Dusseldorf At the Portuguese investment agency Aicep, the phones are running hot: In the seven months of this year, inquiries from companies wanting to set up a location in Portugal have skyrocketed by 50 percent. And that compared to 2021.
Last year was already the previous record year with 97 investment projects worth 2.7 billion euros. Before the pandemic, in 2019, the total was 1.2 billion euros. So far, inquiries from German companies for suppliers in Portugal have more than tripled compared to 2021.
The reason for this development are the global crises, especially the corona problem. Aicep helps large corporations that are interested in Portugal as a location or are looking for suppliers there.
There have been significantly more of these since the outbreak of the pandemic. In view of delivery bottlenecks and skyrocketing logistics costs, companies want to be less dependent on one supplier or one region.
Production in a nearby foreign country, in technical jargon nearshoring, is an alternative to the focus on China that has often prevailed up to now. “The trend towards nearshoring is the main reason for the strong increase in investor interest over the past two years,” says Aicep CEO Luís Castro Henriques.
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It is true that companies cannot simply relocate a factory from China to Europe. But when it comes to new investments, they are now more often deciding against Asia and in favor of Europe.
Portugal offers many well-trained IT experts and has been developing into a location for IT services and software development for several years. What is new this year is the increase in industrial companies that want to set up their own production in Portugal or are looking for suppliers.
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One of them is the German cooking accessories manufacturer Springlane. “Before the corona crisis, we worked a lot with suppliers from Asia,” says Philipp Kowalatis, who heads global procurement at Springlane. But the cost of a container from China has exploded in the pandemic. Currently, at around $10,000, they are still three times what they were before Covid-19.
“That’s why we are now increasingly looking for reliable production partners in Portugal and Turkey,” says Kowalatis. Portugal is particularly attractive when it comes to ceramics – the country is famous for its tiles and earthenware.
Some companies are already fully booked
Kowalatis traveled to Portugal several times in 2021 to look for ceramic manufacturers there as partners. He wasn’t the only one. “Four out of five manufacturers said to us: We’re sorry, but we’re already fully booked for 2022,” he says.
They have major customers like Zara or Williams Sonoma and would first use their capacities to serve increasing inquiries from existing customers. “It’s difficult for new customers to find a supplier – we usually have to pay more to get a foothold in the market,” says Kowalatis. In the end he found a partner, the first delivery followed almost a year later, in the second half of this year.
Having lived in Asia for a long time, Kowalatis joined Springlane in 2015 to build up the China business. Now he is trying to reduce the proportion again. In addition to the lower logistics costs, he appreciates the better quality in Portugal. “They implement optical details such as color gradients better than the Chinese, and we can also produce smaller quantities in Portugal,” he says.
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So far, small shortcomings with Chinese suppliers have been accepted because they were on average 40 percent cheaper than Europeans. However, this difference has been more than halved due to the high logistics costs. In addition, it is still not possible to travel to China. Personal exchange is particularly important for the development of new products.
The first Portuguese manufacturers are expanding their capacities
These arguments are likely to be shared by some in the car industry – even the Portuguese manufacturers of car parts can hardly save themselves from inquiries. “Most companies have fully utilized their capacities,” says Mafalda Gramaxo, head of the metal industry association in Portugal.
Promecel, a manufacturer of electrical and mechanical components, is already building a new facility to increase its capacity by a quarter to meet high demand. “Shortly after the pandemic, we received numerous inquiries from European companies,” says Promecel manager José Silva. “Most wanted to diversify their supply chains and locate 30 to 50 percent of their suppliers outside of China.”
The fashion group Hugo Boss is also moving away from Asia. “We are changing our strategy, but not only because of China, but also because of the war,” explained company boss Daniel Grieder in an interview with the “FAZ”. In the future, production will be more close to the respective sales markets.
In Turkey, Boss is doubling its existing capacities. “In Europe we talk more to Portugal, Eastern Europe or Italy. Everything that has been frowned upon in our industry over the past ten to 15 years is becoming relevant again,” says Grieder.
The Ukraine war promotes “friendshoring”
The nearshoring trend is reinforced by the Ukraine war, which promotes a second phenomenon, so-called friendshoring. Companies are looking for locations or suppliers in trustworthy countries. They want to prevent their investments from being jeopardized by the unpredictable politics in autocracies.
“Since the war in Ukraine, entrepreneurs have also been replacing suppliers in Eastern Europe with others in politically safer regions,” says Paulo Azevedo, Vice President of the German-Portuguese Chamber of Commerce in Lisbon. The companies could not yet assess the effects of the Ukraine war on neighboring countries such as Poland or Romania and were therefore oriented towards the west.
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German companies are among the largest investors in Portugal. Your requests to Azevedo have increased by half since the pandemic. The demand for technically demanding product groups such as precision technology, in which Promecel is also active, is particularly strong. The trend is also affecting Portuguese exports, which have increased significantly (see chart).
Beyond geopolitics and supply chains, however, the increasing importance of sustainability also makes locations in Europe more attractive. “The topic is becoming increasingly important for consumers, and certifications such as Öko-Tex for textiles are more common in Turkey than in China or Pakistan,” says Springlane buyer Kowalatis.
Portugal is definitely one of the countries that will benefit from a reorganization of supply chains. However, it remains to be seen how broad it will be. Because there are also surveys in which companies are skeptical about friend and nearshoring.
According to a representative survey by the Ifo Institute, 41 percent of companies in the manufacturing sector are planning to change their procurement strategy, 35 percent in wholesale and 27 percent in retail.
However, only about every tenth company mentions reshoring (relocation of production to the country of origin), nearshoring or insourcing (taking on tasks that have previously been performed by external companies) as an option. The rest want to diversify their suppliers more or increase storage.
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