SMITH BRAIN TRUST — Setting aside NAFTA reform, a border adjustment tax and U.S.-China trade war as potential disruptors, "conditions especially favor the United States to remain a key hub in the global supply chain and to expand its competitive leadership in the future," says Sandor Boyson, research professor and co-director of the Supply Chain Management Center at the University of Maryland's Robert H. Smith School of Business.
He sized up the U.S. supply chain base for a recent Washington, D.C., gathering of industry leaders hosted by SelectUSA, a program housed in the International Trade Administration at the U.S. Department of Commerce.
"The U.S. increasingly attracts substantial supply chain investments," says Boyson, referring to his conference presentation. It's a trend that's driven by demand from reshoring U.S. companies and from companies in emerging markets.
"Domestically in 2016, for example, there were 5,400 business investment announcements, $166 billion in capital investment in business facilities, and 402,000 new and retained jobs," says Boyson, citing stats from Deloitte Access Economics' Investment Monitor.
As e-commerce grows and as production costs in emerging markets rise, U.S. companies are looking to reshore their business, seeking the cost-efficiency of a reliable supplier network at home, says Boyson, who is also a member of the Secretary of Commerce's Advisory Committee on Supply Chain Competitiveness and chairman of its IT/Data Subcommittee. Those drivers also have emerging market firms looking to the United States as a cost-friendly supplier and production base that's rich with tech-savvy and demanding consumers.
Accordingly, China IT investment in the United States over the past decade reached $14.2 billion, Boyson says. "For example, China's big Internet companies, Tencent and Alibaba, increasingly focus on extending their presence in Silicon Valley to secure hardware and software from technically advanced suppliers and to build e-commerce launch pads for their own products and services within the North American market."
"These trends speak to a bright future for U.S. supply-chain competitiveness," he adds, "and it goes beyond tech industries. In 2016, Thailand's Chareon Pokphand Foods bought Minneapolis-based Bellisio Foods for $1.1 billion, and seafood producer Thai Union acquired Red Lobster."
As for Chinese firms, overall in 2016, they invested $51.09 billion in the United States via 65 deals — a 360 percent increase from 2015. This investment represented 12 percent of all U.S. mergers and acquisitions in 2016.
E-Commerce Demand for Supply Chain Infrastructure
Not only is the United States geographically prime for e-commerce fulfillment and distribution centers, but the rents also are cheap for logistics facilities.
According to a 2015 study by CBRE, the world's largest commercial real estate services firm, the U.S.-based logistics markets, globally, had the highest growth in rents, while remaining relatively inexpensive. The most expensive U.S. market was Los Angeles-Orange County at $8.04 in dollars per square foot. That compares to the most expensive global markets: Hong Kong at $28.94; Tokyo at $16.74, and London at $16.36. This signals that "supply chain investments in the U.S. will continue to offer investors the prospects of high rates of return on capital," Boyson says.
Three Potentially Disruptive Trade Issues
1) NAFTA renegotiations, expected to begin in August, are expected to focus in part on shrinking a $74 billion automotive U.S. trade deficit with Mexico. The North American Free Trade Agreement has helped create an integrated supply chain that sees many auto parts cross the U.S. border at least eight times before a vehicle is assembled, the Alliance of Automobile Manufacturers reportedly says in a letter to a U.S. trade negotiator. "Disrupting this integrated supply chain would increase prices, lower sales, threaten exports and endanger American workers' jobs," the letter reportedly says, suggesting that automakers could seek supplies outside North America if the continental business model unravels.
"At the present time, we understand the Secretary of Commerce is seeking a rapid renegotiation of NAFTA with an objective to accelerate and intensify negotiations soon and reach some early NAFTA wins this fall," says Boyson. "This however is not a unilateral call, and we do not know how many other concerns Canada and Mexico will bring to the table that will complicate negotiations."
2) Border tax adjustment proposals – both President Trump's and the GOP's — pose risk for import-reliant supply chains in the United States. Some retailers could see net profits plummet, Boyson says. "A good example is Walmart, which imports so much of their inventory and is leading the charge against border adjustment tax proposals that could increase upward pressure on prices to consumers and dampen demand."
3) An all-out U.S.-China trade war? "I doubt there will be trade war," Boyson says. "The SelectUSA conference experts on my panel concluded that China's labor and materials costs are rising at such a fast clip, and total landed costs of transporting goods from China are rising to the extent that U.S. manufacturing is once again becoming highly competitive with China, both on the world stage and on our own, domestic stage."
Subsequently, he adds, "expect to see huge capital inflows from China as their globalizing firms seek to establish footholds in the huge American market and as their investment community seeks higher, more stable returns outside China."
Advice for Supply Chain Managers
The aforementioned issues illustrate why supply chain managers need to be prepared to assess and respond to a wide range of risks, Boyson says. "We see many global companies hiring specialized supply chain services who provide real-time risk surveillance and event alerting."
"Companies we work with here at Smith, such as Resilinc and NC4, are leaders in this space," he adds. "In fact, we teach our MBA and MS students to use Resilinc Software to identify, analyze and manage risks in the global supply chain. We believe this is a critical managerial competency in the current highly volatile business environment."
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