De-risking instead of decoupling: The 5 steps that medium-sized businesses are taking to reprogram their industrial DNA

Why European SMEs need to reprogram their industrial DNA in the geopolitical tension between resilience and dependence

Germany's small and medium-sized enterprises (SMEs) are at a historic turning point. The geopolitical shifts of recent years have shaken the foundations of an economic order that for decades rested on the premise that economic interdependence creates peace and that the global division of labor maximizes prosperity. This naive notion has become obsolete, at the latest since the Russian invasion of Ukraine and the Chinese export restrictions on critical raw materials. Small and medium-sized enterprises, which form the industrial backbone of Germany and Europe, are now confronted with a reality in which geopolitics dominates economic logic and supply chains are being weaponized.

The challenges discussed at the international roundtable in October 2025 reveal the depth of the transformation facing German and European SMEs. It is no longer just about cost optimization and increasing efficiency, but about existential questions of strategic autonomy, industrial resilience, and economic security. The discussion between representatives from academia, business associations, and research institutes clearly demonstrates that Germany and Europe need a fundamental change of course to be able to survive in the new multipolar system of competition.

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The economization of geopolitics and the end of naive trade strategies

The global trading order is undergoing a fundamental transformation. What was once taken for granted—the peace-building effect of economic interdependence—has been reversed. Economic interconnections are increasingly being instrumentalized as a lever of geopolitical power. The rivalry between the United States, China, and Europe has reached an intensity that makes structural adjustments in trade, investment, and industrial policy imperative.

Germany and the European Union must recognize that their previous strategy of open market access and the hope for reciprocity has failed. For decades, China has pursued a strategic industrial policy based on self-sufficiency, state subsidies, and systematic technology acquisition. The Made in China 2025 program explicitly targets those industrial sectors where Germany has its greatest strengths: mechanical engineering, chemicals, the automotive industry, and metal production. The speed with which Chinese companies have climbed the value chain has surprised many German SMEs.

The necessary response must be an integrated European strategy comprising three pillars: economic pragmatism in diversifying markets and increasing competitiveness, political resilience through strengthened European alliances, and technological sustainability to reduce critical dependencies. Germany must abandon its belief in the automatic healing power of free markets and acknowledge that competitors like China have long pursued strategic trade policies, while Europe remains mired in ideological rigidity.

The Federal Republic of Germany has little experience in intelligent industrial policy and strategically investing in winners. Decades of relying on market forces and a reluctance to intervene have left Germany in a vulnerable position today. Russia has demonstrated how energy dependence can be weaponized. China, with its export controls on rare earth elements, gallium, germanium, graphite, and antimony, shows how economic dominance in strategic sectors can be used for political blackmail. Germany's dependence on China for critical raw materials now surpasses its previous dependence on Russian energy.

An immediate export ban on Chinese lithium alone would jeopardize €115 billion in industrial value creation, roughly 15 percent of Germany's total industrial value creation. The automotive industry, which relies on lithium for electromobility, would directly lose €42 billion. Indirect and induced effects would increase the losses to €88 billion. These figures illustrate the extent of the structural vulnerability.

The answer cannot lie in protectionism or complete decoupling. De-risking, not decoupling, is the guiding principle. This means systematically reducing critical dependencies through diversifying supply chains, building strategic reserves, promoting domestic production in key sectors, and creating alternative sources of supply. Following the British model, Germany must establish a task force that systematically assesses critical dependencies and develops product-specific strategies. The European Raw Materials Alliance offers a promising approach, but its implementation lags behind its promises.

Family businesses as strategic resilience anchors in systemic competition

In times of geopolitical upheaval, family businesses prove surprisingly resilient. While publicly traded corporations suffer under the pressure of short-term quarterly expectations and must adjust their strategies accordingly, family businesses possess structural advantages that become particularly valuable in times of crisis. The concept of entrepreneurial family galaxies describes how family-run networks of companies, family offices, and foundations respond to geopolitical disruption.

Traditional family businesses face increasing pressure from trade restrictions and shifting alliances. Family Galaxies, however, which span multiple companies, offices, and foundations, can strategically reconfigure their assets to maintain liquidity and resilience. This organizational flexibility allows them to respond more quickly to external shocks than monolithic corporate structures.

The key levers of resilience in family businesses are manifold. First, they secure critical inputs through strategic procurement and long-term supplier relationships. Second, they enable cross-industry alliances that promote knowledge transfer and dual-use innovation. Third, they support the transition to defense-related supply chains through clear standards and qualification pathways. Fourth, they strengthen governance structures and liquidity instruments to enable long-term investments.

The socio-emotional wealth of family businesses fundamentally distinguishes them from other forms of business. Their long-term orientation, the embedded trust in local networks, and the willingness to pursue non-economic goals make them stabilizing factors in regional economic structures. They think in generations, not quarters. This perspective allows them to make investments that only pay off over longer periods but are strategically valuable.

The social integration of family businesses into their regions creates bonds that extend beyond purely economic transactions. They preserve jobs even in economically challenging times, support local institutions, and engage in community activities. These non-monetary contributions are often overlooked in standardized success metrics, but are of immense importance for societal resilience.

However, family businesses are not immune to current challenges. The lessons learned from the COVID-19 crisis cannot be directly applied to the current polycrisis context. The overlapping of multiple crises, from geopolitical tensions and climate shocks to technological disruption and economic uncertainty, creates a complexity that demands new responses. The ability of family businesses to absorb these multiple shocks depends on their strategic foresight, financial resilience, and willingness to challenge traditional business models.

The Galaxy concept shows parallels to ecosystem thinking, but is deliberately family-centric and emphasizes the inter-organizational connections created by entrepreneurial families themselves. These networks are based on trust, shared values, and long-term relationships. They enable resource transfer, knowledge exchange, and joint strategic action that extends beyond the boundaries of individual companies.

Family businesses are of vital importance for European strategic autonomy. Their ingrained trust, long-term vision, and socio-emotional wealth make them anchors of economic stability. Policymakers must recognize and specifically promote these strengths, instead of burdening family businesses with excessive bureaucracy and regulatory uncertainty.

Germany's hidden export dominance and the asymmetry of dependencies

The public debate about Germany's economic vulnerability often focuses on import dependencies, particularly on China. However, a more nuanced analysis of trade relations reveals a more complex picture, highlighting German and European strengths. Germany possesses remarkable export dominance in specific product categories, which can be leveraged strategically.

A detailed analysis at the product group level shows that approximately 180 to 200 of over 5,300 product groups are considered export-dominant, defined as having at least a 30 percent share of the global market. Two-thirds of these product groups are found in the chemical, mechanical engineering, and base metals sectors. The automotive sector dominates in terms of value. Although the number of dominant product groups has decreased since 2010, it appears to have stabilized recently.

In international comparison, Germany performs respectably. It surpasses France, Italy, and Japan in the number of export-dominant products, but lags behind the United States and significantly behind China. However, when considering the EU27 or the G7 plus EU bloc as a whole, these regions still exceed China in the total number of export-dominant products. This underscores the importance of European integration and coordinated action.

While Germany's dependence on Chinese imports is significant, it is concentrated in a relatively small number of product categories. For certain electronic components, textiles, rare earth elements, and medical products, the Chinese import share ranges between 60 and 92 percent. This concentration makes targeted countermeasures both possible and necessary. Conversely, the data shows a strong dependence of the United States on European imports, particularly for industrial and strategic goods.

These asymmetrical dependencies are politically valuable. If Germany dominates the export of certain goods, other countries are to some extent dependent on it. Given US tariff policies and the steadily tightening of Chinese export regulations for rare earths, this can serve as a trump card for exerting political pressure. The challenge lies in strategically leveraging these strengths without succumbing to protectionism.

Germany's critical dependencies on raw materials have been known for years. Beyond management inertia, this inaction is partly due to a deeply ingrained belief in open markets, while competitors like China pursue strategic trade policies. Germany lacks experience in intelligent industrial policy and in selecting winners. Initiatives like the European Raw Materials Alliance offer promising steps forward, but their implementation needs to be accelerated.

A pragmatic, product-specific approach to industrial policy and de-risking is needed. Not all dependencies are equally critical, and not all sectors require the same level of government support. The challenge lies in combining strategic foresight with entrepreneurial flexibility and linking macroeconomic strategies with the realities at the firm level, which often diverge from aggregated national perspectives.

The strategic reassessment of global production sites

Diversifying production sites is one of the most pressing tasks for German SMEs. Decades of focusing on China as an extended workbench and increasingly as a sales market have led to dependencies that are now proving to be a strategic risk. Statistical data and expert interviews show that alternative locations exist that mitigate risks and open up new opportunities.

German direct investment in the manufacturing sector has traditionally concentrated in the Americas and within the EU, followed by Asia. While China remains the second most popular destination, investment plans there are declining, while interest in other Asian countries is growing. India, Vietnam, Thailand, and Indonesia are increasingly seen as attractive alternatives.

The criteria for selecting production sites have fundamentally changed. Political stability and trade agreements have gained importance, reflecting companies' growing focus on risk diversification. Pure cost optimization is giving way to a holistic risk assessment. Factors such as legal certainty, infrastructure quality, availability of skilled workers, geographical proximity to sales markets, and regulatory stability are systematically integrated into decision matrices.

Interactive country scorecards and country profiles provide SMEs with guidance in evaluating potential locations. These tools consider economic indicators as well as political risks, ESG criteria, and logistical conditions. The German Federal Government supports this diversification through guarantees, advisory services, and diplomatic support, but companies themselves must be prepared to take on new risks in order to reduce existing dependencies.

The challenge lies in the fact that diversification initially incurs costs. New supplier relationships must be established, quality standards implemented, logistics processes adapted, and local specifics understood. For SMEs with limited resources, this presents a significant hurdle. Targeted support is needed here, for example through cluster initiatives, joint market development, or public start-up funding.

The issue of energy prices and bureaucracy in Germany itself must not be overlooked. If high costs and regulatory complexity make the domestic location unattractive, this will increase the incentive to relocate. A competitive industrial base in Europe is a prerequisite for companies to have the capacity to pursue strategic diversification. Framework conditions must be improved so that companies once again demonstrate a greater willingness to take risks.

Geographical realignment must go hand in hand with technological modernization. Digitization, automation, and artificial intelligence can help increase productivity and reduce dependence on specific locations. Nearshoring and reshoring become more attractive as production processes become more flexible and less labor-intensive. The transformation to a circular economy, which relies on recycling and closed-loop systems, reduces the need for primary raw materials and thus import dependencies.

The hub for security and defense offers well-founded advice and current information in order to effectively support companies and organizations in strengthening their role in European security and defense policy. In close connection to the SME Connect working group, he promotes small and medium -sized companies (SMEs) in particular that want to further expand their innovative strength and competitiveness in the field of defense. As a central point of contact, the hub creates a decisive bridge between SME and European defense strategy.

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Dual-use technologies as a bridge between civilian innovation and strategic autonomy

The restructuring of European defense and industrial ecosystems opens up new opportunities for SMEs, but also presents significant challenges. Dual-use technologies, which serve both civilian and military purposes, form a practical bridge between sectors. They enable companies to transfer their existing expertise to new markets without having to completely reorient themselves.

Europe's defense market is fragmented along national lines, with countries often favoring domestic suppliers and pursuing bespoke military requirements. While this supports national industries, it limits economies of scale and discourages significant investment in production capacity. Only 27 percent of EU defense procurement is conducted through joint initiatives, compared to 61 percent in the United States. The result is fragmentation that stifles innovation and increases costs.

SMEs are crucial for resilience, innovation, and flexibility, but face significant barriers to market entry. Access to decision-makers and procurement platforms is difficult. Complex certification and security clearance requirements present substantial obstacles. Export control and compliance burdens are particularly severe for small businesses. Financing problems due to long contract cycles exacerbate the situation.

Automated logistics systems can improve both civilian supply chains and military readiness. A dual-use warehouse project exemplifies how technologies from civilian intralogistics can be adapted for military applications. Such projects demonstrate the feasibility and added value of sector coupling.

Targeted policy measures are needed to accelerate the participation of SMEs: transparent procurement processes designed to be SME-friendly; fast-track prequalification processes that reduce bureaucratic hurdles; and tailored support programs with appropriate lot sizes and payment terms. Creating an SME window in EU funding instruments, simplifying tendering procedures, and strengthening the integration of SMEs into strategic defence planning at both national and EU levels are necessary steps.

Ultimately, a vision of SMEs as essential nodes in Europe's dual-use backbone is needed. They can strengthen both competitiveness and strategic autonomy. Europe's military modernization cannot be driven solely by a handful of large corporations. The integration of the diverse SME landscape is essential to mobilizing innovation and diversifying supply chains.

The dual-use debate must be conducted within society. Destigmatizing security-related innovation is essential so that companies can operate in this field without reputational risks. The balance between economic benefits, ethical considerations, and security policy necessities must be discussed transparently. A mature democracy can and must lead this discussion.

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Reluctant Innovation under Wartime Conditions as a Blueprint for European Industrial Policy

The rise of the Ukrainian drone industry is a remarkable example of reluctant innovation, innovation born of necessity. Under the pressure of war, a decentralized ecosystem emerged, combining business initiative, voluntary engagement, and targeted government support. Early reforms proved crucial. A decentralized military budget allowed brigades to procure drones directly. New platforms like BRAVE1 connected innovators, defense stakeholders, and investors, creating a functioning drone market that fostered dual-use technologies.

Existing strengths in technical training and IT infrastructure further accelerated progress. Within two years, Ukraine's drone capacity increased twentyfold, with production costs up to ten times lower than in the EU. Continuous feedback from the battlefield enabled rapid experimentation, iteration, and competition, transforming necessity into a dynamic innovation process.

The government reduced bureaucracy, lowered procurement thresholds, and introduced tax breaks, subsidies, and training programs. It effectively instilled an entrepreneurial spirit in the military. The BRAVE1 platform model functions as a government accelerator, providing startups with capital, market access, and contacts. Over 2,800 projects from more than 1,200 Ukrainian innovators have been registered. In the first two years, over 540 grants worth the equivalent of US$50 million were awarded. Nearly US$75 million is budgeted for 2025.

For other countries, the lesson lies not in imitation, but in interaction. Closer cooperation with entrepreneurial defense tech companies, joint ventures, and exchange programs can strengthen Europe's ability to adapt and innovate under pressure. The speed, scale, and urgency of the Ukrainian experience underscore the importance of these factors for defense innovation.

Decentralization has enabled access for SMEs, but also carries potential risks such as corruption. Nevertheless, decentralization has also increased resilience. Venture capital is increasingly flowing into drone technology, creating opportunities for cross-border collaboration. Potential applications in logistics monitoring are hampered by regulatory and approval barriers. Targeted regulatory relaxation could unlock innovation without compromising security.

Experience shows that new industries can emerge rapidly when government support aligns with entrepreneurial initiative. Dual-use technologies could offer a viable pathway for SMEs to enter defense-related markets. For European industrial policy, this means that agility, decentralization, and a willingness to collaborate with new players are crucial. Traditional procurement mechanisms, which favor large systems integrators, need to be reconsidered.

Between strategic inertia and pragmatic necessity for action

The discussions at the roundtable revealed a fundamental contradiction: On the one hand, there is broad consensus on the need for de-risking and diversification. On the other hand, considerable resistance persists against concrete measures, mainly for cost reasons. Germany and the EU often lack strategic thinking. This discrepancy between awareness and action is dangerous.

Critical dependencies on raw materials have been known for years. Beyond management inertia, this inaction is partly due to a deeply ingrained belief in open markets, while competitors like China pursue strategic trade policies. Germany lacks experience in intelligent industrial policy and in selecting winners. This ideological inhibition must be overcome. The European Raw Materials Alliance and similar initiatives offer promising steps forward, but the pace of implementation is insufficient.

The importance of pragmatic trade negotiations cannot be overstated. The EU must actively leverage its negotiating position and be prepared to use economic leverage. Reciprocity must be enforced, and unfair trade practices must be sanctioned. This requires political will and a willingness to accept short-term economic losses for long-term strategic gains.

The importance of combining macro-strategic approaches with company perspectives has been repeatedly emphasized. The reality at the company level often differs from aggregated national views. Policy measures must take into account the heterogeneity of small and medium-sized enterprises (SMEs). Not every company has the same opportunities and needs. Differentiated support instruments are required.

Family businesses demonstrate exceptional resilience during geopolitical upheavals due to their long-term orientation and social capital. Their networks and non-economic objectives help them maintain relationships and navigate crises. These structural advantages must be politically recognized and promoted. Regulatory burdens should be reduced, and financing instruments should be tailored to the needs of long-term oriented companies.

China has pursued industrial policy for decades, while the EU appears unprepared and lacks a coherent long-term strategy. This asymmetry must be addressed. Europe needs an industrial policy vision that identifies strategic sectors, sets funding priorities, and concentrates resources. This does not mean protectionism, but rather intelligent positioning in global competition.

Improving the framework conditions for SMEs is essential. Energy prices, bureaucracy, and regulatory uncertainty disproportionately burden smaller companies. Reducing energy costs through an accelerated energy transition, intelligent grid management, and European energy solidarity is necessary. Bureaucracy reduction must finally be taken seriously. Companies must regain the willingness to take calculated risks. This requires planning certainty and confidence in political stability.

The long road to strategic autonomy

The need to balance openness and resilience in the face of geopolitical uncertainty represents the central challenge for German SMEs. De-risking is particularly relevant for SMEs and the German Mittelstand, whose global integration makes diversification both vital and challenging. Numerous policy instruments already exist to support smaller companies, but the greater need lies in a societal discussion about dual-use technologies and the destigmatization of security-related innovation.

Building resilience is not solely a matter of industrial policy, but also of mentality and public understanding. A mature society must be able to discuss security technologies without reflexively resorting to pacifist or militaristic extremes. Europe's ability to ensure its security also depends on companies being able to operate in this sector without facing social ostracism.

The realignment of existing supply chains towards dual-use applications will take longer than some expect. Technological adaptation, certification processes, cultural change within companies, and the development of new skills all require time. However, this process is essential for Europe's long-term competitiveness and strategic autonomy. Impatience is counterproductive; consistency and perseverance are required.

The findings of the roundtable will inform ongoing discussions and contribute to policy dialogues. Science must fulfill its role as a critical observer and advisor to policymakers. Empirically sound analyses that connect macroeconomic trends with microeconomic realities are indispensable for evidence-based policymaking.

Germany is at a crossroads. The decision as to whether small and medium-sized enterprises (SMEs) emerge stronger from the geopolitical upheavals, or whether they suffer structural weakening and a gradual loss of importance, will be made in the coming years. The course must be set now. This strategic realignment requires bold political action, entrepreneurial risk-taking, and a societal consensus on the necessity of resilience and autonomy.

The multipolar world order, growing economic security concerns, and rising protectionism demand a renewed rethinking of industrial competitiveness and resilience. Geopolitical tensions are challenging the long-standing business models of many SMEs that have relied on leveraging the specialization advantages of international trade. The responses to these challenges and the support from policymakers will determine whether Europe can maintain and expand its industrial base.

New business opportunities are emerging in growing defense and security markets. Integrating SMEs into defense supply chains, traditionally dominated by large players, can succeed if the right framework is established. Europe must systematically evaluate and adapt what it can learn from other countries, particularly from Ukraine's experience with rapid industrial development under extreme conditions.

Germany's small and medium-sized enterprises (SMEs) possess enormous innovative strength, technological know-how, and entrepreneurial spirit. These strengths must be mobilized to manage the transformation. The combination of a long-term, family-oriented approach, technical excellence, and international experience forms a solid foundation. However, without decisive political action, societal support, and a willingness to abandon traditional paths, this potential cannot be fully realized.

Europe's strategic autonomy depends significantly on our ability to strengthen small and medium-sized enterprises (SMEs), build resilience, and simultaneously maintain openness. The road ahead is long, the challenges immense, but the alternative—increasing dependence and declining competitiveness—is unacceptable. The time to act is now.

I would be happy to serve as your personal advisor.

Head of Business Development

Chairman SME Connect Defense Working Group

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I would be happy to serve as your personal advisor.

contact me under Wolfenstein ∂ Xpert.digital

call me under +49 89 674 804 (Munich)

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The global economy is currently experiencing a fundamental change, a broken epoch that shakes the cornerstones of global logistics. The era of hyper-globalization, which was characterized by the unshakable striving for maximum efficiency and the “just-in-time” principle, gives way to a new reality. This is characterized by profound structural breaks, geopolitical shifts and progressive economic political fragmentation. The planning of international markets and supply chains, which was once assumed as a matter of course, dissolves and is replaced by a phase of growing uncertainty.

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Industry focus: B2B, digitalization (from AI to XR), mechanical engineering, logistics, renewable energies and industry

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