Karel Stranský (Colliers): Nearshoring marks the end of globalization (as we knew it)

nearshoring

Robert McLean

#cee, #proptech, #development a #architecture

We’ve become used to the idea of nearshoring as a major potential source of new business for industrial developers. The now-accepted narrative behind this conviction is that the pandemic served as a wake-up call for manufacturers and consumer goods producers. That in their quest for ultra-cheap, just-in-time delivery, they’d built a fragile house of cards. Any failure along the complex supply chain could result in having no goods to put on shelves. Or semiconductors to into cars.

The solution was nearshoring: shortening the supply chain to make it less vulnerable to disruption.

But Karel Stranský, Head of Corporate Industrial Advisory at Colliers, says the idea is nothing new. In fact, the pandemic caught many manufacturers and producers partway through a strategic re-think of supply chain strategies. Nearshoring (moving production closer to your market) is one of the potential adaptations that was already being explored. Adaptation is going to be the name of the game, says Stranský, because we’ve probably reached the end of the road on globalization as we knew it.

The world has been changing for several years now, and it hasn’t been in the direction of liberalized, free markets. You have to understand these forces if you really want to understand how Europe and especially the CEE markets could be impacted.

A more complicated future

Nearshoring isn’t exactly a myth, says Stranský. There have been and will continue to be examples of companies shifting production from Asia back closer to Europe. But they’re just as likely to be shifting production within their existing manufacturing footprint to take advantage of new markets. “The typical offshoring locations from 20 or 25 years ago are now becoming opportunity markets,” says Stranský. People in China and Vietnam, Mexico and Central Europe are all earning a great deal more money than they did when manufacturers first opened operations there. As a result, they can now buy more. “That means there’s a benefit in staying close to those people — not just because it’s cheaper than staying in Germany, but also because there’s an opportunity to sell more.”

In other words, why move a factory from China closer to Europe if the Chinese market is potentially so lucractive? Especially given the expenses involved for a corporation to move production from one country to another? Manufacturers are often restricted contractually to produce a component or item at a certain price, from a set location, beginning from a set date.

René Buck, CEO of BCI Global, presented this slide during a great CTP-organized discussion at Expo Real 2022

As a result, most companies are adopting more nuanced strategies, such as engaging with alternative suppliers that are closer to their own markets. Others are taking the even simpler approach of building up stock to protect themselves against further supply chain disruptions.”

Stranský warns that that even when manufacturers decide to locate closer to European markets, the Central European countries are no longer the only game in town. The Baltic countries and the Balkans are definitely in play these days. He’s even advising manufacturers who are considering Central and South Central Asian (Kazakhstan, Uzbekistan, etc.), the Caucus region or even North Africa. It all depends on the depth of a country’s labor pool, demographics, political stability and proximity to market.

New global barriers to trade

But there’s another new force in the world, which is changing the strategic thinking about where to build new factories and where to source raw materials, components, and good from: it’s called geopolitics.

“Globalization worked because of certain assumptions, rules and principles,” says Stranský. “One of them is that when you’re sourcing components, or purchasing natural gas or oil, that it’s simply a matter of negotiations over price and other commercial conditions. Another of these principles is that when you move things from one location to another — let’s call it supply chain — it’s basically a predictable risk. The whole system of how things move from one place to another was predictable and relatively safe. Globalization assumes that the whole world is open for business.”

“That’s what’s changing because these principles are somehow being violated or called into question. It’s no longer just about commercial conditions and whether you want it at certain price. It’s about whether I want [or am allowed] to sell it to you.”

This goes back further than the economic sanctions slapped on Russia over its war against Ukraine. A version of it no doubt went into the war’s planning as Russia assumed Europe would capitulate to its demands over threats to its gas supplies.

But Stranský believes the first signs of change were even earlier. “I think the first change started with U.S. president Trump imposing the sanctions on Chinese trade or when he said the United States was importing too much from Germany. Those types of questions and thoughts began to break the system. It’s not entirely broken but it brought an element of risk into the process.”

And it’s not just a Trump thing. In the past weeks, U.S. president Joe Biden made it illegal for Americans to work in some Chinese technology companies or for American companies to sell components needed to manufacture advanced chips to Chinese tech firms. European countries themselves have banned the use of Huawei components in their critical telecoms infrastructure over security concerns.

Would China ever use its control over companies as leverage? “I’m not saying it’s going to happen,” says Stranský. “I’m saying that now you have to evaluate this risk.”

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