Tag: geopolitical transformation

Be more agile! How to anticipate a transforming risk landscape

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An effective risk management process is a basic requirement for tackling transformation risks. In most cases, the risk analysis that goes with identifying risks focuses on actual risks. Abstract risks, which are currently hard to assess and thus difficult to evaluate, yet which in essence derive from systemic change or resultant strategic decisions, are often overlooked. However, to master the ever-increasing speed of change we are challenged to adjust the pace with which we tackle the associated risks. Agile risk management plays a decisive role in this process.

My first article of the current HORIZON series introduced our 4 Risk Changers model and put the spotlight on the multiple challenges faced by companies. In the light of ongoing and rapid change, these challenges are to date omnipresent.
 
Based on our vast experience and extensive expertise in corporate risks, I consider these complex changes as systemic risks. I have categorised them as ecological, geopolitical, technological, and social transformation risks.

The 4 Risk Changers

Unlike the tangible assets in former years, it is now the intangible assets which increasingly influence the transformation of companies’ risk environment. The major challenges for a forward-looking risk management are posed less by the concrete individual risks at an operating level but more by the abstract systemic risks which are caused by global events and external developments.
 
Central to my view are the effects of this systemic change on the risk situation of companies. Also, I differentiate between primary and secondary transformation risks.

  • Primary transformation risks derive directly from the risks associated with systemic change. For example, the impact of the war in Ukraine on the supply of energy and the development of prices in Europe are a result of geopolitical transformation.
  • Secondary transformation risks are typically speculative. They include both risks and opportunities and derive from the metamorphosis which companies have undergone because of systemic change. The aim is to emerge from the crisis stronger than before and/or take advantage of the new opportunities presented by this change. The resultant new risks – despite being abstract – are of great significance and cannot be ignored. They must be viewed from a holistic perspective.

How systemic change affects insurance

Primary and secondary risks tend to increase during a transformation process. They evolve over time. At the beginning, these transformation risks can only be identified with great difficulty. Most of the time we tend to pay less attention to them. Only when they reach a specific threshold, when we become aware of “soft signals”, can they be identified as such and dealt with by risk management.
 
As is the case with conventional “emerging risks”, the required risk assessment, however, lacks experience, i.e. it lacks historical data and information, presenting an obstacle for analysing transformation risks.
 
When developing suitable risk management strategies, the attempt to transfer these risks to the insurance market as part of the development of suitable risk management strategies is bound to fail in most cases. The principle of insurability applies. This means, a risk must be measurable for the insurance market to secure adequate capacities. If there is no measurability – as opposed to the maximum loss calculation in the case of fire risks, where the possible maximum loss (PML) represents the maximum expected damage caused – it will be determined based on data modelling of historical risk and claims as well as on actuarial assumptions.

Transforming risk landscape affects insurability

Since new risks and transformation risks lack the required historical data, there is usually also a lack of availability of insurance capacities, especially in their uncertain early stages of development. Adequate insurance solutions (can) only come into being over time.
 
The current systemic transformation leads to numerous new and changing risks which cause companies’ risk landscapes to change permanently and at an increasingly rapid pace. These dynamics now result in less and less insurance for operational risks, which in the past were adequately and successfully insured.
 
Thus, as the gap between the lack of insurability and company risks continues to widen, there is an urgent need for the implementation of new methods in risk management.

A transforming risk landscape is often ignored

In practice, many risk management systems that have been implemented only manage concrete risks which already exist. Due to a lack of both early-warning mechanisms and the outside perspective on systemic change and its global events, the risk analysis focus is still on the known and assessable risks. The attention is on the actual situation of the risk environment.
 
Today’s abstract risks, i.e. risks which still evolve as a result of the changing business environment and have therefore not yet occurred or new risks arising from strategic changes in the business model that aim at seizing new opportunities, are often ignored. In practice, the resultant transformation of the risk landscape is hardly ever anticipated. It is only dealt with once risks manifest themselves because that is when they can be identified and assessed accordingly.
 
So, how can risk management help to tackle increasing volatility, uncertainty, complexity, and ambiguity and, in turn, boost the resilience of companies? An effective approach that facilitates an agile management of abstract transformation risks needs to be implemented. Existing risk management processes must widen their scope and perspective with some type of risk forecasts, enabling risk managers to anticipate risks at an early stage and allowing them to better prepare themselves.

Agile approach to anticipate transformation

Quite often, we encounter situations where a company’s risk management is organised in closed administrative departments which function like silos that were put in place to comply with legal requirements. Because such risk management deals with risks at an individual level only, its benefit as a company-wide tool to effectively manage risks often fails to achieve its full value.

Systemic change - Primary and secondary risks

The agile management of risks and opportunities is based on a corporate culture that is open-minded towards such risks and opportunities and is organised around transparency, dialogue, trust, and constant feedback cycles.
 
It comprises interdisciplinary teams whose members act with utmost flexibility as and when needed and who are an integral part of strategic and operative decision-making processes.
 
That way, transformation risks can be anticipated and acted upon at an early stage. This boosts the resilience of companies, enabling them to make the most out of future opportunities.
 
Anticipating transformation risks at an early stage means viewing the world from a future perspective and interpreting the inherent risk situation in the best possible way. Paying attention to soft signals, like new and shifting trends, as well as an open-minded attitude towards strategic considerations helps the establishment of effective early-warning indicators to manage risks.

Agility drives insurability and strengthens resilience

As a risk specialist, it is our vision to manage the risks of our clients in such way that they can rest assured and focus on their core business.
 
As a loyal and trustworthy partner, we work for and with our clients in flexible, interdisciplinary teams where we prove our transparent, dialogue-driven culture every day.
 
We anticipate systemic change and proactively direct our organisation towards the future needs of our clients. Agile risk management plays a key role for us.
 
In future, our progressive service approach will focus even more strongly on anticipating any change and resultant risks at an early stage.
 
HORIZON – “Risk Thought » Fast Forward” is our platform for risk-thought leadership. It follows our ambition to anticipate systemic change at an early stage, drive the insurability of a transforming risk landscape and create value through tailored solutions that strengthen our clients’ resilience and protect their future ventures.
 
 
GrECo, matter of trust.

Georg Winter

CEO

T +43 664 962 39 06

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Be more agile! How to anticipate a transforming risk landscape

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Investing in Backup Systems to boost resilience: Interview with Mariana Kühnel

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Mariana Kühnel, Deputy General Secretary of the Austrian Chamber of Commerce spoke with Georg Winter, CEO GrECo Group about staying calm in these unpredictable times and how Europe can gain comparative advantages in the age of geopolitical transformation.

Winter: Recently you have been present in the Austrian media, speaking about the situation of Austrian companies in the Ukraine in view of the war. Does the war in the Ukraine show us the dramatic face of a new political world order?

Kühnel: Austria’s economy has been remarkably resilient so far in the face of the unstable geopolitical situation. But of course, there are continuing downward risks to the Austrian economic development, most pressing in the Energy sector. Energy prices in Europe are currently higher than in other parts of the world, massively hampering economic growth.
 
Given the current geopolitical situation and the increasing instability of existing supply chains, the EU needs to find viable alternatives and more than ever engage with up-and-coming regions such as Latin America & Southeast Asia. EU trade agreements not only ensure better market access for goods, services, and investments in third countries, but are also an important tool to mitigate negative socio-economic developments. They help strengthen the economic resilience of businesses by providing opportunities for much needed supply chain diversification.

Winter: The war also made us aware of Europe´s dramatic energy dependency, particularly on Russian natural gas. How can the economy become independent and mitigate this risk in the medium to long term?

Kühnel: A warm winter and our strong efforts to store gas helped us to avoid energy shortages. But the current crisis is not over yet. To reduce our dependency from Russia, we need to further diversify our energy supply. On the one hand by accelerating the deployment of renewable energy in Europe, on the other hand by building up new energy imports routes. In addition to improving energy efficiency and the availability of renewable electricity, we need to invest in back-up systems, climate-neutral gas, and liquid energy sources to compensate for the resulting volatility. Especially with the goal of climate neutrality by 2050 in mind, we need to employ all alternatives that can contribute to the reduction of greenhouse gases and embrace the principle of technological openness.

Winter: With the new Inflation Reduction Act (IRA), the United States are currently attracting numerous European companies to invest overseas., in particular in the field of renewable energy and infrastructure. What chances do you see and how should the European Union react to avoid the danger of de-industrialization in Europe?

Kühnel: First and foremost, it is important to stay calm. A subsidy race between the EU and the United States is the last thing we need right now. As far as the level of funding is concerned, we see that existing EU funding is in no way inferior to the IRA. However, the IRA comes with much less regulations and bureaucracy than we have here in Europe. Therefore, we can actually learn from the US in this regard, on how a policy design for the EU could look like. In addition, the IRA mainly focusses on mass deployment of green technologies rather than innovation. By focusing on early-stage development and increasing EU resilience to trade disruptions the EU might gain a comparative advantage in the medium to long term.

Winter: The United States are also gaining in importance for European companies in view of the cooling relations with China, which is confidently promoting its role on the global stage. The Chinese Belt and Road Initiative for instance demonstrates the future balance of power. Strategic competition between the U.S. and China is driving global fragmentation as both focus on boosting self-reliance, reducing vulnerabilities, and decoupling their technology sectors.

While China was one of the most promising trading partners just a few years ago, companies are now faced with political unpredictability resulting in unreliable supply chains, to name just one effect. Taiwan is another key flashpoint. How do you see the future development of foreign trade with China?

Kühnel: In these unpredictable times we are currently living in, we can observe a trend that companies are looking into diversifying their markets and supply chains. However, China will remain an important player on the world economic stage given the sheer size of its market. Although 2022 was a tough year for Austrian businesses in China, our trade relations actually increased. From January until November Austrian exports rose by 9.6% and imports registered a plus of 33%.

Winter: Do you see trends that the lessons learned from the supply chain problems over the last few years will lead to a relocation of production back to Europe, for example Eastern Europe?

Kühnel: We have indeed learned that, in addition to efficiency, we need to pay increased attention to resilience and the reduction of strategic dependencies in our international trade relations. Various legislative initiatives at the EU-level, such as the European Chips Act or the Critical Raw Materials Act, are designed to do exactly that. In addition, it is important to also expand our trade relations with like-minded partners and promote global cooperation.

Winter: The European Union has been negotiating an association agreement with the Mercosur countries (Argentina, Brazil, Paraguay and Uruguay) to create stable and predictable rules for trade in goods, services and investments. In 2019, an agreement in principle was reached. What is the strategic relevance of those countries for European companies and which other territories should be on the radar for the future?

Kühnel: Europe is deeply connected with Latin America by common languages, culture, and commerce. We are like-minded partners with shared values and interests. Faced with an unprecedented multitude of crises, it is crucial to deepen our economic ties with this up-and-coming region. In addition, global climate concerns require urgent and coordinated action to ensure a transition toward clean energy. The access to critical raw materials, is one of the preconditions for the digital and green transition in Europe. We should therefore secure our resource supply channels through EU trade agreements.
 
With regards to other areas of strategic interest, the EU is currently negotiating with Indonesia and Australia. We hope that also negotiations with the Philippines, Thailand and Malaysia will soon continue. These potential markets offer great potentials for Austrian businesses. Indonesia and the Philippines combined have over 380 million inhabitants and in the case of Australia offer important resources like Lithium, cobalt, and rare earths metals. When it comes to Africa, there is also a geopolitical need to strengthen the EU’s presence on the continent. In the past we have seen increasing engagement of China and Russia on the continent, mostly to the detriment of the traditional close ties to Europe. Therefore, deepening and improving EU-Africa relations should be a priority.

Winter: Companies in all industries are struggling to find new employees. In view of the demographic developments, there are clear signs of a dramatic shortage of workforce in Europe. On the other hand, fewer and fewer people are willing to work full-time. What are the most urgent actions for both, companies and politics and what role will migration play in the future?

Kühnel: The demographic development and the resulting lack of skilled workers is really challenging for Europe. In Austria, the number of 20- to 65-year-olds is said to decline by 244.000 by 2040. Much more needs to be done to allow companies to fill their vacancies and to close this developing gap. Apart from tapping the domestic potential, by increasing the number of women in full time employment and by mobilising older people, a clear focus must be put on developing a qualified migration policy.

Georg Winter

CEO

T +43 664 962 39 06

Mariana Kühnel

Deputy General Secretary of the Austrian Chamber of Commerce

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The Impact of Sanctions on Aviation and Safety in the Air

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The_Impact_of_Sanctions_on_Aviation_and_Safety_in_the_Air.

Economic sanctions used for foreign policy purposes are economic penalties – such as prohibiting trade, stopping financial transactions or barring economic and military assistance – used to influence a nation and provide incentives for obedience with the rule of law or other governing rules and regulations.

Given the extent and complexity of global interdependence in the international goods and tourist traffic, sanctions not only affect the sanctioned nation, but also have repercussions all over the world. 

The aviation industry is particularly affected by the sanctions imposed upon Russia:

  • Closed airspaces over Russia and the Ukraine war zone
  • Airspace closure for Russian aircraft en route to western states
  • No import of spare parts for western types of aircraft in Russia
  • Terminated leasing contracts for Russian aircraft, no return of leased planes
  • Stagnant or a lack of tourism and business travel
  • Etc.

The economic impact of a non-existing passenger and air cargo traffic – which is only possible using alternative routes – is obvious for all parties concerned: higher costs, lower goods turnover, a lack of passenger and tourism traffic.

What impact do the sanctions imposed on Russia have on aviation safety?

No other industry sector is as strictly regulated as aviation. Precise maintenance regulations and intervals specify the renewal of aircraft parts and components and help ensure that aviation continues to provide the safest means of transport. However, Russian airlines and aircraft owners are no longer able to comply with these strict regulations. Due to sanctions and EU export bans for aerospace technologies and goods, much needed parts and components for western types of aircraft (which comprise the majority of the fleet of aircraft in Russia) can no longer be procured. Airbus and Boeing were among the first to suspend deliveries of spare parts, technical support, and maintenance services.
 
Meanwhile, aircraft manufacturers have raised safety alarms due to the lack of spare parts. There are reports that airlines are stripping grounded aircraft (of which there are plenty given the low level of air traffic in Russia) as well as aircraft that were not returned to western lessors to keep other aircraft airworthy. One can take a wild guess how long this “supply” will last. Another concern is that aircraft subject to irregular maintenance intervals or non-compliance with international maintenance standards quickly lose their safety certificates. Besides subjective and objective safety concerns, this poses a problem of possible landing bans and further restrictions.
 
In addition to technical regulations, there are certain requirements for pilots and flight crews which ensure the validity of their license, their knowledge and skills of operating procedures. Due to a large number of fleets having been grounded, pilots and flight crews lack the routine with specific flying procedures. Pilots, for example, are reduced to logging the required amount of flight times in simulator trainings, which normally are only an add-on to real flights. They cannot use these trainings over an extended period of time to maintain their level of flying skills and the validity of their license.

Aviation safety, whether in the air or on the ground, is a top priority

The International Civil Aviation Organization (ICAO) has therefore defined rules for safety standards and recommended practices. These are implemented on a national level via, e.g., the European Union Aviation Safety Agency (EASA). Similarly, there are standards and regulations for the airworthiness of aircraft, for aircraft operation, and for training and licensing of flight crew members.
 
While passenger numbers are increasing, the number of casualties is decreasing. Technical improvements, rules and regulations that stipulate maintenance and licensing procedures for aircraft, the development of airport infrastructure and air traffic control as well as training of personnel give us reasons to be optimistic about a safe future.

Sources:
Austrian Wings: www.austrianwings.info
Focus: https://www.focus.de/finanzen/news/wie-russlands-totgesagte-luftfahrt-trotz-extremer-sanktionen-ueberlebt_id_179965191.html
Wiener Zeitung: https://www.wienerzeitung.at/nachrichten/wirtschaft/international/2146511–Russlands-Luftfahrt-in-Turbulenzen.html
European Parlament: https://www.europarl.europa.eu/factsheets/de/sheet/134/luftsicherhei

Ilse Konheisner-Holub

Group Practice Leader Aviation

Hotline available 24/7: +43 5 04 04 200

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The New Silk Roads

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The New Silk Roads

This article will provoke thoughts and create awareness about the new political world order, the changing influence of Western and Eastern powers as well as the emergence and formation of a new centre of gravity in the global economy. It takes a close look at an emerging geopolitical dominance and focuses on the new crossroads between the West and the East – the New Silk Roads.

The past two and a half years have been extraordinary in terms of rising levels of macroeconomic uncertainty and business cycles. The troubling combination of a global pandemic exacerbated by energy shortages, soaring inflation and geopolitical tensions poses serious challenges to businesses in managing emerging risks and opportunities. The systems, institutions and orders that have supported global stability and security for decades are now unravelling and taking on new forms.

Geography will shape future politics

Over the past hundred years, geo-politicians have proposed three theories depicting the control of the world from a geographical perspective:

  • In his “Sea Power” theory, Alfred Thayer Mahan from the United States argued that those who controlled the sea would control the world.
  • In his “Heartland” theory, Halford John Mackinder from Britain argued that those who controlled Eurasia would control the world,
  • while Nicholas John Spykman from the United States argued in his “Rim Land” theory that those who controlled the rim land would control it.

Not so long ago, former White House Strategic Adviser Steve Bannon proposed that China’s “Belt and Road” initiative embodied all three theories, intending to control the world by promoting this initiative.  

Geopolitical risks are reshaping the world

Geopolitical risks refer to a situation involving power struggles such as wars, aggravated tension between states or terrorist attacks that cannot be resolved peacefully. Up to now, geopolitical risks were always related to growing geopolitical tensions between the world’s major powers.

It would be correct to define the current geopolitical situation in the world as a period of uncertainty. The 20th century saw two world wars. After World War II, the United Nations was formed to prevent similar catastrophes and disasters in the future. Soon thereafter, it became obvious that the two existing superpowers USA and USSR were engaged in a fierce competition known as the Cold War. Alarmingly, and as a result of the arms race, a large amount of the weapons of mass destruction (nuclear, chemical, biological) were produced. The Cold War ended after the collapse of the Soviet Union and the Russian Federation as its heir took control of the former Soviet Union’s weapons of mass destruction.

Today, the economic impact of Russia’s war in Ukraine has many facets that will aggravate numerous problems associated with it:

  • The energy supply in Europe
  • The food supply in the Middle East and North Africa
  • Inflation
  • Closed transportation or trade routes
  • Global supplies of energy and other raw materials

Russia’s war in Ukraine also heightened another possible risk: that of accidental shelling on the territory of a NATO member state. The severity of the consequences of such an incident cannot be predicted. A nuclear threat – or more precisely the spread of radiation – exists even without weapons being used because the biggest nuclear power plant in Ukraine has been under heavy shelling. Intentional damage to the nuclear power plant would create a real disaster, not only for Ukraine but for Europe as a whole, as well as for the rest of the world.

Geopolitical transformation will create a new centre of gravity in the world


“Ancient Greece begat Rome, Rome begat Christian Europe, Christian Europe begat the Renaissance, the Renaissance the Enlightenment, the Enlightenment political democracy and the industrial revolution. Industry crossed with democracy in turn yielded the United States, embodying the rights to life, liberty and the pursuit of happiness.” This is the story we have been told – the mantra of the political, cultural, and moral triumph of the West. However, watching current events unfold, this account seems flawed. There are other ways of looking at the world and its past ways that do not take the perspective of the winners of recent history.

Today, much attention is devoted to assessing the likely impact of rapid economic growth in China, where the demand for luxury goods is forecast to quadruple in the next decade. Similarly, social change is happening in India, where more people have access to a mobile phone than a flushing toilet.

On the other hand, the halfway point between the East and the West, running from the Eastern shores of the Mediterranean and the Black Sea to the Himalayas, might seem to be an irrelevant position from which to assess the world. This region is home to Kazakhstan, Uzbekistan, Kirgizstan, Turkmenistan, Tajikistan, and the countries of the Caucasus.

It is a region that is associated with regimes that are unstable, violent and a threat to international security, such as Afghanistan, Iran, Iraq, and Syria – or ill-versed in best practices of democracy, such as Russia and Azerbaijan. Overall, it appears to be a region that is home to a series of failed or failing states, led by dictators who win impossibly large majorities in national elections and whose families and friends control sprawling business interests, own vast assets, and wield political power. These are places with poor human rights records, where freedom of expression in matters concerning faith, conscience and sexuality is limited, and where control of the media dictates what does and what does not appear in the press.

These countries seem foreign to us and are treated by the Western world as obscure and political backwaters. Yet, in fact, they are the bridge between the East and the West. They represent the very crossroads of civilisation – as they have always been since the beginning of history: The New Silk Roads.

Ways to manage geopolitical risks

Our world is already undergoing a global transition to the next economic era. This transition can be considered through the prism of the PEST analysis. However, we have replaced the traditional economic factors with factors concerning energy:

  • Political – The world order is moving towards multipolarity, a reassembly into regionally and ideologically aligned groups. Such multipolar changes, coupled with regionalisation, create new risks for companies operating in different countries.
  • Energy – Resource-based energy systems face security vulnerabilities as they channel investments into low-carbon energy sources. At the same time, they must meet a growing demand for energy. The transition towards a carbon-neutral economy will thus be accompanied by geopolitical tension between global producers and consumers of energy resources. This creates several risks for companies active in the energy sector.
  • Social – Demographic forces will transform a young world into an aging urban world, an era of infectious diseases may give way to an era of non-communicable diseases, and inequality within states may increasingly challenge the social structure and the businesses that support it.
  • Technology – Technology platforms face a rapid growth of transversal technologies, particularly artificial intelligence, or bioengineering, which, if combined, could create another great surge of progress in the next economic era and create new risks and opportunities for companies and global institutions.

These factors pose new geopolitical and macroeconomic challenges for businesses. They, in turn, must respond through effective risk management and insurance systems. An effective risk management strategy serves as a compelling tool for increasing enterprise value through its risk function. Any decision made by the company’s management increases, preserves, or reduces the enterprise value of that company.
 
Due to risk being an integral part of value creation, leading strategically oriented businesses do not seek to eliminate a risk. Their approach creates a new perspective of risk management, as opposed to past traditional views of risk that considered it as something to be avoided. Rather, these businesses seek to manage risk across all parts of their organisation so that at any given time, they are taking just the right types of risk necessary to effectively achieve the company’s strategic goals. This optimal risk appetite or optimal risk zone is shown in the picture below.

optimal risk appetite

The most versatile and effective risk management tools that effectively describe and manage geopolitical risks include the following:

  • Event tree analysis – a graphical technique that represents the mutually exclusive sequences of events that can take place after an initial event, depending on whether various systems designed to modify the consequences are functioning. An event tree can be quantified to provide probabilities of different possible outcomes.
  • Scenario analysis, which involves identifying one or more risk scenarios, detailing the key assumptions (conditions or drivers) that determine the magnitude of the impact, and assessing the impact on the key target.

The role of a company’s risk function is crucial in correctly assessing the geopolitical risks and defining the optimal risk appetite that will, in turn, enable a company’s enterprise value to grow. After mapping geopolitical risks against the company’s optimal risk appetite, one can work with the risks above it and address the insurance market for transferring these risks. The role of the insurance broker is to collaborate closely with the company’s risk function in tailoring an effective insurance program that meets the exact insurance demand of the company and maximises the insurance value.

References:
Peter Frankopan, The silk roads: a new history of the world
McKinsey Global Institute, On the cusp of a new era?

About Mykhailo Rushkovskyi:
– MBA, PhD researcher
– Founder of RUNDERC.com
– Winner of the European Risk Management Awards 2022 – Business Continuity Programme of the Year

Mykhailo Rushkovskyi

Mykhailo Rushkovskyi

Head of Research & Analysis
Kyiv Consulting

Zviadi Vardosanidze

Group Practice Leader Energy, Power and Mining

T +43 664 962 39 04

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“Energy Autonomy Frastanz” is Taking Shape

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Energy Autonomy Frastanz_Udo Nachbaur

Plans are underway to construct a new power plant fuelled by waste material on the premises of Rondo Ganahl AG as part of the Initiative “Energy Autonomy Frastanz”. The new plant in Austria’s most western province will cover the future thermal energy demand of the Rondo paper mill and corrugated board plant and will also supply other businesses and private households.

Achieving independence from fossil fuels

The challenging situation in the energy and gas market persisted during summer and autumn, and prices continued to rise. The demand for gas is expected to increase again in Austria and Europe in the coming winter months. The project “Energy Autonomy Frastanz” was launched at the end of June 2022 to counteract soaring prices and take a big step towards independence from natural gas, particularly from Russia. Its core element is the construction of a waste material power plant on the premises of Rondo Ganahl AG. 

Project progress on schedule

The plans for the project were finetuned during the last months for submission as scheduled at the beginning of 2023. At the same time negotiations are being held with the Municipality of Frastanz and the Federal State of Vorarlberg to rezone the company car park as part of the project. Hubert Marte, Chairman of the Board of Rondo Ganahl AG, highlights the significance and necessity of the project: “It is high time that we put our energy supply on a new footing and assume responsibility for our employees and customers. The new power generating plant is our response to the uncertain supply of gas. More importantly, it will make us self-sufficient with regard to energy and will boost our gas independence.”

Energy Autonomy Frastanz_Rondo Ganahl AG

Clean energy for paper manufacturing and local heating

“Energy Autonomy Frastanz” is a joint initiative of Rondo Ganahl AG, the community of Frastanz, the Frastanz Brewery and the E-Werke Frastanz Electricity Company. The parties involved in the project are creating new impulses for the local energy supply. Rondo’s new in-house power generating plant will supply the paper mill and corrugated board plant with process heat. Until now, the required thermal energy, could only be obtained from gas. In addition, the power generating plant provides the opportunity to expand the local bio-heat network of Biowärme Frastanz. The recyclable and residual waste resources available in the Federal State of Vorarlberg can be used as valuable sources of energy directly in Frastanz itself. “The time has come to no longer rely on oil and gas for heating, which is why we want to offer private households and businesses a sensible alternative”, says Walter Gohm, Mayor of Frastanz.  

Other companies besides Rondo should also benefit from heat from the power generating plant, such as Frastanz Brewery, Rondo’s closest neighbour and project partner. Up to 500 private households could receive thermal heating once the Frastanz local heat network has been expanded and the new power plant integrated into the network. 

Turning valuable residual waste products into energy

Currently, Rondo requires approximately 14 million standard cubic metres of gas or 150 GWh of thermal energy every year. This corresponds to the average annual demand of about 10,000 households in Vorarlberg. The waste material power plant, fuelled by waste products from commercial production, has been designed for an annual volume of around 200 GWh of thermal energy. A total of 35,000 tonnes of waste material can be converted into energy every year. A good third are residues from Rondo’s own paper manufacturing that can no longer be further processed into recycled paper but may still be used as a source of energy. The remainder comes from local waste disposal specialists. At any rate, approximately 100,000 tonnes of such residual waste products accrue in Vorarlberg every year.  Currently these products are processed into energy in neighbouring countries.

Risk Management

The power generating plant in Frastanz will be built according to state-of-the-art technology standards and will benefit from the high quality plant and filter systems used to limit emissions. An area on Rondo’s premises currently used as a car park has been earmarked as the location for the plant. During planning attention has also been given to the objective to smoothly incorporate the new building into the cubature of the current buildings and blend it harmoniously into the townscape. According to current plans, the power generating plant will be completed by 2025.

Fact box
Frastanz waste material power plant
Capacity: 35,000 tonnes of residual waste (material input) each year
Share of Rondo paper mill:11,000 tonnes
Total performance (output):200 GWh of thermal energy each year
Required area: 3,600 square metres on the company premises of Rondo
Height of building:approximately 32 metres
Planned investment sum:  80 million Euros
Realisation:   by 2025

About Rondo Ganahl
Rondo Ganahl AG, headquartered in Frastanz (Vorarlberg, Austria), is specialised in the manufacture of corrugated board raw paper, paper recycling and the production of individual external packaging made of corrugated board and customised moulded pulp internal packaging. The roots of this modern family-owned industrial company date back to the year 1797. Today, Rondo employs a workforce of about 1,800 at various locations in Austria as well as in Germany, Hungary, Romania and Turkey. The company promotes the sparing use of resources and collects, sorts and presses recycled paper and cardboard packaging as raw material for its own corrugated board raw papers. This is how Rondo succeeds in closing the recycling chain within the group of companies.
 

Udo Nachbaur_Rondo Ganahl AG

Udo Nachbaur

CTO
Rondo Ganahl AG

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Geopolitics Shapes the World to Come

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Managing the risks of Black Swan events

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Managing the risks of Black Swan events

“Prediction is very difficult, especially if it’s about the future!”
(Niels Bohr, Nobel laureate in Physics)

Emerging risks and new threats that are hard to grasp and estimate are a much-discussed topic. Add to that today’s increasing number of Black Swan events. These are unprecedented and unexpected events which nobody could have imagined, making them almost impossible to predict.
 
Experience shows that Black Swan events can, however, turn into emerging risks and can eventually be regarded as conventional risks and be treated as such in terms of standard risk management processes. Cyber risks, a blackout or pandemic comes to mind as typical examples.

Lack of patent recipes for complex issues

Strategic warning systems are thus gaining importance for both strategic management as well as for corporate risk management. In principle, this topic is not new in business theory and practice, but there is still a lack of “patent recipes” due to the complexity of this issue.  This is mainly because, due to the lack of empirical data for such events, subjective assessments and evaluations can naturally turn out differently. Scientific debates on this topic can be traced back to the mid-1970s.
 
Back then, Igor Ansoff’s theory of monitoring weak signals was deemed a milestone in business management. Ansoff established that companies are surprised by discontinuity because traditional planning processes – if such situations have been considered in a timely manner – are not suitable. According to Ansoff, an arising discontinuity can be identified by increasing management’s awareness of weak signals, such as:

  • An accumulation of similar events within the company
  • The dissemination of to date unknown opinions, ideas, and statements
  • Trends in jurisdiction and similar indications in domestic and foreign legislation

Both the system’s surrounding environment (external) and the company’s system (internal system) must be monitored. Ansoff also established that this process is a typical team task that involves creative techniques (e. g. brainstorming or scenario analysis) and requires an organised and formal approach. He also highlighted the fact that these changes pose risks as well as opportunities. Or, in the words of Max Frisch, Swiss playwright and novelist: “A crisis is a productive state. You simply have to get rid of its aftertaste of catastrophe.”

Black Swan events and risk management

In light of recent turbulences, universities have once again taken a closer look at ways to manage the unimaginable – i. e. managing the risks of Black Swan events – because traditional risk management quickly reaches its limits in the face of the unimaginable.
 
Harvard strategy professor Robert S. Kaplan discussed how one could even grasp the unimaginable. In doing so, Robert Kaplan identified three human traits as obstacles:

  • Lack of experience in dealing with and addressing seemingly absurd situations. He recommends inviting scriptwriters to brainstorming sessions.
  • Discarding one’s opinions and stereotypes which have trapped creative thought, and
  • Standing up to peer pressure and those claiming to be “reasonable“ – as one is quickly branded as being paranoid if one wants to safeguard oneself against the highly unlikely

Kaplan therefore suggests two organisational alternatives:

  • Designate a Chief Worry Officer (CWO) to keep his ears to the ground to detect any anomalies and highly unlikely Black Swan events at an early stage.
  • Set up a non-hierarchical detection and reporting system that is easily accessible by all employees. This must ensure that employees can immediately report their alarming concerns without fearing sanctions (call it a whistle blower system for Black Swans if you like).

To sum up: The more we are surprised and affected by new and unexpected threats, the more innovative, creative, and unusual the methods we develop must be to identify and assess these risks. Or, as Albert Einstein so aptly put it: “I’m more interested in the future than in the past, because the future is where I intend to live.”
 
 
Sources:
Ansoff, I. ”Managing Surprise and Discontinuity …“ in Schmalenbachs Zeitschrift für betriebswirtschaftliche Forschung (ZfbF) 28 (1976), page 129 ff
Kaplan, R. Harvard Business Review 2020/11

christian oppl

Christian Oppl

Dean GrECo Academy

T +43 5 04 04 260

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Food Price Inflation in CEE and SEE Countries – Its Impact on Insurance and the Future

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According to the International Monetary Fund food and energy are the main drivers of today’s inflation. That is obvious to each of us as we pay more for both food and energy these days.

This article compares the food price inflation in the countries of Central and Eastern Europe where GrECo Group operates. How did these differences in prices come about and what are the consequences for insurance?  

How food price inflation is measured

The United Nations’ Food and Agriculture Organization uses the Food Price Index (FFPI) to track and monitor price changes in international markets for key basic foodstuffs. The reference period from 2014 to 2016 serves as the FFPI base value, this being 100. For example, if in July 2005 the FFPI in Austria was 76.4, this means that the main basket of food products cost 23.6% less in July 2005 than the average basket in 2014-2016yy. If the FFPI, let’s say, in June 2022 was at 121.1, the food inflation was 21.1% compared to 2014-2016yy.

Food Supply Chain

Different rates of food price inflation in Europe

We analysed the food price indices in CEE/SEE countries, which are split into 3 groups:

  • EU countries using the Euro as an official currency
  • EU countries using their own national currency
  • Non-EU countries

The analysis shows that the increase in food prices in EU countries follows the same course, i.e. the dynamics from 2020 are very high compared to the previous 20 years (2000-2019yy). This proves that the economies of EU countries are interconnected. 
 
Looking at countries outside the EU, we see that prices have risen in different ways at different times. For example, an interesting fact about Ukraine is the sharp increase in prices in 2013-2014, which can be attributed to the destabilisation of the economic situation during the Maidan Revolution, followed by the first Russian occupation and the subsequent large devaluation of the local currency.
 
A more interesting trend can be seen if we take a closer look at the period 2020-2022, primarily related to COVID and Russia’s invasion of Ukraine.

  • Among the six Euro area countries we analysed, Austria showed the lowest FFPI increase and Lithuania the highest.
  • Among the five EU countries that use national currencies, the highest inflation was recorded in Hungary, and the lowest in the Czech Republic.
  • Among the four non-EU countries, Ukraine suffered a much higher FFPI than in the period 2014-2016. Serbia, however, is the most stable in this respect.

A look at increasing food prices during 2020-2022

The table below clearly illustrates the differences between countries. It allows for a better comparison of FFPI values at different points in time during recent periods. For example, the column 2022vs2020 shows the percentage increase in food prices on July 1, 2022 as compared to July 1, 2020.

table food prices

The table also shows that inflation in the period 2022-2022yy was twice as high as in the period 2020-2015yy in almost every country. Prices started to increase drastically as from the third and fourth quarter of 2021. We therefore believe that the root cause was the post-COVID food and energy supply chain crisis.

Why is food price inflation so high in 2020-2022?

One of the root causes of any inflation is the scarcity of goods, eithertheir total lack or their availability in only insufficient quantities. This happened in the post-COVID recovery phase, when deferred demand for energy resources collided with supply chain constraints. At the same time, in 2021, we witnessed a sharp increase in the prices of cereal and oilseed raw materials. We also saw the first forecasts of increasing food prices. Soon thereafter, Russia’s invasion of Ukraine led to a new problem in the food supply chain, a problem that continues to this day.
 
Another cause of inflation is excess demand, be it due to the government printing extra money, the acceleration of the money multiplier, new demand created by GDP growth or due to the inflow of new foreign capital. For example, according to Forbes the consistent monetary stimulus on a massive scale, unprecedented since World War II, turned the flywheel even further in 2020-2022.
 
On top of that, the negative expectations of enterprises and consumers add even more fuel to the fire. Today, nobody is willing to take a risk by selling goods without hedging against the risk of higher production costs in the future. Already, manufacturers are increasing their prices in order to transfer the risk to their consumers. There is also the theory, that big corporations and monopolists (e.g. in the energy segment or food retail) merely squeeze out more profit by driving prices up. Therefore, it will be interesting to see what the final 2022 balance sheets and ESG reports will look like in 2023.

Impact of the inflation on the insurance markets

In our opinion, inflation impacts negatively on insurance consumption and insurance premiums. On the positive side, greater financial uncertainty and changes in the spending behaviour (increased share of spending on inflexible goods and utilities) make households and enterprises rethink their insurance spending.
 
To further curb price increases, central banks significantly raised base rates. Together with inflation expectations and the calculation of an additional risk premium for uncertainty, such actions lead to a significant increase in the cost of capital. This means that investors in the insurance industry are increasingly making outrageous demands.
 
Thus, we have already witnessed a lack of capacity following the first wave of investor capital outflow from international insurance markets. As a result, insurers are not only starting to optimise their portfolios, they are also becoming increasingly risk averse. Some of the conventional property risks are very difficult to renew and additional limits in e.g. the meat industry, in agricultural insurance, and in other sectors can hardly be obtained. Markets are thus hardening again.

What can we expect in the near future and what will save us from the abyss?

Food and energy supply chain constraints pushed up prices post-COVID. Aggressive government monetary policies, negative expectations and further supply chain disruptions caused by Russia’s invasion of Ukraine exacerbated the situation. This has affected the countries of the CEE/SEE region in different ways, yet what they have in common is that prices in 2021-2022 have soared at an unprecedented rate. The insurance market, in turn, is entering a phase of portfolio optimisation due to the growing lack of investor capital.
 
So, what does the future have in store for us?
 
A similar scale of inflation (as shown in the graph below) took place in the 1970s when price increases were associated with oil shocks in 1973 and in 1979-80. That said, prior to these shocks, monetary policy was focused on keeping interest rates low to maintain employment levels and pour more money into an economy that resembles ours today. Further policy tightening resulted in a deep economic crisis in the early 1980s.

food price index

However, there are two important differences between the current situation and the 1970s:

  • The magnitude of commodity price jumps today is smaller than in the 1970s.
  • A paradigm shift in monetary policy frameworks took place since the 1970s, i.e. central banks in advanced economies now have clear mandates for price stability, which is expressed as an explicit inflation target.

According to The Centre for Economic Policy Research (CEPR) “beyond the near term, inflation is expected to decline, but the experience of the 1970s suggests some material risks to this inflation outlook”. CEPR considers risks to be material if the following events do not occur: ”1. global production lines and logistics adjust, 2. inflation expectations are likely to remain well anchored over the medium term, 3. the structural forces that depressed inflation before the pandemic persist”.
 
In addition, we believe that increasing economic activity towards the reconstruction of Ukraine and new investments in technologies leading to the decarbonisation of economies will additionally inject economic growth, which will in turn, result in a stabilisation of prices.
 
Sources consulted:
https://www.fao.org/datalab/website/web/food-prices
https://www.forbes.com/sites/georgecalhoun/2022/09/30/what-is-really-driving-inflation-today/ 
https://www.fao.org/faostat/en/#data/CP
https://www.imf.org/en/Blogs/Articles/2022/09/09/cotw-how-food-and-energy-are-driving-the-global-inflation-surge )
https://cepr.org/voxeu/columns/todays-inflation-and-great-inflation-1970s-similarities-and-differences

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

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The Dynamics of Multiple Crises Drive Our Group’s Risk Management Forward

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ENGEL Produktion St. Valentin

Max Pernsteiner, Vice President Global Purchasing & Supply Chain at ENGEL Austria GmbH, spoke with Johannes Vogl, General Manager at GrECo Risk Engineering GmbH, about supply chains and their risks.

Vogl: Which role does supply chain management play nowadays in a global business like ENGEL Group? Are you able to keep your supply chains up and running despite the current situation? Which role does pricing play in procurement?

Pernsteiner: To cut a long story short, yes, we managed to keep our delivery promises. That has always been our top priority. And, prices continue to play a role in procurement – to a possible extent. We produce injection moulding machines which are used in the manufacture of plastics parts and components as well as products for daily use. We are market leaders in Europe and the USA for machines with more than 1000 to clamping force and are active all over the world. We have nine production plants in Europe, Asia and North America as well as subsidiaries and representatives in over 85 countries. Our procurement is centrally organised, which means that all strategic decisions are made at our headquarters in Schwertberg, Austria. My team and I are working in tandem with our international offices in Asia, Turkey and Mexico to ensure an optimal service in these supplier markets.
 
Sales continue to do well, which means we need smooth supply chains. Our advantage is the energy efficiency of our machines. Our customers have stepped up replacement investments to save more energy and operate sustainably. As injection moulding makes up about 25% of the production costs, our machines can reduce this proportion by about 30%. That is why both delivery capability and delivery reliability are key factors for our business. 
 
Vogl: How does ENGEL identify risks in the existing supply chain?

Pernsteiner: We conduct supplier assessments and hold supplier performance meetings for our main suppliers every year. Besides the hard facts, we also look at all other relevant factors, such as quality, technology, logistics, procurement as well as customer service. We evaluate the performance, document deviations from the “mean value”, the “best of” of our suppliers as well as those concerning the “commodity”. For us, transparency is not a lip service but part of our everyday reality. Of course, we communicate the results of our assessments with our suppliers and show them where there is room for improvement.
 
During our performance review meetings with our suppliers, we jointly agree on the measures that will be binding for the next year. At ENGEL, risk management is at the top of the agenda, which is why it also defines the way how we collaborate with our suppliers.
 
Vogl: How do you select new suppliers?

Pernsteiner: We differentiate between procurement parts and engineering parts. We select suppliers for procurement parts via a market enquiry. Suppliers for development parts provide components, such as control units which have been defined in year-long development processes. Following a concept competition and a strict selection process, we jointly carry out further engineering work. When it comes to these types of components, we cannot simply change from one supplier to another, which is why we carefully select our engineering suppliers. However, including sub-suppliers in the engineering phase is currently difficult. We have therefore adopted a dual and multiple supplier strategy with global diversification almost everywhere to protect ourselves against supply chain risks and we try to follow the same strategy for engineering parts. We know that this may come to an extra cost. It has, however, paid off during the crisis. We are consciously spending more money to secure our supply chains and maintain customer promises. That is why we also buy semiconductor chips from the secondary market.
 
A diversified procurement strategy via several continents usually comes with a cost advantage as well. An example is the sheet metal we purchase in China: Despite high transport costs and tariffs, buying sheet metal from China is sometimes cheaper than buying it in Europe. 
 
Vogl: Which methods to you use to evaluate suppliers?

Pernsteiner: We conduct on-site assessments to evaluate quality capabilities – so-called Rapid Plant Assessments (RPA) – irrespective of the location of our suppliers. It is a simple and effective method that was developed in 2007. Only a few pages are needed to show 9 topics for the on-site inspection. They range from maintenance and service, order and cleanliness, parts and logistics, material and process flow to quality management, governance and compliance criteria. Nowadays, our assessments also include ESG criteria, such as environment and humane working conditions. The result of the RPA (based on a traffic light system) determines whether the supplier receives an unrestricted release for quotation requests and nominations (green) or whether improvements must be made (yellow). In case of a lack of stability or a supplier reorganisation, the supplier does not receive any requests for quotation (red).
 
Our RPA approach has been successfully used, has increased quality, and has reduced risks. It features 5 characteristics:

  • It is simple to use and delivers fast and effective results.
  • Pictures are used for visual assessment and comprehensible documentation.
  • Evaluation is done according to a +/- system with no percentages.
  • The result is an assessment of the supplier regarding quality capabilities.
  • It can and will be applied for assessing sub-suppliers as well.

Vogl: Does this also mean that the multiple crises have improved the maturity level of ENGEL’s risk management, and especially that of its supply chain management?

Pernsteiner: We have been well positioned for years and have implemented a group-wide enterprise risk management system. But, yes, the dynamics of the multiple crises somewhat drive our group’s risk management forward. Already back in January 2020, before the first Covid pandemic lockdown, we set up a task force. Today, this task force is permanently active in anticipating changes in the risk landscape and helps us to flexibly adjust to changes in the market.
 
As part of our strategic focus, we are setting up our digitally networked production with facilities in Austria, Asia and the US and are using our global data base with matching numbers, key figures, and standards. Our production takes place where quality, time and costs are best met. The availability of materials, punitive tariffs, transport routes and costs, our competitive advantage, and the availability of skilled labour are some of the factors we consider as well

About Max Pernsteiner:
Vice President Global Supply Chain ENGEL Austria GmbH

  • Graduated in business informatics at the Johannes Kepler University in Linz
  • Extensive experience in procurement and supplier networks in the automotive industry
  • Successful localisation of (sub)assemblies and finished products in best-cost countries
  • Responsible for ENGEL’s global production network, supply chain and procurement since 2018
  • Volunteers in supporting disadvantaged children and families

About ENGEL:

ENGEL is one of the leading manufacturers of plastic injection moulding machines. The Group today provides all technology modules for plastics processing from a single source: injection moulding machines for thermoplastics, elastomers, and automation, including individual components which are equally competitive and successful on the market. With nine production plants in Europe, North America, and Asia (China, Korea) as well as subsidiaries and representatives in over 85 countries, ENGEL provides customers all over the world with optimal support, new technologies and cutting-edge production plants and is a driving force for their competitiveness and success.

Krystle Lippert

Max Pernsteiner

Vice President Global Supply Chain
ENGEL Austria GmbH

Johannes Vogl

General Manager GrECo Risk Engineering

T +43 664 883 805 04

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Supply Chain Managers as Crisis Managers

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Supply Chain Managers as Crisis Managers

In the last two years, supply chains were exposed to unforeseen risks. The impact of the pandemic, Evergiven’s blockade of the Suez Canal, or the recent disruptions as a result of Russia’s attack on Ukraine, to name a few. What else must we prepare for?

We live in turbulent times, and our world is changing. While change is important and a good thing, we are now facing a whole new dimension and new dynamics of change. Companies are challenged to find ways to manage these dynamics and their impact.

Globalisation is undergoing a reorganisation

In Europe, we rely on globalisation. Europe is the world’s largest exporter. It has brought us prosperity. Our value and supply chains also rely heavily on countries in the global South. They are our raw material suppliers. They are not only rich in raw materials, minerals and metals, they also offer the advantage of low costs of energy and labour. The ability to collaborate on a global scale – and tackle systemic risks, such as climate change – is thus a most decisive factor.
 
The big nations in the South, such as India, are gaining in economic strength. India is an alternative to China and benefits from the current geopolitical tensions. Investments made by multinationals in India are on the rise, and analysts are already predicting a decade of strong economic growth. Naturally, developments like these come with risks and opportunities for us as well as our value and supply chains. Our task is to anticipate both risks and opportunities.
 
The same applies to the effects of geopolitical constellations, such as sanctions, import restrictions or changes in legal frameworks, e.g. the EU Supply Chain Act. More and more supply chain managers have to act now also crisis managers. Cost efficiency in procurement is becoming less important. Besides quality and delivery reliability, supply chain management increasingly addresses geographical, geopolitical and ESG criteria. These developments pose a particular challenge to the small and medium-sized business sector.

Delving into supply chains

In light of the above, it is essential to examine supply chains in two steps: first, one’s direct suppliers, and second, the risk potential of their suppliers. Analysing and evaluating one’s direct suppliers is often difficult enough. Taking the second step means delving into the supply chain. In doing so, at least one’s direct supplier must be sensitized and his supplier systems and audits be checked to identify any blank spots, make reliable risk assumptions, and develop coping strategies.
 
This can be a ”diversification strategy to avoid”, i.e. selecting new suppliers, seeking new markets and market opportunities, or using alternative technologies to reduce the dependence on a certain raw material. An essential feature is the step taken towards an acceptable risk, for example via a traditional risk transfer with respective insurance solutions, despite the insurability of systemic risks being limited. In terms of the supply chain, this means “security comes first, before insurance”. One should be aware of one’s acceptable risk and its evaluation. Similarly, one should also keep monitoring this risk on an ongoing basis. “Transparency” thus becomes a decisive success factor in supply chain management.

Systemic risks and black swans

Managing systemic risks and black swans in the supply chain means one must also answer the question of whether one can influence the potential danger. If the answer is “yes”, the route to take includes appropriate risk management, quality, safety and environmental management or a risk transfer using insurance management. If the answer is “no”, preventive measures are called for, including crisis management, emergency planning, business continuity management as well as resilience management to optimally prepare for unexpected and to date unknown events. Flexibility is thus a key success factor.

Johannes Vogl

General Manager GrECo Risk Engineering

T +43 664 883 805 04

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More Procurement & Logistics Resilience for Donau Chemie

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DonauChemie-Pischelsdorf-Industriepark

Krystle Lippert, Strategic Sales Manager at GrECo in Austria, has spoken with Dr. Gerald Dums, Head of Purchase of Technical Equipment & Logistics at Donau Chemie AG about supply chain problems and procurement and logistics resilience.

The past years have shed light on the downsides of the very same globalization that has been responsible for stable economic growth for a long time. The consequences of recent negative events are disruptions in trade and supply chains, order backlogs, rising energy and transport costs, and more. Whether earlier events or most recent geopolitical developments, such as the war in Ukraine, nearshoring and so-called “glocalization” are now moving into our focus.

Lippert: Donau Chemie recognised the changing trend long before the pandemic and the supply chain problems that followed suit. Out groundbreaking works for a new plant in Pischelsdorf to expand the product portfolio already began in 2019. It is Europe’s first production plant for amidosulfonic acid. What brought about this decision and which role did short distances play for procurement and sales?

Dums: Short distances in procurement and sales and therefore proximity to customers are part and parcel of our corporate philosophy. Besides the quality and availability of our products, our customers really value our other pillars of success: our personal service, the short response and delivery times as well as our solid reliability.

Because of our customer proximity we knew that the European market cannot provide amidosulfonic acid and relies on Asia for deliveries. This triggered more research and eventually the erection of a new plant in Pischelsdorf. The ready availability of the raw materials and the perfect storage and distribution opportunity on site in Lower Austria positively impacted on the feasibility study.
 
Lippert: Since there are no similar plants in Europe for this core process, there must have been a huge influx of customers during the pandemic, especially since China still grapples with lockdowns. How important is procurement and logistics resilience for your customers?
 
Dums: During the feasibility study, we already received positive feedback from prospective European customers who signalled their keen interest in our idea to erect an amidosulfonic acid plant in Pischelsdorf. Increased flexibility due to shorter delivery times, more reliability and security of supply, no loss of quality due to long sea transport and rapid availability have become increasingly important for our customers, over and above a high product quality and more attention being paid to ecological aspects.

Furthermore, an additional European supplier also increases the procurement and logistics resilience of customers. The recent lockdowns showed the negative impact in a most dramatic way. Within days, goods were no longer available, means of transport became a scarce commodity, container vessels jammed harbours, and transport routes were closed. Customers desperately searched for goods and alternative transport facilities, at times to no avail.
Within weeks, the prices for the “white powder” skyrocketed. Building up new procurement and logistics resilience became the order of the day. The obvious dependence on producers and logistical flows supported our decision to plan and erect Europe’s only amidosulfonic acid plant in Austria.
 
Lippert: What is your experience with international competitors from Asia? How do your customers rate short-term availability vs. price?
 
Dums: The pandemic and the dispute between Russia and Ukraine have shown that the global flow of goods can quickly come to a halt, causing existential crises among customers. In the medium term, such crises will continue to have a significant impact on our world economy and dictate prices. That is why customers have shifted their focus on short delivery distances and a more stable (European) framework. We have used our strength as a local producer to our advantage and continued to provide our customers with important industrial chemicals despite tough conditions. Of course, product prices play an important role but reliable quality, supply security, flexibility, and short delivery distances have become crucial and decisive factors for customers. 
 
Lippert: At the GrECo Risk Day we learned that logistics experts expect the complexity of supply chains to trigger a bullwhip effect. Do you share this view?
 
Dums: Yes, indeed. The global production and transport sector’s current complexity and dependency needs an optimal setting to work. Any change or deviation in the system will cause a ripple effect at all levels. The consequences have already become visible and may hold more surprises in store in the years to come. Planning, transparency, and the implementation of resilient systems coupled with forward-looking management qualities will certainly be helpful.
 
Lippert: If we consider that globalisation and the search for increasingly cheaper alternatives was placed higher on the agenda than local added value and short delivery distances, do you think this behaviour is a conscious decision made by customers or is it rather driven by politics?
 
Dums: The principles of a free market economy and globalisation have undoubtedly contributed to the wellbeing of our society. It has its merits and still applies. However, in my opinion, a critical evaluation and an adaptation to solve the global existential survival crisis – and thus protect our planet – are desirable and necessary. Political decision makers are key in determining the course for future economic areas and the habitat we live in. The creation of long-term sustainable wealth must be our common top priority. The restructure of economic areas, transport routes and supply chains can contribute a lot in this regard. Our project for a new amidosulfonic acid plant serves as a prime example.

DonauChemie-Brueckl

Donau Chemie plant in Brückl, Carinthia

Lippert: Considering Europe’s energy crisis, does Donau Chemie also plan to erect new plants at new locations, and is Europe still an attractive manufacturing market?
 
Dums: Donau Chemie relies on organic growth. Over and above that, we are evaluating possibilities to expand our portfolio – like we did when we decided to bring the amidosulfonic acid production back to Europe – and tap into new markets. Alone in the last two years, we invested about EUR 35 million in our plant in Brückl in Carinthia. We erected a new distribution warehouse and filling facility, a new synthesis with heat extraction as well as a salt treatment facility for solar-dried sea salt.Container ship crews – mostly Asian – were no longer allowed to board or leave a vessel. Container ports came to a standstill, and the entire cycle of transporting and shipping goods was bogged down – until today.
Lockdowns which blocked the global economy ensued. As the restart did not take place simultaneously, the world economy struggled to restore its rhythm. Add to that the war, following Russia’s invasion of Ukraine. While Ukraine has become the main supplier of raw materials and intermediate goods for many industry sectors, the Western world saw itself forced to act by imposing sanctions on Russia.

Sanctions, not only harm Russia’s economy in the medium and long term but which negatively impact the energy supply chains of the Western world in the short term.

About Donau Chemie:

The Viennese based company counts among the largest in the chemical sector. It produces and distributes base chemicals such as clorine, sodium hydroxide solution, hydrochloric acid or calcium carbide, manufactures application-specific compounds, and produces and distributes activated carbons. Donau Chemie products are mostly found in consumer goods in the field of cosmetics, household and technology.

Dr. Gerald Dums

Leitung technischer Einkauf und Logistik Donau Chemie AG

Krystle Lippert

Krystle Lippert

Strategic Sales Manager GrECo International AG

T +43 664 962 40 37

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