CBRE report highlights strategies to avoid overreliance on China as a supply chain partner

Steps need to be taken by United States-based supply chains—dealing with the ongoing COVID-19 pandemic, supply chain disruptions, economic downturns, and trade wars—to shift the lion’s share of their product sourcing and manufacturing out of China and into expanding Asian and European locales, to set up new U.S.-based national distribution models, according to recent research published by Los Angeles-based industrial real estate firm CBRE.

In a report, entitled “The Changing Flow of International Trade: Impact on Global Supply Chains & Industrial Real Estate,” explained that the need for United States shippers to spread out sourcing and manufacturing outside of China is being heightened by rising labor costs in China and ongoing trade conflicts, adding that diversifying supply chains throughout Asia, in what it called a multi-country strategy, or “China Plus One,” to “reduce supply chain dependency on China alone” is a strong approach.

But even with the possibility of, or at least the vetting, on behalf of U.S.-based shippers to look outside of China, CBRE made it clear that does not mean that turning away from China is an option.

“As a result of the COVID-19 pandemic, global occupiers with an overdependence on one country or region may reassess their souring and manufacturing within each region (e.g., an Americas manufacturing hub),” the report stated. “Nevertheless, a widespread exodus of manufacturing capacity from China is unlikely given the sophistication of the industry, the maturity of the supply chain, and China’s massive domestic consumer market. While there is no doubt that the number of small manufacturers in the Americas will grow significantly, the volume of goods produced in China and broader Asia likely will remain dominant.”

While China’s standing as a sourcing and manufacturing power is expected to remain intact, CBRE pointed out that exports out of China to the U.S. were off 12.7% in 2019, with total trade between China and the U.S. off $100 billion annually. These declines have resulted in increasing trade opportunities for both of the United States’ fastest growing trade partners, Taiwan and Vietnam, with total trade between the U.S. and Taiwan and Vietnam up $18.7 billion and $9.1 billion, respectively, in 2019. European markets that have seen upticks in trade with the U.S. include Belgium, the Netherlands, and France.

Stateside, some of the primary beneficiaries of increased trade activity with European countries and ones in Asia that have access into the U.S. via the Suez Canal are Southeastern- and Gulf-based ports, including the ports of Houston, Charleston, Virginia, and Savannah, among others, the report said.

And it added that the Southeast region is well-positioned for additional industrial space demand, driven by import shifts to other parts of Asia that reach to the East Coast more quickly through the Suez Canal, with the region also serving as a primary importer of goods through the Suez Canal and from Europe. As for the Gulf Coast, the report cited Houston as a growing port of entry to supply for the Southcentral U.S., where population is expected to increase by 7.1% between now and 2025.

In an interview, James Breeze, Global Head of Industrial and Logistics Research for CBRE, said that the “China Plus One” strategy, in which China remains the major supplier of goods, coupled with other sources of goods in other countries, can serve as the template for the types of new distribution models that could arise through expanding Asian and European markets, as U.S. supply chains look to decrease overreliance on China.

“Another strategy that can be used in tandem or separate would be to keep more ‘safety stock’ onshore, he said. “Many companies pre-COVID used a ‘just-in-time’ distribution strategy, which kept a minimal amount of goods onshore. This strategy has struggled, first with the trade war, and now with COVID-19. Inventories, which were low to begin with, rapidly deteriorated. Now, many companies will keep extra inventory on-hand. This will be a major demand driver for industrial real estate. An internal calculation shows that for every 5% increase in business inventories, an addition 400-500 million square feet of warehouse space is needed.” 

The CBRE report also posited that there is likely to be an increase in domestic manufacturing, which could result in near-term real estate demand spikes in some U.S. markets, due to supply chains readjusting and more parts being sourced in North America to meet new requirements. The possibility of this happening has been highlighted in recent months, due to disruptions that are requiring manufacturers and retailers to be more flexible and nimble.

CBRE’s Breeze said that for U.S. domestic manufacturing, in the form of reshoring, to see gains, there are a number of things that need to happen, including finding qualified and affordable labor, keeping production costs low, and finding the right location for a facility.

“Many products will not be able to reshore back to the United States, especially high volume goods like apparel,” he said. “These types of goods will remain in China—with a ‘plus one’ strategy in another Asian country—will completely move out of China into another Asian country, with Vietnam being the most popular alternative, or, look into moving into the western hemisphere with Mexico being a popular destination.  Products that will return to the United States will be ones that can be produced through automation or require little labor. Also raw material sourcing is important. If most raw materials are sourced in Asia, most likely manufacturing will stay in the region to avoid the costs of shipping those materials.” 

Another potential driver for the reshoring of U.S. manufacturing relates to the United States Mexico Canada Agreement (USMCA), which took effect on July 1.

CBRE said that this pact could lead to more reshoring, as well as increased industrial demand, especially for automobile production, due to a provision that mandates a higher percentage of North American-sourced materials in the assembly of autos.

“Mexico and the United States have had free trade since NAFTA was signed in the 90’s, but the USMCA assures this will continue,” said Breeze. “The USMCA is also in the positive column when contemplating reshoring because of the easy flow of goods between the two countries. Also the movement of finished goods between the two countries are important for both economies, as Mexico is one of the top buyers of American made goods and vice versa. In terms of real estate demand, markets from El Paso, which is one of the top emerging industrial markets in the country, up through the central U.S., including Dallas, Kansas City, St Louis, and Chicago, will all continue to see demand from the flow of goods from Mexico to the US and vice versa.”