Tariffs? Geopolitical tensions? Natural disasters? External threats have always informed every manufacturing or logistics site selection decision. What has changed, however, is that logistics and manufacturing site selection is increasingly viewed through a regional lens—rather than a purely global view—focused on reducing costs, improving service to customers and mitigating risk.
While the regionalization trend may be news to some, it’s simply a return to the manufacturing landscape of decades ago. Following WWII and the establishment of the World Trade Organization, among other developments, manufacturing and distribution truly became globalized as manufacturers pursued lower labor costs around the world.
However, supply chain disruptions of the past few years—coupled with the rise of e-commerce— launched a transformation of manufacturing and logistics strategies. Consumers now expect same-day or, at the very least, same-week deliveries. Users of industrial products remain ever cognizant of potential supply chain risks resulting from materials shortages. Bringing production and distribution closer to customers is one way to reduce risks and cost while improving customer service.
To navigate geopolitical change and ensure business continuity, manufacturing and logistics leaders are developing resilient supply chains, and implementing less risky manufacturing and/or sourcing strategies, and focusing on more « regionalized » supply chains. Strategies involve diversifying suppliers, enhancing decision-making processes, prioritizing high-growth regions, relocating production closer to consumer markets, and adopting customized approaches for different regions.
Industrial occupiers are aiming to bring manufacturing and sourcing as close to their end consumers as possible. For example, companies selling products in North America want to manufacture or source the products in North America and, ideally, to source materials in the region, too. Shorter travel time to customers and a more streamlined supply chain reduces freight costs, improves service and also mitigates risks.
The evolution of manufacturing and supply chain strategies is one reason why the United States has seen demand for manufacturing real estate rise by 50% each year since 2020. Another important factor has been recent U.S. legislation, including the Creating Helpful Incentives to Produce Semiconductors and Science Act (CHIPS), the Infrastructure Investment and Jobs Act (IIJA, also known as the Bipartisan Infrastructure Act), and the Inflation Reduction Act, all of which catalyzed significant investments in U.S. manufacturing and supplier networks.
The CHIPS and Science Act and the Inflation Reduction Act alone resulted in a combined total of more than 131,000 jobs and $387 billion in investment in the United States. Spending has begun to level off as projects are completed and interest rates continue to be higher than desired, but the direction is positive. Although nearly 70% of manufacturing investment has come from U.S.-based companies, 11% has come from Korean companies and 9% from Taiwanese businesses. Germany also has made several major automotive investments, although its share is currently only 3% of total manufacturing investment in the United States.
Of particular importance is the $39 billion in CHIPS Act incentives for semiconductor manufacturing, plus a separate advanced manufacturing investment tax credit. Embedded in everything from smartphones and laptops to automobiles and heavy industrial equipment, semiconductors are critical for U.S. economic growth. The combination of market demand and supporting public policy has catalyzed U.S. domestic semiconductor manufacturing capacity.
Combined, these tax incentives are helping reduce U.S. dependence on overseas semiconductor manufacturing. Domestic semiconductor manufacturing volume will grow by 203% in less than a decade, according to a report from the Semiconductor Industry Association/Boston Consulting Group. The researchers project that the United States will soon expand its share of the global chip fabrication capacity for the first time in decades.
The perceived success of U.S. industrial policies has inspired the EU to implement similar support programs for key sectors like electric vehicles, cleantech, and semiconductors, though, these initiatives have yet to yield tangible results.
In the period March 2022 to June 2024, nearly €796 bn of aid was approved either under the Temporary Crisis and Transition Framework or directly under the EU Treaty. Around €219 billion has already been granted to companies. This represents 27% of the aid approved and corresponds to 0.5% of EU GDP. These figures do not include sizeable support measures taken by several Member States to support their economies outside of above-mentioned frameworks.
Similarly, in the aftermath of the COVID-19 pandemic, numerous Asia-Pacific governments have implemented an extensive range of incentives to attract foreign direct investment (FDI) across various industry sectors. This strategic approach has yielded significant results, with the region experiencing some of the world’s highest growth rates in FDI attraction over the past few years. The diversity and scope of these incentives reflect the region’s commitment to maintaining its competitive edge in the global market for foreign investment. Countries such as Singapore, Vietnam, and India have been particularly proactive in refining their FDI policies to capitalize on shifting global supply chains and evolving business priorities.
The trends we are seeing and have highlighted in the United States, we are also witnessing in other regions of the world.
Searching for the “Three P’s” of people, proximity and power
Despite its strategic value, regionalization can be tricky from a site selection perspective. Finding the right “Three P’s”—people, proximity to customers and power—can be challenging, particularly in mature economies.
A major issue is that manufacturing and distribution sites alike need substantial amounts of building square footage and land acreage for their operations. Much of the available stock of industrial manufacturing facilities are functionally obsolete and costly to upgrade, and developing a greenfield site may, in some cases, be more cost-effective. Yet, attractive greenfield sites aren’t always available in the right locations and their development requires time—a resource companies rarely have in abundance.
Labor dynamics have evolved both in manufacturing and in distribution. Manufacturing has become increasingly technologically advanced and sophisticated, requiring a skilled workforce that can operate complex systems and equipment. Where yesterday’s warehouses might have employed only 150 employees, a modern pick-and-pack e-commerce fulfillment center requires 1,200 to 1,500 employees , due to increased volumes of processed products—and a large labor pool to provide a steady supply of workers. Now, with labor in short supply in many parts of the world, otherwise low-cost markets can quickly erode wage savings due to competition.
Access to cost-effective power and reliable utility infrastructure also can be a challenge, especially for manufacturing operations that rely heavily on energy-intensive automation, artificial intelligence (AI) and robotics technologies. Depending on the location, a manufacturer may be competing with data center operators for the power supply, creating pressure on the municipal power grid. However, on-site renewable energy generation is a potential solution if conditions are amenable.
Also important in certain industries, water availability is becoming increasingly challenging. Diminishing high-quality water supplies, legal conflicts related to water rights, rising costs and environmental standards are making it more difficult to find locations for forest products, steel, petroleum, chemicals, food processing and other water-intensive manufacturing. Climate trends and episodes of prolonged drought in some areas have made it even more of a vital concern.
Conditions change—but site selection fundamentals remain
Trade policies and geopolitical trends are always in flux—and that’s why industrial site selection professionals stay focused on the fundamentals of reducing costs, improving service to customers and mitigating risk. In today’s world, a regionalized manufacturing or sourcing strategy effectively addresses these fundamental supply chain objectives. Join JLL for a MIPIM session on Global manufacturing and Supply Chain: How geopolitics and trade policies impact industrial real estate, on Wednesday afternoon, 12 March, to learn more about these mega-trends and site selection strategies in a changing world.
Source: Semiconductor Industry Association, “America Projected to Triple Semiconductor Manufacturing Capacity by 2032, the Largest Rate of Growth in the World”
Article written by Rich Thompson & Iwona Chojnowska
