The machinery and equipment (M&E) sector powers economies and shapes industries. As climate action takes center stage, industries around the world are grappling with the task of reducing their carbon footprint. While the M&E sector has made progress in curbing its Scope 1 and Scope 2 emissions (direct emissions from operations and energy consumption, respectively), the majority of its carbon emissions come from a more elusive source: The intricate web of its supply chain. In this blog post, we will focus on the often-overlooked Scope 3 emissions, which are indirect and come from sources beyond a company's immediate operational boundaries.
In 2021, China, Germany and the United States stood out as the top exporters of machinery and equipment (M&E). China leads by a significant margin with $1.54 trillion in exports, or 28.2% of global exports, followed by Germany with $435 billion or 7.96%.
China's special importance in the global M&E industry is not only reflected in this impressive total trade volume, but also in its major role as a supplier of key components and materials to the M&E industries of other major producing countries. This hidden role of China, among other carbon hotspots, will be revealed in this post and in our drill-down on M&E supply chain emissions.
But before we deep-dive into global supply structures, let's first look at the overall CO2 intensity of M&E production in different countries. The CO2 intensity is a measure of CO2 emissions relative to economic output: China has a CO2 intensity of about 0.75 kilograms of CO2 equivalents per euro of sector turnover (kg CO2eq/€). Germany and the US have much lower but very similar specific emissions: 0.30 kg CO2eq/€ in Germany and 0.29 kg CO2eq/€ in the US.
Figure 2 shows the wide range of carbon intensity among the top 20 M&E producing countries, from below 0.25 kg CO2 eq/€ to above 0.8 kg CO2 eq/€. It also illustrates the distribution of emissions between final production (Scopes 1 and 2) and supply chains (upstream Scope 3). While the shares of the three scopes vary between countries, with Scope 2 being the most volatile due to different electricity mixes, there is a common narrative: the vast majority of greenhouse gas emissions comes from the supply chain (upstream Scope 3). This supply chain focus for climate change action becomes even more apparent when looking at the different products produced by the M&E industry:
Using the German M&E industry as an example, figure 3 shows the breakdown of the industry into its 28 most relevant sub-sectors. Scope 3 shares, which reflect supply chain emissions, range from 70% for industrial mold manufacturing to 94% for farm machinery and equipment.
It is therefore clear that any meaningful decarbonization strategy in the M&E industry must include supply chain management. However, this is much more challenging for companies than managing carbon emissions within their own operations. To make matters worse, the majority of supply chain emissions do not come from direct suppliers. Many emissions come from steps in the supply chain that are distant and beyond the direct reach of traditional procurement management.
Figure 4 shows this for the German M&E industry, where more than 66% of total greenhouse gas emissions come from the deep supply chain beyond direct suppliers and own facilities.
It is worth noting that while CO2 is unsurprisingly the most relevant greenhouse gas for the M&E industry as a whole, there are exceptions to this rule in certain sub-sectors, particularly those that use refrigerants. For example, when looking at the German sub-sector 'Air conditioning, refrigeration and hot air heating equipment', 66% of Scope 1 and 2 emissions are attributed to hydrofluorocarbons (HFCs) (see figure 5).
The supply chain thus emerges as the largest source of emissions for the M&E industry, a consistent trend across countries and sub-sectors. A comparison of the three main producers of M&E - China, Germany and the US - reveals significant differences between their supply chains:
The German M&E industry relies heavily on imports from other countries, with more than 50% of its supply chain emissions coming from abroad. The US, on the other hand, is more self-reliant, with only 37% of its emissions coming from imports. But in terms of a domestically focused economy, China really stands out with 99% of its supply chain emissions coming from domestic sources (see figure 6).
Interestingly, Germany and the US have one thing in common: apart from their domestic emissions, both countries import most of their emissions from China at roughly the same level: 13-14%.
This makes China the second most important country for both in terms of existing and future regulation. While domestic developments are usually on the radar, the fact that Chinese regulation represents a significant price risk can easily be overlooked.
For the German M&E industry, imports from China are in the same league as all other EU imports combined. Apart from the price risk of potential regulation, this is also important in the context of the European Carbon Border Adjustment Mechanism (CBAM) and the associated reporting requirements.
We will cover this interesting topic in more detail in a future post.
Figure 8 shows that basic metals and the associated supply of electricity and gas are the key production stages in China that determine its role for the carbon footprint of the German M&E industry.
It is evident that businesses worldwide are entering a critical phase of transition, where climate action is not just a moral imperative but a powerful economic driver. The urgency to decarbonize is growing rapidly, and this transformation is reshaping industries, including the machinery and equipment (M&E) sector. To succeed in this endeavor, M&E companies must confront the challenge of managing emissions that originate beyond their direct suppliers, which poses unique difficulties. Climate strategy, and procurement/supplier management become more and more intertwined.
China's central role in global M&E supply chains cannot be overstated. It not only serves as a major producer but also as a significant source of supply chain emissions for countries like Germany and the United States. The potential impact of Chinese regulations on international trade, and carbon pricing, should not be underestimated, especially in the context of evolving global climate policies.
Both, risk management and climate change mitigation, need reliable and actionable data. And as difficult as it is to unravel complex global supply chains, there is a solution to it! All the insights into the M&E industry within this post come from our carbon model matter+s. With this model and the accompanying tool-set, ctrl+s provides a shortcut to supply chain carbon management.
In the upcoming posts of the “talking number+s” series, we will investigate the situation of other key industries and countries on the path to decarbonization of our global economy.
Johannes Scholz, co-founder ctrl+s
7th September 2023
