indirect added value trading partners and governance along the entire added value chain or at central interfaces of the chain are also crucial. Example of German automotive industry: It is not enough to concen-trate on good trade relations with Germany’s di-rect European neighbors from which many inter-mediate goods are imported directly. Economic relations with major added value suppliers such as the United States, Russia and China are also crucial. At the same time, Germany must advo-cate international rules for managing the entire automotive added value chain and prevent the escalation of bilateral disputes between countries that produce many car parts for Germany or al-low transit for them.        Page 7 Future Social Market Economy Policy Brief #2019/01 Bibliography  Bertelsmann Stiftung (Ed.) (2019). “Wert-schöpfungsnetzwerke am Beispiel der deut-schen Automobilindustrie.” GED Study. Gü-tersloh.  Bosker, Maarten / Westbrock, Bastian (2019): The Network Origins of the Gains from Trade. https://voxeu.org/article/network-origins-gains-trade   Gereffi, Gary / Humphrey, John / Sturgeon, Timothy J. (2018): The Governance of Global Value Chains, in: Gereffi, Gary (Ed.) 2018: “Global Value Chains and Develop-ment. Redefining the Contours of 21st Cen-tury Capitalism. Cambridge University Press. Cambridge. 108 – 134.   Los, Bart, Marcel Timmer and Gaaitzen de Vries (2015). “How global are global value chains? A new approach to measure interna-tional fragmentation.” Journal of Regional Science (55). 66 – 92.  WIOD (2018). World Input-Output Database. http://www.wiod.org/home  Page 8 Future Social Market Economy Policy Brief #2019/01                     Responsible for Content according to   German Media Law Bertelsmann Stiftung Carl-Bertelsmann-Straße 256 D-33311 Gütersloh   Armando García Schmidt Telephone: +49 5241 81-81543 armando.garciaschmidt@ bertelsmann-stiftung.de  Dr. Thieß Petersen Telephone: +49 5241 81-81218 thiess.petersen@bertelsmann-stiftung.de  Eric Thode Telephone: +49 5241 81-81581 eric.thode@bertelsmann-stiftung.de                     Cover photo: © roibu – stock.adobe.com  Author | Contact  Dr. Thieß Petersen  Program Megatrends  Bertelsmann Stiftung thiess.petersen@bertelsmann-stiftung.de Telephone: +49 5241 81 81218 Thomas Rausch Program Megatrends  Bertelsmann Stiftung thomas.rausch@bertelsmann-stiftung.de Telephone: +49 5241 81 81330 Dr. Andreas Sachs Prognos AG andreas.sachs@prognos.com Telephone: +49 89 9541586 702  ISSN: 2191-2467    

Globalization of the German Automotive Industry: Where Does Added Value Occur? Bertelamann Policy Brief #2019/01

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