Episode 33 -Is the COVID-19 Pandemic Redrawing Europe’s Borders
Rick Weddle: Welcome to Site Selection Matters, where we take a closer 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 the top leaders in the world of corporate site selection and economic development. We speak with the members of the 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, Elias van Herwaarden, principal with Locationperspectives. In this capacity, Elias assists companies in building and restructuring their business internationally. This includes a wide range of services and location selection, footprint optimization, and glocalization, or helping companies successfully adapt their products and services to local markets. Today, Elias will talk with us about the COVID-19 pandemic, and how it may actually be redrawing Europe’s borders. Join me as we welcome Elias van Herwaarden to Site Selection Matters. Elias, the COVID-19 pandemic has underlined the importance of how and where companies produce their goods and services. Certainly, this has contributed to this ongoing debate we hear about reshoring or as some would say, rightshoring. Could you take a minute or two and explain just what reshoring is and maybe what it means in a European context?
Elias van Herwaarden: Thank you very much Rick for that question. I think the answer to that question depends on who you ask. If you would ask the French government, they actually understand it as bringing the jobs or the work back to France. If you would ask the Bulgarian Prime Minister, he will say reshoring is, well, bringing it back from Asia and bring it to Europe and, by the way, as you do that, bring it to my country. So, it’s a political perception, which I think if you talk to business people, you’re getting a different answer because for them reshoring is about shoring closer to market or closer to certain suppliers and providers. So, there’s a difference between the two. But companies are more thinking about rightshoring, rethinking their structures, then they’re literally taking the word reshoring for moving back to their country of origin.
Rick: Okay. Well, let me ask you this, with that different perspective, now, let’s take it from the company’s perspective, does it always work? Is it functionally the right thing to do in this current environment?
Elias: Let me talk from the European side. It is striking that I think it was back in 2016, the European administration set up a reshoring monitor and attract around 700 reshoring projects, meaning intentions to reshore. They closed the project down in early 2019. And there’s some interesting information in there because it shows projects that reshored and did well. And there are striking examples of projects that reshored or shored closer to market and failed. And actually, Europe and the U.S. have one in common. It was when Adidas set up its Speed factories. Recall, in the old days, Adidas was manufacturing its sports shoes and gear in China, and it moved into Vietnam, as China became too expensive. And then to stay ahead of the game, Adidas said, “We’re going to make fully automated factories. We’re going to place them near market. One was in the U.S., the other was in Germany, and will allow people to actually assemble or design their sneaker off the internet and get it delivered within a couple of days, as opposed to getting a standard off the shelf thing that took six weeks to travel by ship from China to Europe. So, they set up the Speed factories. They were quite expensive, very technology-intensive, and they closed them down. Both in the U.S. and in Germany, Adidas, the German company, had to close it down because it wasn’t able to find the right technology-savvy workforce. And they moved it back to, of all places, to Vietnam. Now, we got to understand that if the Speed factories they set up in the Western Hemisphere were like five-star versions, when they dismantled them and shipped the whole stuff back to Vietnam, they set up like a three or a four-star version. So, it wasn’t exactly a regional thing. But the essence was that their reshoring plan or market shoring plan failed for the lack of technology workers.
Rick: So that’s an interesting example from a corporate perspective of something that didn’t work as they planned. I’m sure there’s other unintended concepts in that regard. Under the USMCA, for example, it seems to me that maybe while U.S. reshoring initiatives may take a lot of visibility, Mexico might, for example, be the prime beneficiary. Would you think that would be possible?
Elias: I think that… I don’t think it’s possible. I know it’s possible. And I mean, we’ve all seen the reports by AT Kearney and others on reshoring to the U.S. And I think, by and large, one could say that the initiatives of the U.S. government have had their successes but also, they led to unwanted by effects because indeed, Mexico benefited a lot of that. Thanks to the USMCA agreement, indeed, many U.S. companies did move stuff closer to market, but they were still allowed, providing certain conditions, to use their lower-cost Mexican facilities to service the U.S. markets. But by and large, I think that reshoring initiatives, at least in the U.S. have worked. Here, of course, the feeling amongst politicians is that particularly Central Europe will benefit. And that leads to a lot of debate, even these last couple of months, even pre-COVID. Generally, the debate really started in the European Parliament on whether indeed Europe should follow the initiatives of China, and the United States to invest more in its industrial manufacturing output because the region has been losing market share enormously, particularly as compared to China. But it led to a lot of protests of all types of parties from right wing to green parties, simply because they were very concerned about what that would do to public deficits. But as you well know, things have changed recently, but overall reshoring in Europe hasn’t been planned as structurally and certainly hasn’t had the effects or the impact as it did in North America.
Rick: Do you see that changing? Do you think this will be a sustained effort for governments to continue in Europe, to continue to try to figure out how to benefit from the reshoring trend?
Elias: Yeah. Yeah. I mean, a couple of things, I think the reshoring trend, it’s not something new. I mean, companies for a variety of reasons amongst others, IP theft, damage during transportation, rising wage costs in the so-called, A, specific low-cost countries, transportation costs. Many companies figured out that as they were looking at the total cost of ownership, all of a sudden, it didn’t make sense to optimize wage costs if wage costs only contributed for 15% cost of goods sold. So, companies already started restructuring, realigning, call it reshoring, if you wish, long before any politician put the words in his or her mouth. So, it is a trend that’s ongoing. And of course, politicians noticed that, and they want to capitalize on that. They want to create jobs. Now what we have seen in Europe, here, it’s quite an interesting thing because unlike in the U.S., here we got the European Commission that really sets the absolute rules for state aid. So, if you and I would set up a business, say, in Bulgaria, and we would apply for a grant, that grant needs to be approved by the European Commission, and they will get half of the money and the Bulgarian state will need to get the other half. If we get one dime more than that, you and I need to return it. So, there’s very strict control. And it really benefits, of course, those regions with lower incomes, with lower infrastructure quality. But what we have seen now, with all of these packages, these bailouts that have been announced, I mean, even Lufthansa, mighty Lufthansa has received an enormous bailout from the German government. We’ve also seen that there are these rescue packages that are now permitted, rescue packages that will allow the Bulgarian state to give you and I and our company more than we were initially entitled to.
And it could very well be that we open Pandora’s box in doing that because typically, the divide has been between the western states that were holding on to their money and the Central European states that really needed to invest in infrastructure with money they didn’t have. Now the lid has come off. We have let loose the ingredients of Pandora’s box in the sense that more financing funds are available to help companies realize what they need to do in these times of COVID. I’m not sure given the division in the European Parliament, which is like 50/50 between Central European and Western European countries, I’m not sure that the Central European parliamentarians and representatives will stand clapping if somebody tries to close that lid again. So I think we’re in for something that’s gonna be around for a while, definitely.
Rick: So it seems like what was a very focused and regulated package, maybe in the post-COVID-19 recovery mode has become much more broad, broadly distributed, and you’re saying it’s gonna be hard to get that genie back in the bottle, I suppose.
Elias: Yeah, that would absolutely be my reading. Of course, no guarantee but… And it’s not just Central Europe, but even countries like Italy and Spain that are really diehard and longtime members of the European Union, they also demanded rescue packages and they have been granted that. Do not forget how years ago Portugal, Italy, and Portugal, Ireland and Greece had to be taken out of receivership by common funds of the European Union from all member states. So, they have done this before, and now it’s happening again. And it’s like, the current deputy chief economist of the World Bank has said, look, we’re in a war. You spend the money to fight the war. And then after the war is over, you figure out how you’re gonna pay back the debt. And if a lady of her caliber, I think she comes from MIT, says that I think many politicians will actually follow that call, easily, certainly here in Europe.
Rick: So, moving beyond money a little bit, obviously, money is a big part of it, and cash and capital is a big part of it, but moving beyond that just a bit, what do you think U.S. companies or companies should be considering as they look to adapt their European operations to this new post-COVID-19 environment? Do you see changes there?
Elias: It’s a bit early to really tell, but listening to what they say, they want to go for more automation. But don’t we all? The problem is that Europe is short of 750,000 IT specialists already this year. It’s only going to get worse. So, where do we find that talent? Then as they restructure, they will need a smarter, more business-savvy management. There was an Ernst & Young report out last week that indicated that 75% of European businesses cannot find the workforce and the management skills that are required. So that will be another challenge that U.S. corporations should watch out for. And then finally, I mean, definitely within the guild, we all have our checklists for location criteria. And I recall doing work in APAC a couple of years back, and we actually checked volcanoes. Like in Manila, there are two volcanoes, and everybody thought we were really out for lunch until one of them erupted like 12 months ago. And there are data out there that talk about country resilience, country resilience to earthquakes, to flooding, and all that kind of stuff. What I’m telling my U.S. clients, look at location resilience as well. How did the government react to COVID and why did it react in such a way that it did? Did they just ignore scientific evidence? Did they overemphasize it? How quickly did they roll out information, useful information on their webpages? Did they have, like, webinars to nurture their business? How resilient is the local government? The infrastructure and legislation, has it been adapted? Has it become more flexible, or did people hang on…? I mean, look in Switzerland, in Switzerland there is a judge that applied the law that forced the company that asked its workforce to work from home. The company was forced to pay the rent of the space the individuals used in their houses. Well, if you had that kind of legislation being applied, then, of course, I’m not sure what my clients would think of that in terms of being resilient and of being indeed, flexible in periods of stress. So, I think there’s another criteria coming into the game for U.S. companies right here in Europe as they restructure their operations.
Rick: And it’s a dimension of location factor that maybe wasn’t considered before when they made the investment. So now, they have to look at that. So, you’re saying that they’ll pay attention to this increasingly, next time around?
Elias: I think they really should make it their business. I mean, there’s so much evidence from around the world how governments reacted and even sometimes changed scores. And I don’t think there is no perfect reaction to an attack of which you do not know your opponent, which was the case in COVID. But how governments reacted, how quickly, what they did, and why they did it, if I would set up a plan somewhere in Europe or restructure my operations, bringing back the supply lines from, say, Thailand to let’s call it Poland or Lithuania, then I would be looking at how these governments performed. Were there wise? Have they acted wisely and resiliently? That would be my question. It certainly would.
Rick: Elias, in all these things, there’s obviously winners and losers, as the world changes and evolves and we respond to these things. What do you see the new or maybe emerging locations now that companies should look at as they’re restructuring their global supply lines and adapting to this?
Elias: Like you said before, there is no clear winner. But say that companies are automating more. They’re smarter. They’re building in more resilience in their operations. That to a certain extent will increase the degrees of freedom where they could look at. And typically, when you look at Europe, I mean, everybody goes after the same usual suspects, but there are countries out there on Europe’s border that indeed, have the workforce, have a quite…a resilient government, have a good infrastructure. And I would encourage everybody doing site selection work or looking at location strategy planning in Europe, indeed look at Ukraine, look at Moldova, look at Georgia, look at Egypt, look at Morocco, because these countries have one thing in common. They are not member of the European Union, but they also share trade agreements with the European Union. They will have lower costs and they will have a lesser war for talent. And if you’re looking at distributed structure of operations for resilience, I think it would be wrong just to ignore destinations like that from the start. So, there are new destinations popping up or actually, they’re popping up on the radar screen. They have always been there.
Rick: Let’s shift gears if we can just a minute. We’ve been talking a lot about investment into Europe or investment into the countries, the emerging locations in Europe. Should we see or expect to see European investment perhaps into the U.S. again, after the dust finally settles on this pandemic?
Elias: I personally expect to see more. When we met at our conference in Atlanta, which was, I think, very well managed from a safety viewpoint but indeed, there were positive tones about FDI increasing into the United States, about European FDI increasing… I mean, we had a number of European EDOs attending the Site Selectors Guild conferences for over the years now and the number is increasing. So, obviously, there is a stronger connection. And we’ve got more guild members than ever working on Europe-sourced projects that go into U.S. And that was before the call for resilience that came with COVID-19. I think that now that companies want to keep their supply lines shorter and closer to market, what we already saw as an uptake of Europe outbound investment into the United States, that should only increase across all sectors. And like we discussed in Atlanta, I mean, even on the U.S. side, the usual suspects pick up a lot. But there are a lot of states out there that have everything it takes to actually get more of that foreign investment within their state boundaries, absolutely. No doubt about it.
Rick: Let me throw you a bit of a curve now. Elias, we’ve been talking about countries, and governments, and regions, and companies in the large, macro level. Let’s bring it home a little bit. Talk to me just a bit, if you will, about how has this pandemic affected you as a site locator or a site selector in your…just your daily life, and when will you be able to travel internationally again, to get back to business?
Elias: Wow. That’s not one question, I’m afraid. How has it affected? In two ways, really. I mean, we never saw as many questions and calls for just bouncing off ideas arriving on our desks ever, ever. I mean, it’s like five a week really. And it’s from all over. It’s predominantly corporates but a lot of the EDOs here in Europe are also pulling out their hairs to figure out what should they be doing next. So that’s good. But the flip side is, of course, we all read the PwC survey, which told us that CFOs are really holding on to their cash. So the projects that were continue and they’re picking up speed, again, now that the lockdowns are being dismantled. But the inflow of new projects is [inaudible 00:18:47]. They come in… They trickle in, but not at the same exponential growth rate as we’ve seen in the inquiries. But it’s okay. I think this is absolutely a good time to be in the location strategy business. The interest comes… I mean, I just had a call with people from [inaudible 00:19:05]. And everybody’s just exploring each other’s minds, helping each other too to serve its clients. So I think that’s a good thing. For me, personally, going international, well, I’m traveling to the south of France but that’s for personal reasons, that’s next, but I could show you a picture of Brussels airport in the departure lounge, and all flights are canceled. They’ll be picking up flights again early next week as of Monday, but still, we create kind of bubbles. Countries created bubbles. The Baltic three, Baltic countries, that was a bubble. It was a bubble between Austria and Greece. A bubble is an area within which the governments of the countries concerned have agreed, “Okay, you can come and visit me, I can go and visit you.”
And it’s taken a lot of work at European Union level to create a bigger European Union bubble, which allows indeed…we can travel to France, and go back the same day. If I would go to London tomorrow, which I can do right [inaudible 00:20:05], I will need to stay two weeks in quarantine in London before I actually can have my business meeting. So, I’m not exactly planning to go to London anytime soon. So, travel is still hampered. It is opening up. But yeah, the amazing thing is… I mean, I haven’t used my phone in, I think three weeks. I’m using Zoom all the time. And what I really like about it, a lot of people are using Zoom or likewise technologies, like UberConference, to stay in touch, to establish context, and people have become very relaxed and used to it. And I think that’s a major benefit because though I enjoy traveling, I mean, it’s just the plane, a taxi, and an office, right?
Rick: Right. Right. Right. Well, it’s made a lot of changes. A lot of things are different. And we’re all Zooming a lot more than we ever thought we would. Elias, you’ve really given us a lot to think about. What a great conversation this has been today. But that’s really all the time we have. So let me say thanks to Elias van Herwaarden with Locationperspectives, for taking time today to talk with us about reshoring or maybe rightshoring, and how the pandemic is affecting all of us in this episode of “Site Selection Matters.”
Elias: It’s been a real pleasure, Rick, as usual to have a convo with you, and wishing you all the best. Speak soon.
Rick: Thanks for listening to this episode of Site Selection Matters. And a special thanks to Elias van Herwaarden for helping us get inside and better understand the impact that COVID-19 is having on business facilities and operations in Europe and around the world. What an informative discussion and one that leaves us with a lot to think about. This podcast represents 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 members. Again, I’m Rick Weddle, president of the Site Selectors Guild. We hope you will subscribe to the “Site Selection Matters” podcast on Apple Podcasts, Stitcher, 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.