EU Considers Mandating Supply Chain Diversification Amid German-Chinese Business Ties

The European Union is moving toward possibly imposing legal requirements on companies to diversify their supply chains away from China if diversification efforts prove insufficient. Industry Commissioner Stéphane Séjourné and Vice-President Maroš Šefčovič unveiled this approach as part of the EU's new Resource EU action plan within the broader Economic Security Package. This plan includes amending the Critical Raw Materials Act to require companies to report their diversification strategies to supervisory boards, enabling the EU to evaluate the effectiveness of these measures and potentially mandate diversification in the future if needed.

Current EU regulations already compel companies to take steps toward reducing dependency on critical materials sourced from China. The EU is drawing inspiration from Japan’s multifaceted strategy, which combines subsidies, tax incentives, and the support of a centralized agency (JOGMEC) to secure raw materials and diversify sourcing. Séjourné highlighted Japan's model as a benchmark for balancing economic security with industrial competitiveness.

Despite this push for supply chain diversification, many German companies remain deeply engaged with China. A recent survey found that 56% of German firms aim to expand their businesses in China, while 60% regard Chinese firms as leaders in innovation within their sectors. The collaboration extends to knowledge transfer: 55% of German companies report technical expertise flowing from Germany to China, and 40% note innovative solutions returning from China to Germany. However, challenges such as finding suitable partners amid unclear market structures and differing standards persist for 42% of firms.

This complex situation reflects the tension between advancing economic security through supply chain diversification and the strategic importance German companies place on cooperation with Chinese firms. The EU’s new regulations could significantly impact German firms' operational strategies and supply chain management in the near future.

Commissioner Séjourné urged CEOs to prioritize economic security and supply chain diversification. The establishment of a European Centre for Critical Raw Materials is also planned to enhance reserve building and sourcing options, modeled after Japan’s agency.