Episode 38 – Capturing Reshoring Investments to the U.S.
Rick Weddle (Site Selectors Guild): 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 leaders in the world of corporate site selection and economic development. We speak with 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, René Buck, CEO of BCI Global, one of the world’s leading independent footprint optimization, location strategy, site selection, and supply chain consulting companies. BCI has offices in the U.S., in Europe, and in Asia.
Today, René will talk with us about increasing chances for reshoring or production from Asia to the U.S. More specifically, we’ll also talk with René about what’s driving this movement, and the U.S. states that are the best positioned to capture future reshoring investments. Join me as we welcome René Buck to “Site Selection Matters.” René, before we get into a deep dive on this important topic, take a minute, if you will, to explain to our listeners what you mean by decentralization of production, or also called reshoring. And maybe also, a little bit about what the current drivers are of this process.
René Buck (BCI Global): Yeah, sure. We hear a lot about reshoring. And reshoring is like something which went out of the U.S. or out of Europe to China/Asia and is now supposed to come back. But let’s say we prefer and, I mean, with we also our corporate clients prefer the word decentralization of manufacturing. And decentralization of manufacturing means that is the opposite of having all your eggs in one basket. You can imagine that you have a certain product, or a certain product line and you say, “Well, there’s only one place on earth where I produce that.” So, it’s a global manufacturing plant. Then you will have regional manufacturing plants saying, “Okay. Well, this product, I produce it in a plant for Asia pack, I have a plant for North America, and I have a plant for Europe.” And decentralization means even having more plants than just opposite to having one global plant.
So, we came for economies of scale reasons. A number of companies chose the last decades to say, “Well, I have one global plant who produces that product.” But on the one hand, the U.S.-China trade dispute and on the other hand COVID-19 have made clear that that can be a risky and bumpy road. So, what we see is that companies are looking now into—should we not decentralize our manufacturing, so not having this product produced only in one or two plants, but the more closer to the market so that we are not that vulnerable for business disruption risk? And the reasons, the drivers behind that are there are a couple of drivers. One is from a supply chain risk perspective. You want to reduce the sourcing risk. You want to reduce the risk that you are too dependent of critical suppliers in only one single region. And let’s be honest, COVID-19, certainly in February and Marc, and April made clear that supply chains all over the world were disturbed by the fact that the critical suppliers in China could not deliver anymore.
So, you have supply chain drivers in terms of mitigating sourcing risk. We have also external disruptions. We talk about pandemic. We talk about trade barrier risk. Let’s not forget that for a lot of American companies, this decentralization challenge, where should we produce? What products? With what technologies? For what markets? Where? I repeat, what products do we produce? With what technologies? For what markets? Where? That’s a question which for many companies, U.S.-based companies already from early 2016 when the current administration took office in the White House, and where the China-U.S. trade dispute challenged a lot of companies by saying, “Okay, should we have all eggs in one Chinese basket?”
So, we have supply chain risks where decentralization can be a solution. We have external disruption risk like pandemics, and earthquakes, and natural disasters, and trade barrier risk. And we have also a third category is more strategic customer benefits that our clients more and more who like the fact that product is made in the U.S., or made in Europe, or made in Germany. So, for these three drivers, supply chain drivers, external disruption, risk mitigation measures, and taking advantage of strategic customer benefits, those are the three main drivers why companies are considering decentralization. And that looks all logical from these three perspectives. But on the other hand, we see that companies say, “Okay, but if we compare the production costs in China with Germany or Massachusetts, there is a huge difference.”
Is the supply base in countries where you would like to decentralize to be closer to main markets in the U.S. and in Europe, is the supplier base there so available that you can match that with what you can find in Asia? And let’s not forget, for a lot of companies, China and Asia are still very important markets. So, our drivers for this thought process at the sea level with a lot of companies in decentralization of manufacturing, from a supply chain perspective, from a customer benefit perspective, and from a risk mitigation perspective. But it’s not a late Friday afternoon decision, because for many companies, it’s also a complex decision process they have to go through to find out, “What is really the optimal footprint for us?”
Rick: René, in listening to you talk about those three drivers, let me follow up on that. One of the things that I’m hearing in a lot of our conversations is in the U.S. we’ve talked about essential workers during this COVID-19 that have to go back to work. But we’ve also haven’t talked so much about, but we hear about essential industries. And the U.S. government is actually now talking about essential industries, for example, one that’s you wouldn’t think about soaps and sanitizers as an example, not your typical target industry. But we’re hearing that the federal government’s requiring a certain amount of that now to be produced onshore. So, I guess those kinds of strategic questions would factor into the company’s decision also.
René: Oh, I completely agree. Let’s say if you talk about PPE equipment and medical instruments, I think also, let’s say, various governments, Japan, the U.S. are trying to facilitate that process for onshoring by having them close. And there are two ways to do that. One is just having more inventory. There are a lot of companies who were proud that they had only inventory of four or five weeks and then if something in your supply chain goes wrong, then you are running out of products very soon. The other is producing that on shore. But let me give you an example, Rick, on ventilators being used in intensive care unit. A ventilator has about 500 components. I relocate the final assembly of a ventilator from China, from Asia to the U.S. Okay, in that final assembly operation, I produce 200 of the 500 components. Now, the other 300 are still coming from all over the place. So, the question here is, how much have you de-risked by putting your final assembly operation in the U.S.?
Now, on the pharma side, that’s different because the basic ingredients for pharmaceutical products API are for 80% for use in India and China, which makes us vulnerable for urgent products. So, I see that point of the government. But I’m more from the side that I think also our clients, our corporate clients should decide on some business cases where you tailor in or you incorporate that strategic advantage or disadvantage for not yes being onshore.
Rick: René, before COVID-19, if we were having this conversation, much of our talk would have been probably about cost reduction, lower structural cost, all of those rationalizing cost operations like in a location like China, whatever, since the lockdown. With the pandemic though, a lot of the talk, just as we’ve had the discussion this morning, has shifted to risk and resilience. And those are words that we hear more and more as a heavier weight in the decision framework. In fact, you talk about the need for resilience framework. What do you mean by that?
René: A lot of companies have experienced during COVID-19 that, A, they were very dependent on a couple of suppliers. B, that a lot of these suppliers were in China. And as we all know, the pandemic started in China. And C, was also that a lot of these companies found out that they didn’t know how their total supply chain was built up. You know, you have your tier 1 suppliers, but also the suppliers of the suppliers or the suppliers of the suppliers of your suppliers. So, having that chain visible was for many companies a difficulty and they experience that right now. Now, let’s say risk and cost are still related with each other. If there’s a cost differential between the U.S. and China for a certain product, say, that’s every year $20 million. Okay, if you want to mitigate that risk and you have to spend in 5 years’ time, 5 multiplied with 20 is $100 million extra. I don’t know whether your CFO will look that optimistic and have a smile on his face and you say, “Well, I have a resilient, a future-proof solution by producing onshore, but it’s far more expensive.”
So, you have to look what are various ways. There are ways for dual sourcing. So not depending on one critical surprise but on more geographically spread. You can look into certain decentralization not of all your product lines, but at least that you can produce backup or necessary products in the American market itself. And there is a price on the pandemic. If you have a lockdown in China, and let’s be honest, the lockdown is also in other parts of the world. Because a lot of Chinese companies were complaining in May that they didn’t get their German suppliers providing them the products in Shanghai and in Beijing. So, reshoring and that process of resilience has a geographical focus.
But coming back to your question, you can build resilience by building up more inventory stock by dual sourcing, by reshoring parts of your production. And then still there is, in many cases, a cost to that and you just have to make the tradeoff between, “Hey, this is cheaper.” But on the other hand, if we add to the cost differential, the cost for lockdown, if you’re two months closed and you have to pay your employees and all the costs are running up, that’s a substantial loss. And I would say in certain products, particularly in the U.S., the trade measures where you have a 25% input yield on certain products, how to build the business case for the U.S. Now, you have to be cautious with that because nobody knows whether we will have trade there also in two- or five-years’ time. My personal belief, Rick, is it will because the U.S.-China trade dispute is not a trade war. It’s not about soybeans bought by Chinese in the Midwest. It’s about the technology war. It’s about economic leadership in the world. It’s about the number one and two economies in the world fighting for technology leadership.
So, I think that trade barriers will stay for another 10 years actually. And that means that that can help. It’s coming from a different angle, but that trade there is going to help you in building a reshoring business case, if that’s logical for a company. And, again, it’s depending on the type of products, the investments you have to make, the supplier base, whether they are available in the U.S. in comparison with China, Malaysia, Vietnam, or India. But that’s the equation we have to do. And a lot of our clients, as you know, we have teams in Singapore, in Shanghai, and in the U.S., and a lot of our teams are now working on making for companies’ scenarios. “Hey, if we would relocate one product line, or two, or three, or four, how would that influence the manufacturing footprint? And how would it reduce the risk? So how can we de-risk the supply chain?” And there is no way that you completely can exclude risk, delivery risk, but you can find measures like dual sourcing more inventory, decentralization of manufacturing capacity at least that you mitigate the risk, that you make the risk smaller, it will never be a risk-free world. And that’s why we are entrepreneurs.
Rick: René, I’m intrigued, your comment earlier in your comment on that you used the term future-proof your manufacturing footprint. I’m intrigued by that. I mean, obviously, in a world that’s uncertain, unsteady, unstable as we are right now, future-proofing would be a wonderful thing if we could do that. Is this really possible? And how does a firm go about approaching future-proofing?
René: Future-proofing in our way, and the method we use for that, Rick, is really scenario planning. So, you have a scenario where you say, “Okay, I have…” and I think a simple example, “I have one product. I make audio speakers and I make them in one plant in China.” Now, a low production cost, economies of scale. But on the other hand, risk because if it’s a part of import duties, and if there is something going wrong in that one plant or in the insourcing, the inbound products for the assembly of those speakers, you have a problem. You can make 20 plants in the world for making those for users and you’re sure that you are more expensive. So, future-proofing means that you reduce the risks which you know that can exist.
If we know now that a pandemic can take eight weeks, suppose, that you’re eight weeks out of business. Now if you normally have four weeks of inventory of a certain component or subassembly, you could say, “Well, I increase that to eight weeks, then I have de-risked, to a certain extent, my supply chain. Now obviously, that’s costing money because I have warehouses with components and subassemblies which I don’t use.” So that’s expensive but it’s a way to circumvent to reduce the risk. Future-proofing means that you look into risk, find ways to circumvent, and to reduce, and to mitigate those risks, and look what for the company is the best tradeoff between production cost, quality of the business environment, customer expectations, and risks which can really put your business in jeopardy. So, it’s always a tradeoff between events. If you would have a complete risk-free solution, it will probably be so expensive that a company would go bankrupt before the end of the day.
Rick: Very interesting, René. It’s very commonsensical and very strategic with scenario planning. You make it sound simple. And I’m assuming that we’re gonna have more and more people, more and more companies looking at that in the years ahead. Recently, BCI Global completed a study showing how U.S. states rank for manufacturing competitiveness and how the opportunity to benefit directly from reshoring efforts might occur. Which states does your work show are best positioned to benefit from this accelerated or increased reshoring or decentralization process?
René: So, to start off, our analysis was we see with among our clients that decentralization of production/reshoring is on their agenda. Now, we know that it’s heavily depending on what the plant, and we take an example in China, what the plant is producing, where the sourcing is coming from, so there are component subassemblies, intermediate products, and where it’s going to. Because you can easily imagine that if you have a plant in China as an American company which produces for 80% or 90% for the Chinese market, you don’t put that plant in the U.S., right? So, you have to look to certain products, you have to look to the specific profile of final distribution, you have to look whether those products play a role in the trade tariff discussion between various trade partners in the world.
And so, we took an example of a company producing electronic components and said, “Okay, if you have a plant that has 250 people on board, how would the various states in the U.S. rank?” I would say, that makes our work so interesting, Rick, it’s really case by case. In this case, the analysis show that if we take cost into account, all the cost factors. If I compare Shenzhen with Illinois, or Shenzhen with Georgia, or Shenzhen with whatever state in the U.S., that if you take all cost factors into account or quality of the business environment factors into account and risk environment, that for this company producing liquid crystal devices, we have those 250 with a given sourcing and distribution pattern, eight states, let’s say, were the top league: Georgia, Florida, Utah, Mississippi, Kentucky, Oklahoma, Nebraska, and Michigan.
But I underline that this is for this particular plant. So there are a lot of states in the U.S., and counties, and metros, and cities who all say also politically driven and obviously to mitigate the unemployment levels they have right now in saying, “Yeah, we need more plants who reshore but you have really to look into, What can we offer? Do we have the supplier system which this company is looking for?” Think about my example of these ventilators in the intensive care units. So, it’s a case by case. And also, that means that EDOs, very active EDOs in the U.S. who want to be in this area really have to think, “What are the sectors of industry or the type of operations in Asia where we think that based on our cost profile, our quality of the business environment profile, and our risk profile, we really have a good chance for making a business case to the company that they will consider us as a suitable candidate if that company decides to reshore some of their production capacity to U.S.?
Rick: Makes all the sense in the world. And so, the EDO ought to look at it from the same way that the companies look at it and the same way we advise them to look at it in terms of what’s the business case and how does that fit into the corporate strategy of what’s going on?
René: Hundred percent correct. Because, no, I understand the push why EDOs want to have new manufacturing plants and certainly in these difficult economic times. But at the end of the day, there should be a realistic business case. And a realistic business case might be, if you say, “Well, it’s a couple of million-dollar per year cheaper in Thailand but I still want for strategic reasons or for customer satisfaction reason this plant still in the U.S.” That’s good. But it starts with calculating what are the differences? In our models, we include the lockdown costs, so you make assumptions of what would that mean in terms of transportation, in terms of interim management, in terms of loss of sales, etc. So, by making these kinds of scenarios, and you mentioned a minute ago, that sounds easy, but I tried to make it easy but the reality it’s quite complex modeling to pair with the client. We try to find out what is really the best solution. And that way of thinking is typically, let’s say, what I think that EDO should adopt so every time I’m in an event of the site selecting field, I try to translate the majority of our businesses working for corporates and how can the corporate thinking help EDOs to achieve their objectives?
Rick: Good idea. René, let’s take a longer-term look now. We’ve been in the weeds looking at a lot of details over this process. But if you had a crystal ball to peer into now, what do you see happening over the next few years? And also, what could a U.S. state or a community do to improve their positioning in that timeframe?
René: I think if you look to the drivers, the drivers for companies are circumstances which you cannot influence. So, companies are used to the fact that they have a great product and it sells like hell and you need more production line. Companies are used to the fact that your competitor makes a better product and sells more, or you see decreasing revenues of that certain product. But what companies have difficulty with is coping with external business disruption risk. We talked about natural disasters. Now a pandemic is a global one and hopefully not every year. But we had earthquakes before, we had tsunamis, we have fires we have flooding. So natural disaster is something I may note as a company that you have to cope with it and that you have to address it while you don’t have the means to immediately influence that. That’s the same with trade dispute.
A couple of years ago, CEOs of large companies read in a tweet of the president that their profit has become all of a sudden 25% more expensive. So, I think companies will get more used to the fact that you have to deal with circumstances you cannot influence. But your customers are still where they are. So, your customers are still in the U.S., and in Europe, and perhaps in Asia. So, I think that that decentralization term will be, for many companies, a strategy to consider because it just makes the supply chain less vulnerable for these external business disruption risk. So, my idea is that more companies will choose for more regional manufacturing. And I say simply a plant in the U.S. for North America, a plant in Poland for Europe, and a plant in Malaysia or China for the Asian market. And that decentralization trend is also enhanced by new modern manufacturing technology.
Think about 3D printing additive manufacturing, think about smart manufacturing technologies. So, we will see that also this decentralization trend will be enhanced by new manufacturing technologies, by additive manufacturing and 3D printing. So that will help companies to have more smaller plants around the world which are still cost competitive. So, those plants will be smaller than that one global hub plant but will be closer to markets. And then still in the market, you can consider if you want to sell your products or produce your product in North America, you still have the chance to go to the U.S. but you can also go to Mexico or even all Latin countries. So that discussion will go on.
So I think that manufacturing will be…the new arena will be if there are long lasting external business disruption risk, you cannot say any more as a CEO, or as a VP corporate development, or VP manufacturing, or VP corporate real estate, “We didn’t know.” The trade disputes between the U.S. and China, the pandemics, the natural disasters we have globally, everybody knows you have to look into a footprint which on the one hand combines the economies of scale and the cost competitiveness you need. But you combine that with as much as possible de-risking of your total supply chain. And that’s interesting word, that’s fun work to work with, and that’s what we do on a day-to-day basis.
Rick: Well, that’s it in a nutshell. De-risking of your supply chain. Accomplish that and you’ll be in pretty good shape. René, you’ve given us a lot to think about in our short conversation today. What a great time we’ve had discussing this. But that’s all the time we have today. So, let me say thank you to René Buck with BCI Global for talking with us today on this episode of “Site Selection Matters.”
René: Thank you very much, Rick. It was my pleasure to have this conversation with you. Thank you.
Rick: Thanks for listening to this episode of “Site Selection Matters.” And a special thanks today to René Buck for helping us get inside and better understand global supply chains, U.S. competitiveness, and what companies can do to future proof their manufacturing footprint. What an informative discussion. Again, I’m Rick Weddle, president of the Site Selectors Guild. This podcast 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.
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