Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Logistics Is Splitting Nearshoring from Offshoring
Transcript
- Lucas: We talk a lot about Eurozone supply chains shortening. Nearshoring to Eastern Europe, reshoring to Germany, that sort of thing. But the data coming out of the July PMIs tells a more complicated story — companies are actually splitting their strategies in two. Luna: Splitting how? You mean some things come closer and others go farther away? Lucas: Exactly. The same German automotive supplier that opens a plant in Poland to build wiring harnesses for EV batteries is also opening a plant in Vietnam to assemble lower-cost interior components. Same company, two opposite moves, announced in the same quarter. Luna: So it's not a simple 'we're bringing everything back to Europe' story. It's more like a bifurcation. Lucas: Right. And the Vanguard FTSE Europe ETF, ticker VGK, which is a broad proxy for Eurozone equities, has been grinding higher — up about 0.8 percent over the past five days, trading around 88 and a half. That's priced in some optimism about industrial resilience. But beneath that surface, supply chain strategies are anything but uniform. Luna: What's driving the split? Is it just cost versus risk, or is there something more structural? Lucas: It's both. On the cost side, labor in Vietnam is still a fraction of Eastern European wages — we're talking maybe 250 to 300 dollars a month versus 800 to 1,200 in Poland. But the risk side is about Hormuz, about shipping disruptions, about the fact that the ECB's rate path is now 'extremely volatile', as the July 15 statement put it, because of renewed tensions in the Strait of Hormuz. If you're shipping goods from Vietnam, you're exposed to those routes. If you're shipping from Poland, you're not. Luna: But Poland is also closer to demand. If you're selling into the Eurozone, having a plant in Wrocław instead of Ho Chi Minh City means you can respond to orders in days, not weeks. Lucas: Exactly. And that's the fork. For components where speed and customization matter — wiring harnesses, battery modules, sensors — companies are putting them closer to the final assembly line. For components where cost is the dominant factor and lead time is less critical — plastic trim, simple stampings, textiles — they're going further out to Southeast Asia. Luna: So nearshoring and offshoring are happening simultaneously, not as opposing trends. Lucas: Correct. And the data from the Eurozone PMIs for July bears this out. The manufacturing PMI ticked up slightly, but the details show that input lead times are lengthening for goods sourced from Asia while shortening for intra eu sourcing. That's a direct signal of the split. Companies that can source regionally are doing so, and they're seeing faster deliveries. Companies that are still tied to long-distance supply chains are experiencing delays. Luna: Does that show up in the trade data yet? I know the Eurozone trade surplus has been masking industrial weakness, but I haven't seen a breakdown by source region. Lucas: It's starting to. Eurostat data from June shows that imports from China fell about 6 percent year-over-year, while imports from Poland and Czechia rose about 4 percent. That's not a massive shift, but the direction is clear. And the dollar has been strengthening — the trade-weighted dollar index is around 120.5, down slightly from 120.75 a couple weeks ago, but still elevated. That makes dollar-denominated Asian imports cheaper for Eurozone buyers, which actually incentivizes offshoring, not nearshoring. Luna: So the currency environment is pulling in the opposite direction of the risk environment. That must create a lot of strategic uncertainty. Lucas: It does. And it's one reason why the ECB is struggling to set a clear rate path. Services inflation is sticky — still running around 4.2 percent in the Eurozone — but goods inflation is falling. Wholesale prices actually declined 0.3 percent in June, driven by a drop in gasoline. So the ECB has to weigh the risk of keeping rates too high against the risk of supply shocks from Hormuz pushing up energy prices again. Luna: And that feeds back into supply chain decisions. If you think energy costs are going to spike again, you might want to shorten your supply chains to reduce logistics exposure. Lucas: Exactly. Some companies are effectively placing two bets. A battery plant in Poland hedges against energy price volatility because transport is shorter. A low-cost assembly plant in Vietnam hedges against labor cost inflation in Eastern Europe. It's not hedging in the financial sense — it's operational hedging. Luna: Which sector is doing this most aggressively? I'd guess automotive, given all the EV transition pressure. Lucas: Automotive is leading, but industrial machinery and electronics are following. I spoke with a sourcing executive at a major German industrial conglomerate — off the record — and he said they now have a 'twin-track' sourcing strategy for every component category. If the component is strategic, it's sourced within 500 kilometers. If it's commodity-like, it's sourced from the lowest-cost country that isn't China. That's often Vietnam or Indonesia now. Luna: Interesting that they explicitly exclude China. Is that tariff-driven or risk-driven? Lucas: Both. The EU's anti-subsidy tariffs on Chinese EVs are part of it, but the bigger factor is the risk of supply disruption. Companies don't want to be too dependent on any single country. That's been a lesson since COVID. But they also don't want to over-concentrate in Eastern Europe, because wages there are rising fast — Poland's minimum wage went up 18 percent this year. Luna: So Southeast Asia becomes the safety valve for cost pressure. But that reintroduces the very supply chain risk they were trying to reduce by leaving China. Lucas: It does. And that's the tension. Companies are trying to balance multiple risks at once: geopolitical risk, cost risk, lead-time risk, energy risk. There's no single optimal solution. So they're building parallel supply lines. Luna: Speaking of building, this kind of strategic thinking — understanding how the economy actually moves — is exactly the kind of thing that keeps this show ad-free and independent. If you find yourself thinking about supply chains differently after listening, and you want to support that, you can head over to buy me a coffee dot com slash fexingo. No pressure, just a way to keep the conversation going without commercials. Lucas: Yeah, thanks for that. And honestly, it's listeners who point us to these sourcing anecdotes that make the show better. So if you're in procurement or logistics, we'd love to hear from you. Luna: Alright, back to the data. Lucas, you mentioned the PMIs — anything else in the July release that signals how this fork is playing out? Lucas: Yes, one more thing. The PMI data on supplier delivery times showed a divergence within the Eurozone itself. German suppliers reported improving delivery times, while French suppliers reported worsening. That suggests that the nearshoring trend is benefiting Germany more than France, because Germany's industrial base in Eastern Europe is more developed. Luna: So the benefits of nearshoring aren't evenly distributed across the Eurozone. Lucas: Not at all. Countries with strong existing supply chains into Eastern Europe — Germany, Austria, parts of Northern Italy — are better positioned. Countries that relied more on Mediterranean or Asian sourcing are seeing less benefit. That could widen the competitiveness gap within the Eurozone. Luna: And that has implications for ECB policy too, if some economies are getting a supply chain boost while others aren't. Lucas: Absolutely. If Germany's industrial output stabilizes faster than France's or Spain's, the ECB faces an even trickier rate decision. The one-size-fits-all problem gets worse. Luna: Let's zoom out for a second. If this twin-track strategy becomes the new normal, what does that mean for the long-term structure of Eurozone trade? Lucas: I think we're moving toward a world where intra-Eurozone trade becomes more important for high-value components, while extra-Eurozone trade shifts toward lower-value, higher-volume goods. That would actually increase the Eurozone's trade surplus in value terms, because the stuff produced regionally is higher margin. But it would also make the economy more vulnerable to labor cost inflation in Eastern Europe. Luna: So the fork is also a risk. If you put too much production in Poland and wages keep rising, you lose the cost advantage that nearshoring was supposed to provide. Lucas: Right. And that's why companies are keeping a foot in Southeast Asia. They want a release valve. The question is whether that release valve will be available when they need it — especially if Hormuz disruptions get worse. Luna: We'll see. I guess that's the story for the next few quarters: watching which track wins out. Lucas: Exactly. And whether the ECB can navigate a rate path that keeps both options open.