Sustainability as Strategy: Future-Proofing Supply Chains: Balancing Cost, Sustainability, and Global Strategy

00:00:01: Hello, everyone, and welcome to Sustainability as Strategy, a podcast brought to you by the experts from Roland Burger

00:00:10: Americas.

00:00:12: I'm your host, Sean McMahon, and our topic for discussion today is material value optimization, sustainability, and supply chain opportunities.

00:00:22: Joining me for today's conversation is Jan Schulte, Managing Director of Polaris, which is part of Roland Burger.

00:00:30: Jan.

00:00:30: How are you doing today?

00:00:32: I'm wonderful.

00:00:32: Thank you very much.

00:00:33: Great to be here.

00:00:34: Thank you.

00:00:34: How are you?

00:00:36: I'm doing wonderful.

00:00:37: I'm excited to kick off this conversation.

00:00:39: But I'd like to start by.

00:00:41: just can you walk us through what the relationship is between Polarex and Roland Berger?

00:00:46: Absolutely.

00:00:48: Polarex is a... The subsidiary, if you will, of Hohlenberger.

00:00:53: Hohlenberger is a strategy consulting firm.

00:00:55: We are within the operations platform.

00:00:57: That means anything which is operations related and consulting for a company is where we are part of.

00:01:03: And Polarex particularly was identified as a company supporting Hohlenberger to grow their product cost offerings.

00:01:13: So what we focus on is product cost optimization in all international markets.

00:01:19: All right.

00:01:19: Well, I think one of the key focuses of today's conversation is going to be supply chain.

00:01:24: And obviously, the political environment.

00:01:27: these days, there's been a lot of discussion about supply chain, specifically the geographic location of supply chains.

00:01:33: So what are you hearing from clients out there when the conversation turns to where to locate their supply chain, whether it's reshoring or diversifying in different places?

00:01:45: Oh, yeah.

00:01:45: I mean, this question.

00:01:47: comes up more and more and more frequently.

00:01:50: I mean, especially over the last ten months, we had a lot of development and increasing intensifying development of the need to diversify your supply chain or maybe even completely relocate your supply chain.

00:02:05: With a lot of clients, we have a China-centric or Southeast Asia-centric supply chain for a lot of products.

00:02:13: Some in the automotive space, because also Bologna and Polaris are focused on a lot of automotive clients, is also Mexico and Canada.

00:02:21: But they are the same.

00:02:23: It's a high level of uncertainty and clients come to us and ask us, what can we do to relocate first of all our supply chain?

00:02:30: How can we diversify our supply chain?

00:02:32: And we all know we have a relatively set supply chain globally for specific competencies and you can't just within a few months relocate everything for everyone.

00:02:44: so there is definitely also a high need on how can I optimize product costs?

00:02:48: because the only thing what you can do is when you're hit with high terrorists optimizing your product costs and to avoid passing everything to your client which maybe can hit your demand.

00:03:00: So this definitely a pressing topic currently.

00:03:04: Yeah, certainly.

00:03:04: And I want to dive into a little bit about reshoring supply chains.

00:03:09: Here in the US, that's a key focus of the Trump administration.

00:03:13: Help me separate the hype around that, or kind of the chatter, if you will, from the reality.

00:03:19: You said it's something difficult.

00:03:22: Efficiencies are already set up all over the globe.

00:03:24: But how realistic are some of these high-level goals?

00:03:28: I think it's definitely an ambitious goal, no doubt about that.

00:03:33: And I think for certain industries, that's key industries who are strategically relevant for the United States.

00:03:40: I believe that is a development where we should do that.

00:03:44: But I believe that is unrealistic across the board.

00:03:48: Any investment, any relocation is driven by an investment by allocating capital of a company or investors.

00:03:59: And they are looking what are the future growth opportunities.

00:04:02: And if you look at Southeast Asia, where a lot of those supply chains are currently located, they have macroeconomically the highest growth potential from their population and from their population migrating into the workforce, also from their... income increase potential.

00:04:22: So there is, I think, a huge upside in Southeast Asia for that, where we will see not that much coming back.

00:04:28: We have an extremely high labor cost in the United States.

00:04:32: And I think if we don't want to shut us out for the rest of our life, in my personal opinion... It is unrealistic to believe that we can relocate everything in every industry here back to the United States.

00:04:46: It will be selected, which is strategically relevant for the United States.

00:04:52: Or if that's going to be relocated, I believe it's going to be fully automated.

00:04:56: So we want to see if we relocate manufacturing full-automized manufacturing plants, which yes, it helps investment.

00:05:05: But it doesn't really help a lot of employment, which is I think next to the investment, the primary goal is also to increase employment and underdeveloped areas in the United States.

00:05:19: Yeah, that's an interesting point you make there because so much of the conversation around reshoring these production facilities is people think that the jobs are coming with them.

00:05:27: But you're saying that some of these might not necessarily bring a whole lot of jobs with them, right?

00:05:32: No, I don't.

00:05:33: I don't believe that because China already Walked away from labor arbitrage and China is in their newest investments solely focus and fully automated plans.

00:05:43: So it's the only way to compete with that is do the same thing because we we don't have a labor arbitrage in the United States to at least not for the foreseeable future.

00:05:54: So I don't believe.

00:05:55: if you I believe if you want to compete with that and avoid this high tariff regime In the long run, all you can do is fully optimize your plans.

00:06:05: And with that, you only will have operator who will basically handle machines but not really produce anything in themselves, as it used to be maybe thirty, forty years ago.

00:06:17: Okay, now you mentioned how, you know, it's probably not likely that all industries across the spectrum will be, you know, reshored.

00:06:24: But I want to talk a little bit specifically about the automotive industry.

00:06:27: So, you know, what are some of the OEMs in that space facing?

00:06:31: when it comes when they look at their whole global supply chain and then they face whether it's tariffs or political pressure to open plants in this state or that country, what are some use cases or examples from that specific sector?

00:06:45: I think the automotive industry is one of the industries hit very hard by this reshuffling of supply chains.

00:06:53: because the automotive industry is first of all an extremely globalized industry in their markets.

00:07:01: Camp companies diversified, OEMs diversified their offerings in different areas and geographies in the world.

00:07:11: But also the end of the supply chain is completely diversified globally.

00:07:16: We have big players in Japan and the United States and Europe growing and growing in China and also in Korea.

00:07:25: And we see that automotive OEMs start to focus more and more on local markets.

00:07:36: We see a little bit backtracking of the global expansion because this is also always related to risk.

00:07:46: So there might be a tendency, in my opinion, especially in the automotive world, that we see in the long run more and more local products, local production, and maybe that drives a little bit some of the investments also in North America.

00:07:59: But we need to be careful.

00:08:01: We need to still watch out what international markets do to stay competitive when international competitors enter our market.

00:08:10: So in terms of automotive industry, we definitely see, first of all, an extremely high cost spread right now, with avoiding passing through tariffs because our automotive industry is extremely hit hard by tariffs.

00:08:24: So they want to reduce their product cost.

00:08:27: restructure their supply chain to the second, meaning not just relocating one supplier, more pushing for a multi-scenario strategy, meaning we need various suppliers for the same product to set up potential risk which could arise, which is also new because historically, most components in a car were sourced to one supplier, to one location, and then they're supplied from there for the rest of the program.

00:08:56: That, I think, will have near to mid-term and end until everything settles globally.

00:09:03: And third, I think, automotive players will long-term invest in some specific areas

00:09:10: for

00:09:11: manufacturing, but then, as I said, more completely optimized.

00:09:16: All right.

00:09:16: So what are some of the other things?

00:09:17: that, from a capital perspective, it's difficult to unlock a lot of capital with so much uncertainty.

00:09:24: Setting up a factory somewhere doesn't happen overnight.

00:09:29: So what are some of the other things you're looking for in the marketplace that will make folks who control that capital feel more comfortable about releasing it?

00:09:37: I

00:09:40: think a few things need to happen.

00:09:43: We need to get a little more stability in decision making, first of all.

00:09:46: I think that is currently intentionally, unintentionally, I'm not really sure.

00:09:52: the theme that we have a high level of uncertainty that the landscape can change more or less on a weekly or monthly basis.

00:10:01: So that definitely doesn't drive investment because if I want to invest something, I need to have long-term security of my employed capital.

00:10:11: And I would think once we have, we see settling in the challenge environment that we can more clearly planned for that.

00:10:21: But also, if we see settling in geopolitics, I think what will not change, that we have a more involved political, or let's say a political involvement into economical decisions, as we see that here right now in North America, I mean, of course, especially in China, but we might also see some of that in Europe, I believe, that politics will play a larger role in economic decisions.

00:10:52: And that will also drive some of the investments, I think, because I think those players will one more be combined.

00:11:00: And if we go hand in hand and can resolve all the global conflicts, I think then this can also drive some more investments.

00:11:10: But right now, it's due to earlier, I believe.

00:11:14: So when you're talking about... political involvement.

00:11:16: In and out, there's two ways to look at that.

00:11:18: There's policy, which is, as you mentioned, uncertain, can change from week to week with tariff announcements, whether they're on, they're off, what percentage.

00:11:27: But in recent months, here in the US, the government has been taking stakes in companies.

00:11:33: So what kind of impact would that have in the automotive industry if the US was to go in and either take a stake in one company or you know, different size stakes across the board.

00:11:48: I don't think that the government will have stakes in automotive companies.

00:11:52: That's, I don't believe.

00:11:54: If you talk about, I think you talk about specifically Intel, the investment into Intel.

00:11:58: I think that is more what I mentioned before, a very strategic investment because that is an extremely strategic industry.

00:12:05: And essentially Intel is the only real competitive, more or less competitive semiconductor firm in North America which can secure and produce semiconductors which are relevant for defense, which are relevant for any government, very governmentally, very important industries.

00:12:25: But I don't think the government is starting to invest in automotive firms.

00:12:29: I think the government will more direct policy rather than invest capital.

00:12:35: And I don't think that the government will invest in all the manufacturing reshoring.

00:12:41: This is also another thought, but this would be just too much capital.

00:12:45: I don't think it makes sense.

00:12:46: It doesn't make sense because then we walk completely away from free markets and capitalism.

00:12:52: And so, you know, drawing it back to, you know, this shows all about sustainability, right?

00:12:57: And so we've spent these first few minutes talking about, you know, capital, you know, policy and things like that, but.

00:13:04: What do you and the team at Polarex do when your clients ask you to factor sustainability into this decision matrix with so much uncertainty?

00:13:14: I mean, first of all, Polarex Partner helps our clients to analyze their product costs, first of all.

00:13:23: But as you can hear on my accent, I'm also German.

00:13:27: In Europe, we have a strong push to also not only economical, performance was also ecological.

00:13:38: performance and sustainability is definitely a huge topic in Europe.

00:13:42: so therefore we developed also for our clients tools where we can analyze the economic footprint the carbon footprint for their products and help them navigating them optimizing them that they become better and closer to their goals what they have.

00:14:03: Currently, this is not necessarily a big topic in the United States, as we all know, sustainability and carbon footprint.

00:14:10: But I think there is a big, big bud to that.

00:14:16: North American companies, at least the Fortune-Five-Hundred companies, were for the most part pretty dominant also globally, not only in the United States.

00:14:26: And I don't think that any of those companies should and will walk away from their global presence.

00:14:32: But in order to be competitive globally, they need to fall in line with the sustainability requirements in other markets, especially in Europe, but also more growing in China.

00:14:44: As you can see, China is by now the largest solar energy producer.

00:14:49: They are the largest wind energy producer.

00:14:51: They are employing a lot of capital in... renewable energy.

00:14:57: They are the leader in electric vehicles.

00:15:00: So the image what we had of China maybe fifteen, twenty years ago completely changed.

00:15:04: It doesn't mean that everything is completely clean and healthy in China, but I think they're on the pathway and they set up policy to get there.

00:15:13: And that leaves just a few markets out, but I think also India, even though right now there is still a lot of pollution.

00:15:20: It will change.

00:15:21: It will change to a more sustainable market.

00:15:24: So that means North America will be, if we continue on the path as we are, the only one left out, it doesn't really focus on that.

00:15:32: That means for companies who are very successful in North America and want to remain successful globally, they have to focus also on sustainability goals and they have to set up sustainability targets for their products to be competitive internationally.

00:15:46: Because I think it is not just in the market itself, in the production of the market itself, it's also what is your carbon and emission footprint, if you will, as a company.

00:16:01: when you look at your product production entirely where it comes from.

00:16:05: So therefore, I think we can help our clients here in North America also with that, analyzing their product portfolio.

00:16:12: What is the sustainability in carbon footprint for their product?

00:16:17: And so, can you share some examples on that?

00:16:19: I mean, obviously, when a company is looking at their carbon footprint, you know, they might be considering trade offs they got to make on materials and things of that nature, whether it's aluminum versus steel or anything like that.

00:16:31: So what are some examples of companies making those choices?

00:16:36: I mean, at the end of the day, the choices are still, and I think for quite some time, more sustainable materials will be more expensive.

00:16:48: But this is it.

00:16:50: Also a policy question would be talked about before and this is put in place in Europe and I think it will be intensified in China as well that you have to pay penalties when you use less competitive materials in your product.

00:17:08: So that means a steel or aluminum as you use it today might work as well as a more sustainable alternative.

00:17:18: but a sustainable alternative is by itself much more expensive.

00:17:23: But then it depends on the policy in each region, what they don't penalize companies offering if you get a trade-off or is it going to be an ROI.

00:17:32: In the end, it's just an ROI calculation, not necessarily.

00:17:38: the good bill of a company, maybe to the accounts for some of them, but not for the majority.

00:17:42: So you already mentioned pretty precisely what the main company is talking about.

00:17:46: I mean, it's aluminum, steel, different derivatives of that.

00:17:49: There are some resin material, different resin material.

00:17:52: There's still sometimes the discussion about CFK as a carbon materials or glass fiber materials, but this is not really materials for the high volume production necessarily.

00:18:08: But we can help clients moving into different material rates, which are more expensive, but have a lesser carbon footprint.

00:18:19: Also, when you look, for example, for Germany, Germany moved now to steel production full with hydrogen and aluminum in the future as well.

00:18:30: So that means traditionally, extremely high energy intensive and a lot of emissions to produce steel and aluminum.

00:18:38: But if I can move that to a refinement process solely by hydrogen, then it's only the exploitation of the material and that's it, all of my emissions that I can use that.

00:18:51: But of course, this is now much more expensive and it's a different grade.

00:18:55: But we can help our clients creating a business case and what's the best source to get the material to be compliant with the requirements in each market variable on the go.

00:19:06: So with all these variables we've discussed, regulatory, market dynamics, sustainability, when you're talking to your clients and they're seeking advice about future-proofing their supply chain and scenario planning for all these different potential risks, what do you tell them?

00:19:28: I tell clients clearly you shouldn't sit and wait it out and then make a decision because I think Everyone who is smart enough should now take the time, the time of uncertainty and leave the tactics for your team and focus yourself on the different scenarios, different strategies you can develop that you are able once you have more clarity to execute.

00:19:54: What I mean with that, we can have a one-time strategy set up in my opinion and execute it for the next five years and to be sure everything goes fine.

00:20:03: This is, I think it will be in my opinion, a little naive.

00:20:09: You should use the time wisely and look what are the critical components for my products?

00:20:17: How will my future products look like?

00:20:19: How can I secure all the materials that I need for my future products?

00:20:26: Where do I go?

00:20:27: Because what we see, for example, I have now the requirement that from... some industries to get complete all the electronics out of China.

00:20:36: I mean, there is not so much left in capacity globally where you can go to get all your products outside of China.

00:20:44: So when everybody goes to this small capacities, maybe somewhere in Southeast Asia, there's for sure no capacity left, and if so, then for extremely high prices.

00:20:56: So, but if you would have known that, Five years ago or three years ago.

00:21:01: You could have maybe secured yourself some capacity for lower prices.

00:21:05: That is what I mean.

00:21:06: We need to think about strategies how we can actually secure prices on a global market in different regions invest Smartly into a different region our capacity and build the capacity there that we are able in the future to supply or first of all our global markets on a competitive price level and be able to shift along supply chain on a as needed basis

00:21:34: when

00:21:34: global situation, macro situation shift.

00:21:39: All right, I appreciate that regarding future proofing and kind of keeping the whole supply chain competitive on price and development.

00:21:49: But I want to ask you specifically about sustainability.

00:21:51: So what's one key piece of advice you'd give just on how business owners can keep their eye on sustainability while navigating all these other areas of uncertainty?

00:22:02: There is definitely, I think, not on.

00:22:03: everyone's first thing on their mind is sustainability, I believe, today.

00:22:10: So the only thing I can say for future proof and as advice, don't forget about it, because it's going to be your different ghetto when everything settles down.

00:22:20: I think sustainability is one of the key elements and the key drivers, especially in younger generations.

00:22:25: They have a much higher focus on sustainable products.

00:22:29: And if they become the majority of customers, you should have products in your portfolio who actually provide that and that you also, in case global policy shifts want more in that direction that you can stay competitive with your products.

00:22:46: My advice.

00:22:47: Don't forget about it.

00:22:49: Short-term, focus tactically, mid-term, start-to-think about it, and long-term, execute it.

00:22:57: Well, that sounds like some pretty sound advice to me.

00:23:00: Listen, Jan, I appreciate you sharing your insights with us today.

00:23:03: Thank you very

00:23:04: much.

00:23:05: Thank you very much, Jan.

00:23:06: We're glad to be here.