Even prior to the pandemic, the last year had not been easy. The uncertainty of the tariffs had impacted many project decisions. Also, the threat by the Trump administration to issue another 20–25 percent tariffs on cars being imported from the European Union did not help clients feel comfortable to announce an automotive-related project in the U.S.
The supply chain for cars — and also airplanes — is nowadays very complex. An A380 consists of four million parts: 2.5 million produced by 1,500 companies from 30 countries. A trade discussion disrupts the entire global supply chain.
The U.S. exports $56.1 billion worth of automobiles. German OEM BMW AG manufactures $10.5 billion of this total at their U.S. plant in Greer, S.C. BMW builds several different models in the U.S. and exports 70 percent. Before the tariff discussions and the coronavirus pandemic, shipping parts from other regions of the world was not a problem.
The U.S. is currently trying to finalize one trade agreement with Mexico and Canada. As confirmed by each participating country, the updated United States-Mexico-Canada Agreement (USMCA) allows the three countries to continue their ongoing tariff-free trade in qualifying goods and services within North America. According to the new USMCA, the local content is now set to 75 percent. Several German OEMs ship engines and transmissions to the United States. They will now have to adjust their supply chain.
The trade war with China and also Europe has also not been resolved, and there is currently not much progress. The election in the U.S. in November will likely further postpone this process.
The trade deficit between the U.S. and China amounts to US$375 billion. China responded to President Trump’s actions strongly from the beginning and announced it would retaliate against all tariffs imposed by the U.S. The initial retaliation from China was to cancel all its import contracts for American soybean. Thereafter, China issued a tariff of 25 percent on $16 billion worth of exports from the United States.
In response to United States’ second round of tariffs, China threatened that it would impose tariffs on U.S. exports including American pork, electric vehicles, and other goods worth $60 billion. Globally, consumers who are buying U.S.-made products have been suffering by paying much higher prices for the finished products. Now, in addition, the global pandemic has had a massive impact on the global supply chain leading to a serious disruption of the overall supply cycle. U.S.-based manufacturing companies relying on Chinese parts and components face major disruptions.
More and more companies have already shifted their manufacturing bases to countries like Thailand, Malaysia, and Vietnam, where the labor force is more affordable than in China. In the last few years, Thailand has seen many large foreign investments mainly from the automotive industry and its supply base. This is beneficial for firms that were previously exporting their products directly from China into the United States.
The tariff discussions as well as the COVID-19 pandemic will change the thinking of many companies. It seems to be much safer to manufacture closer to where they sell their products. Production that is targeted for the U.S. and currently executed in China will be brought back or nearby. Canada, with its strong labor market and friendly immigration policies — as well as Mexico, which already has a trade agreement with Europe in place — will benefit from a near-shoring location trend. And the U.S. is also still very attractive with its competitive energy costs. It is predicted that up to 800 million square feet of warehousing, logistics, and manufacturing space will be required in North America subsequent to the coronavirus crisis.
Impact on Europe
Europe has been impacted hard by COVID-19. German exports plunged by one third in April. Some €75.7 billion of goods were sold to foreign countries in April — 31.1 percent less than in the month prior. German imports also decreased by 21.6 percent, although imports from the U.S. increased in April by 2.4 percent.
Supply chains will be adjusted, and manufacturing will probably return to where the products are consumed. Nations that were impacted very strongly by the global pandemic strongly reduced their imports from Germany. For example, the U.S. decreased imports from Germany by 35.8 percent, Italy by 40.1 percent, and France by 48.3 percent. However, German exports to China were only reduced by 12.6 percent to €7.2 billion.
Currently, among the main problems for European companies considering locating in the U.S. are the travel and visa restrictions, issued to prevent the coronavirus spreading. Despite the hurdles mentioned, the feedback from clients is very positive. One European manufacturer that had started its site selection last year was in the final selection stage when the COVID-19 lockdown started. As the owner could not travel to the U.S. and participate in the final site visits, all remaining sites anticipated longer delays. But surprisingly, a decision was made in the middle of the pandemic and the project will be announced shortly.
Some Positive Signs
Speaking with some experts in the manufacturing industry, I find their outlook is also quite positive. Barbara Boedenauer, partner at The Executive Consulting, Inc. is a native of Austria and works with a lot of European companies and chambers of commerce. Her company collects and provides information for market research and determines growth potential, among other things. She has received many inquires recently and is very optimistic that as soon as the travel restrictions are lifted, investment in the U.S. will pick up again.
Margaret O’Riley, who handles business recruitment for the automotive, chemicals, plastics, and battery industries for Duke Energy Corp., sees the same trend. She also reports that many international companies would like to start their projects in the United States but have had to postpone not only due to travel restrictions, but in some cases the suspension of entry visas.
China, the first country to be impacted by the coronavirus, has lifted its lockdown much earlier than Europe or the U.S. One good example of FDI from Europe in China is the current project from Schott AG, headquartered in Mainz, Germany. The company is building a glass plant for pharmaceutical packaging in Huzhen Town, Jinyun County, Zhejiang. Construction time is about 18 months, and the global pandemic hit right at the first phase of the construction.
Frank Lenzen, the project director from Schott who is overseeing the project on site, is very optimistic that they can keep the anticipated schedule despite the coronavirus impacts. The main issue he is currently facing is bringing in the specialists to install the equipment. Everybody traveling from Europe to the Schott site has to quarantine in a hotel for seven days before being able to work on site. And people are hesitant to travel during a pandemic. But overall, Frank Lenzen is very optimistic to finish the project on time.
Although the coronavirus shut down the global economy and the tariff discussions are still ongoing, the outlook for FDI from Europe is positive. Supply chains will be adjusted, and manufacturing will probably return to where the products are consumed. The U.S., Mexico, and Canada are attractive, with competitive energy costs, existing trade agreements with Europe (e.g., FTA EU-MX), and skilled labor. Once the United Sates allows entry again of foreigners from the Schengen countries and China, FDI will increase — especially from the automotive industry as related to electric mobility and autonomous driving.