Do you still remember the proud advertising slogans “Das Auto” (“The Car”) and “Das WeltAuto” (“The World Car”) for used vehicles from a well-known car manufacturer? In a way, these claims reflected the aspirations of many international - and especially German - companies.

As part of their globalization efforts in recent decades, companies delighted consumers all over the world with products that were developed and manufactured centrally and then exported to sales markets, provided transport costs allowed.

The German automotive industry in particular is a prime example of this. German cars were centrally designed, developed, and produced. With the claim “Made in Germany,” they became highly desirable products worldwide. Centralized production created enormous economies of scale, which had a positive impact on profitability. However, the significant dependence on currency developments, along with the dismantling of trade restrictions and tariffs, led to the globalization of production facilities already in the 1990s.

At the same time, many sectors reduced their vertical value chains, leading to greater division of labour. This meant that more production steps were outsourced or relocated to low-wage regions. The advent of information technology also drove productivity - and often profitability - gains for companies. These developments were strongly supported in the first two decades of the 21st century. The rise of emerging markets, their growing appetite for consumer and investment goods, and their preference for global brands seemed boundless. But then, this trend was abruptly slowed, and tectonic shifts began to challenge companies.

First came the COVID-19 pandemic, followed by disruptions in supply and production chains, the reintroduction of tariffs, and regulatory hurdles caused by increasing geopolitical fragmentation. These factors are forcing companies to reinvent themselves, at least in part. The growing regionalization of consumer preferences also requires a shift in thinking. For example, Chinese car buyers look for completely different features than European or American consumers.

To adapt to these changing conditions, development and production must increasingly be regionalized. Demographic trends in different regions, increasing automation, and especially the use of artificial intelligence present additional challenges. A recently published McKinsey study highlights the high profitability levels of companies worldwide - even accounting for specifics such as the attractive profit margins of U.S. tech firms. However, for the future, investors must ask themselves many questions:

• How will the profitability of many companies evolve if economies of scale diminish and they have to invest more heavily in local development and production?
• Will companies become more capital-intensive again, as they were in earlier decades? At what level will returns on invested capital stabilize?
• What impact will these potentially greater investments have on balance sheets? Will companies need to take on more debt? And what will this increased investment demand mean for future dividends and share buybacks?

Conclusion: Companies have successfully leveraged the opportunities and challenges of recent years and decades, achieving record levels of profitability across the board. But new challenges are looming. When selecting stocks, in addition to all other key aspects, investors should also consider the question: “What does Local-for-Local mean for your company?”