Near Shoring Is On Pause

The Real Estate Espresso Podcast

Near Shoring Is On Pause

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Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host Victor Menasce. On today’s show, we’re taking a look at the near-shoring trend and how it might’ve been upended in the past couple of weeks since the inauguration of the new president in Washington.

On the minds of most business leaders in manufacturing, are some important questions. Is the global landscape, how has it changed? Where should you establish manufacturing capacity geographically? The globalization of the past few decades has proven to be a geopolitical failure. The assumption was that if economies were sufficiently intertwined, there would be a protracted period of world peace and collaboration.

The supply chain shortages of the pandemic demonstrated the first major flaw in the global supply chain. Customers needed to secure a local second source of supply. Globalization was further proven to be a failure when it didn’t stop Russia from invading Ukraine and it didn’t stop China from allying itself with Russia. That single action fractured the global economic system and showed Western nations, they could no longer rely on China to be a partner, but instead became viewed as a predator.

Companies and countries desperately sought alternate sources of supply. Choosing the cheapest supplier no longer became the right choice. Security of supply and North American supply started to become more important. Even retailers like Walmart started asking suppliers for their second source and their security of supply strategy. Choosing a location requires several criteria to be satisfied.

You need a plentiful supply of skilled labor at reasonable wages. You need access to high quality manufacturing and industrial engineers who are capable of designing and operating a world-class manufacturing facility. You need a favorable jurisdiction both from a regulatory and from a taxation standpoint. And then the cost of the operating facility should be competitive including property taxes, insurance and energy.

And then finally, there’s got to be a robust transportation infrastructure nearby that’ll bring raw materials to the factory and finish products to market. The conventional wisdom over the past year was that China was the main target of concern when it comes to trade deficits. The assumption was that manufacturing within the free trade zone of North America would be deemed to be within the fold.

There’s a big difference between the cost of labor in the US versus the cost of labor in Mexico. Canada is also expensive, but at least the exchange rate with the US means that Canadian labor is at a modest discount to US labor. You have to remember that facilities vary widely in terms of the number of people they employ even when manufacturing similar products.

When I was in the telecom industry we were opening manufacturing in China. We brought our manufacturing philosophy which was to design a factory that would maximize automation. Our Chinese joint venture partners asked us to rethink that manufacturing process in order to maximize the employment of people and prioritize that over automation.

The most modern facilities in the world use full automation. That’s particularly true in the assembly of microelectronics. Geometries are so small these days that humans no longer have the fine motor skills to perform the assembly process reliably. That process absolutely has to be automated.

So if new factories are opening in the United States, will they really create that many jobs? It’s hard to say. Yes, manufacturing will be on U.S. soil, but how much economic benefit will it bring to that local region? The addition of machine learning to the manufacturing process is new. And we don’t yet fully understand the impact.

If we continue to manufacture the way we’ve done for 100 years the products will not be competitive in terms of cost or quality. Unfortunately, with the loss of manufacturing facilities in the US, the US has also lost in manufacturing know-how and engineering. Some industries will rethink the manufacturing strategy and locate factories closer to their customers. But remember, the world has enough manufacturing capacity right now. If a new factory opens, then another will close.

The choice of location is going to be influenced less by access to low-cost labor and more by access to low-cost energy and access to the manufacturing, engineering that can design and operate an efficiently designed factory. Conventional wisdom over the past year is that manufacturing will move to North America to a low-cost geographic area, like maybe one of the border towns in Northern Mexico. Goods would flow into the US barrier-free under the banner of the North American Free Trade Agreement or the Canada-US-Mexico Trade Agreement.

Under that thinking, transportation and logistics would be key. But in the opening weeks of the new US presidency, it looks like parts of the free trade agreement are going to be renegotiated. Several industries appear to be in the crosshairs of the US president including automotive, dairy, oil, and various agricultural products, and perhaps more will be added to the list. Until these trade negotiations are settled, it’s going to be virtually impossible to make any investment decisions on a near-shoring strategy.

As you think about that, have an awesome rest of your day. Go make some great things happen! We’ll talk to you again tomorrow.

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