Episode 32 – Reshoring in Response to the COVID-19 Pandemic
Rick Weddle: Welcome to ”Site Selection Matters” where we take a close look at the art and science of site selection decision-making. I’m your host, Rick Weddle, president of the Site Selectors Guild. In each episode, we introduce you to leaders in the world of corporate site selection and economic development. We speak to members of the Site Selectors Guild, our economic development partners, and corporate decision makers to provide you with deep insight into the best and next practices in our profession.
In this episode, we have as our guest, Mark Williams, former Guild chairman and president of the Strategic Development Group, Incorporated, a firm that provides a variety of site selection and location and city of negotiation services designed to enhance the operational performance and produce cost savings to companies and their suppliers. Today, Mark will talk with us about the issue of reshoring as it relates to the current COVID-19 environment. Please join me as we welcome Mark Williams to ”Site Selection Matters.”
Mark, despite the lockdown and stay-at-home guidelines, this has to really be a busy time for location advisors. Take a minute, if you will, and give our listeners a brief overview of your role in the Strategic Development Group and what you do.
Mark Williams: Sure, Rick. Thanks for having me back on this great podcast. You know, we remain very busy. Strategic Development Group is a location advisory firm and we have a suite of existing clients and are always generating new clients to advise them on where to locate and why. So of course, there are factors related to logistics sites, technical aspects of sites, labor, etc. So no two projects are the same. We’ve been in business for a long time and have kind of seen the good and the bad and the ugly related to navigating this path of site location. So we help our clients do that. Generally, our clients are medium and very large firms, many of them global firms. So we help with those locations, but there are always things that come up where additional advice is required in that process. It could be related to the political nature of things, it could be related to how do we negotiate incentives in the COVID environment? What is the acceptance of that concept? So it’s dynamic. It’s very interesting. It’s been very interesting to me.
Rick: Well, thank you. Since the outbreak of COVID-19, which I think has changed nearly everything, we’re hearing more and more about the concept of facility reshoring or bringing facilities back to the US. For the benefit of our listeners, how do you define reshoring?
Mark: Rick, for I’m gonna say about the past 20 years, companies, many of them from the U.S. have been looking to focus on improving their economics of their production systems. And they have decided in many cases to move offshore for economic reasons. In 2019, for example, 18% of all the U.S. imports were from China. You know, my definition of a reshoring is, okay, these companies have moved production capacity offshore, reshoring is the concept of them considering bringing it back. And they may have some reasons for that we can discuss that or economics or logistical or other, but that’s the concept. And it’s getting a lot of attention for a lot of reasons we can chat about.
Rick: You know, Mark, I’ve heard you describe when we’ve talked about this, that manufacturing risk and economics really, as a pendulum. What do you mean by that? And where would you see that pendulum earlier this year? Where is it now also?
Mark: So the pendulum had swung in the direction I was describing towards the economics and what has been happening for the last I’ll call it five or eight years, more and more the pendulum is swinging back to reducing risk, reducing risk of supply chain issues, reducing risk of quality issues, reducing risk of theft of intellectual property. And then when you superimpose the whole COVID situation on that, it injects even more energy into that exposing supply chain risks, you know, related to pharmaceutical products, medical devices, defense, things that are strategic to the U.S. health, the U.S. business. So that pendulum swung way toward the side of economics in sort of a low-cost labor environment in many cases. And now it’s…I think it’s swinging back. But I have to say in my opinion, you know, we’re gonna be in a recession here. And this recession is kind of interesting because it was introduced by a health issue. Not that we weren’t due for one after, you know, 127 months of economic recovery, but every recession we’ve ever had in this country has resulted in increased automation and fewer employees. And I think because of the recession, and even because of COVID, to an extent, we’re gonna see more and more automation, which was, you know, that path was already coming. And what that’s gonna mean is that reshoring is even more attractive in the U.S. because that’s a great place to install automation and get that going. So any recession, I think, would have induced more reshoring. If you superimpose COVID on that, and maybe restrictions in terms of workers and workplace safety and other things, plus automation it’s just a, kind of a brew for this reshoring concept to gain some more steam.
Rick: So Mark reshoring is obviously impacted now by this COVID-19 outbreak. Some have said that there’s new…they’re big changes underway that will always be different, but some have said that a lot of this what’s going on is acceleration of trends that were underway already stepping them up a little bit. Is that true about what COVID-19 has done for reshoring? Is it kind of moved it forward a bit?
Mark: Yeah, that’s what I was conveying. Look, we had a 127-month recovery entering I think February of this year. If we assume COVID had never occurred, you know, ultimately, we would have had a downturn. Maybe it would have been this year anyway, that would have driven some of the reshoring, but the COVID has had it a whole new set of factors and considerations as I mentioned related to workplace safety. I mean, if you’re in an automotive assembly facility, you know, how close will you be in the future to your colleagues that are working with you? What are the other safety procedures? What’s gonna happen in the office environment? How’s that gonna work? How close can you be? Are there gonna be offsetting schedules? So, you know, in terms of reshoring, I think it’s…COVID has kind of jacked it up a bit, but I think there’s some other factors that are also stimulating the reshoring concept, and I’m gonna use a term political, but one of them is political. I mean, it seems clear to me that the president is very interested in kind of a bringing it back to America. This predated COVID, correct, with, you know, tariffs were part of it and trying to bring companies back, but COVID has brought even more of this to light in terms of risks that we may face in terms of medical supplies, you know, major components of pharmaceutical manufacturing inputs that are made in China and other places. So in addition to a recession, in addition to COVID, then from a political perspective, you know, the president is, I don’t know, about two weeks ago issued executive orders related to incenting companies to come back, particularly out of China. And the U.S. is not alone in this. Japan is involved in this, same kind of policy. Europe is as well. So this is happening on a federal level of encouraging reshoring. And I have to tell you, we’re seeing it on a local level. We’re seeing counties in the U.S. developing and implementing incentive policies focused on reshoring, focused bringing back specific sectors to their communities and providing incentives to encourage that. So, it’s kind of firing on a few cylinders here, in terms of the reshoring concept.
Rick: You know, Mark, we’ve always said that the U.S. doesn’t have an industrial policy. We don’t pick winners and losers. But with all this emphasis on reshoring and manufacturing, bringing these operations back, it kind of speaks to a little bit of industrial policy, doesn’t it, at the federal state and local level of deciding that we’re gonna make a big economic development play?
Mark: I can’t deny that appearance, I mean, and philosophically, how do…you know, where do we all stand on that? I mean, to a certain extent, I would expect that most citizens would feel it’s up to the federal government to make sure that certain things that are manufactured strategically in the U.S. if it’s a safety issue, that if we have a shortage of something, it puts us in some kind of peril, but all along, and this isn’t a political statement, it’s just kinda reading what’s out there, I think the current administration has focused on instigating I would consider tariffs policies as well. So there have been a number of things, whether people agree with it or not, that are more and more government policies, which tariffs are, to encourage more U.S.-based manufacturing. Plenty of debates about that, free trade and now this, it’s a little confusing, but very interesting.
Rick: We’ll have to see where that goes.
Mark: We will.
Rick: Mark, let’s switch gears. Let’s switch gears if we can, just for a minute. If you were a state or a local economic developer right now in this kind of crazy environment, what specific business sectors would you be targeting or looking at, especially as it relates to reshoring?
Mark: I’d be looking specifically at those business sectors that are voicing the greatest concern about supply chain risk logistics, intellectual property theft. I’d be targeting those sectors that are most likely in this last round of upcoming recession as I see it, COVID, presidential policy, etc., being focused on that. So, what are they? I mean, I think a couple of samples are pharmaceutical business ingredients for pharmaceuticals, medical products, variety of medical products. I think that companies that were manufacturing overseas but have a distinctive U.S. market are gonna think very hard about whether or not they should come back. And so, if I were on the state and local economic development side, I’d be thinking about who’s got a big U.S. presence, but a big offshore manufacturing presence, because I think those are companies that really have to consider this for all the reasons we’ve been talking about.
Rick: Mark, is it the time to do that targeting now, if you’re back at that state and local level? Is there a sense of urgency about this?
Mark: I think it’s absolutely the time for it. I think that, you know, I don’t expect that there’s gonna be a…called a major wave of reshoring that it’s…but I do think it’s gonna accelerate. And I do think it’s the time for states and regions to begin thinking about who those targets might be and what the assets of those states and communities are that match with the needs of those sectors. So I’d be defining my targets. I’d be like in any other major marketing effort and economic development, define those targets and figure out how to begin a dialogue with those entities. And as I mentioned, Rick, earlier, I’ve seen a number of local written, approved incentive policies that are very specific in their targets, principally medical products. So many communities are already on this path, they’re already on it. And from what I’m hearing from some of them, they’re getting some activity. So I think the time is now in that thought process. I think the time is now on the state and local level too, and maybe less related to reshoring, but just, you know, who are the winners and losers moving forward from this pandemic? Who are the winners and losers in real estate, who are the winners and losers in certain business sectors, because there’re going to be both? And, you know, if I were trying to get in the head of a potential location client, I just wanna know who’s growing where they need to be, you know, what their regional logistics considerations might be too. So, I think there’s a lot of opportunity on the state and local level to think carefully, develop, plan strategically. I think we all have to look at it, even in the site selection business is this is a big opportunity. It’s a big change, there’s some pain, but there’s a lot of room for growth and fine-tuning what we do and doing it better and being prepared in the economic development world to better serve our constituents.
Rick: Mark, you’ve mentioned a couple times today the R word or recession. Certainly, with huge job losses and business closings, if we’re not in a recession already, looks like we’re gonna be in one officially sometime this summer. What impact do you see a recession, or let me, heaven forbid, maybe a depression having on reshoring operations or manufacturing in the U.S. as a whole?
Mark: You know, Rick, I guess the definition of a recession is two back-to-back quarters of down GDP. So I think we were down 4.8% in the first quarter and I suspect the second quarter is gonna be a lot further down. So yeah, I think we’re gonna be in a recession. How does that impact reshoring? Well, I guess for some, it would make it harder, right? I mean, if there’s business stress, it would be harder for some companies to have the wherewithal to pick up and leave, which is a complicated process. And for many, it would probably take years. I mean, maybe the reshoring decisions are getting made in this time or made in this recession, but like many things it takes years for them to be implemented. So I think in that sense, in terms of resources, it could make it more challenging to reshore, but I’m really interested in what the government…I think I saw a $25 billion budget the federal government was considering to distribute to states to help with reshoring activities. So maybe that makes up for some of it. But companies generally are gonna look past the recession. They’re gonna look at their long-term risk and where they need to be. If a recession slows down their reshoring activity and they really feel strategically that that needs to happen, I think it’ll eventually happen. And it’ll just take more time.
Rick: Mark, getting back to COVID-19, the situation we’re in right now, how has that really, on a personal note, impacted your day, your client activity, or maybe even your ability to serve clients that you…because of travel restrictions and difficulty flying?
Mark: Yeah, that’s a really fun question. So, for Strategic Development Group, we entered this year in the COVID scenario with a very strong backlog of work and our client projects, you know, fit into a couple categories in terms of reaction to COVID. Well, you know, one category is full speed ahead. So, in those cases, we are proceeding with site searches, we are proceeding with various negotiations, and I have to say that that activity is hampered by the inability to travel. It’s hard to negotiate electricity rates and natural gas rates and other things if you can’t be there. It’s hard to see sites if you can’t be there. And I know there’s, I think you’ve got, the Guild has another session coming up, which I know will be very popular that includes the concept of virtual site selection, or, you know, looking at sites virtually, which is really critical. So, but anyway, we have projects that are proceeding with vigor. We have some that have slowed down and some that have canceled. From a pure real-time business perspective, we’re doing quite well. We’re very busy. Where I have some concerns in terms of our business is our ability to generate new work. And we’re, I hate to use this analogy, but we’re kind of like sharks. I mean, we got to swim and we gotta eat and we need to develop clients. And so, we’re busy working off our backlog, but I have to say that the new business development is probably not quite where I would like it to be at this moment.
Rick: Well, let’s hope that, you know, this reopening works and let’s hope that there’s an opportunity for the shark to get back and swimming and feeding. That’s a great metaphor.
Mark: Well, you know, we’ve been in business 21 years. This’ll be the third recession if that occurs. We’ve done well in all recessions. In the 2008, 2009 recession, we did better than the previous year. Why was that? Well, it’s because we adapted. How did we adapt? Well, instead of helping companies figure out where to locate new facilities, we helped them figure out which ones to close. We conducted analysis of various facilities and what was the strategic place to close. So we’re all in business. We gotta work our way through this. We gotta make, you know, we gotta make it work and we will, we’ve done it before, we’re gonna do it again.
Rick: And smart business people make money and do well in good times and bad, you know, they basically adjust accordingly. Let’s switch one final gear, Mark. Looking ahead, if you had a crystal ball, then you could peer into it right now, how would you see the role of economic developers changing in the near future? And what major changes might you see there in the whole practice of site selection?
Mark: You know, that’s a really important question right now, Rick. If I could reflect for a second over the last six months, and some of the projects we were dealing with, if you looked back to late in 2019, and a lot of…a number of the states we were working in, labor was tight in terms of incentive offerings. Many states just shut their incentive programs down, or some did that we were working in. So there was [inaudible 00:19:45] economic developers in that period, I think you had Chris Lloyd talking about this in one of the other podcasts. You know, the economic development profession was finding it a bit challenging to try to recruit companies at that time, because why should we focus on recruiting? I mean, business is great, right? We don’t need any more. We don’t need any more. And so fast forward, you know, February 19th I think is the high of the stock market. And then fast forward 90 days, things are just plummeting. So what is the value of the economic development community moving out of this? Wow, it’s profound. I think number one, they become very, very important. I’m gonna use the term again. Not that they always weren’t, but I think we need them now more than we ever did. And I think that’s gonna become clear to some of the naysayers of the whole economic development process late in 2019. So we need them now more than ever. We need them to figure out strategically, you know, there’re gonna be a lot of people hitting the street looking for jobs, looking for retraining. We did finish, you know, a long recovery in most areas or have a shortage of sites and other product for site location. So economic developers need to be focusing on that and they need to be focusing as we refer to earlier in our talk is just, you know, what are the targets? And so this is getting more complicated, more sophisticated, and I think it’s a real opportunity for the economic development community to become more valuable than they ever have, more strategic than they ever have been before and help guide their states and communities through this. And I gotta say, we, you know, at Strategic Development Group, and I know with our other site selection colleagues look forward to working with all of them in that process and helping all of us be successful.
Rick: It’s gonna be a lot of change coming down the pike and a lot of differentiation, but I think what you’re saying is that those that are agile and a little bit able to adapt will do well. Mark, you know, you’ve given us a lot to think about today, what a great conversation this has been, but that’s really all the time we have. So let me say thanks to Mark for talking with us today on this episode of ”Site Selection Matters.”
Mark: Thanks, Rick. Look forward to next time. Take care.
Rick: Thanks for listening to this episode of ”Site Selection Matters” and a special thanks today to Mark Williams, president of the Strategic Development Group for helping us get inside and better understand the issue of facility reshoring in the age of COVID-19 and beyond. What an informative discussion. Again, I’m Rick Weddle, president of Site Selectors Guild. This podcast episode presents my views and the views of my guests, and they do not necessarily represent the views or opinions of the Site Selectors Guild or its membership. We hope you’ll subscribe to ”Site Selection Matters” podcasts on Apple Podcasts on Stitcher, on Spotify or wherever you get your podcasts. We look forward to bringing you some great discussions in the year ahead. Until next time, good day.