With all the international events of the last several years, it is highly likely that companies are going to be rethinking their operational footprints and starting to build more facilities on shore.
COVID 19 threw a wrench in companies’ logistical operations. For a long time, international operations were viewed as providing strategic geographic diversification. By optimizing transportation processes, the ability to keep logistical costs at minimal levels fostered cost effective geographic production and profitability. Most of the risks were viewed heavily in financial terms. Other non-financial risks were given “second fiddle”, but the non-financial risks are gaining much more visibility given current events.
With Russia invading Ukraine, the realization that potential expropriation is a big and growing risk.
Many companies geographically diversified their operations. A big part of that diversification was the lower costs of production in those locations. Unfortunately, depending on the cost of building an international facility, the time the facility has been located in the country, and the overall production savings, expropriation of those facilities could totally overshadow any production savings. It’s similar to buying a 60K car for a five cent savings on each gallon of gas. It can take a long time to cover the margin savings on gas with the 60K expenditure on the car. If the car were taken and not replaced (expropriation), the savings in the gas would amount to comparatively nothing.
A great example of on shoring in the current environment would be Intel. Their CEO, Pat Gelsinger, quickly moved to build new fabrication facilities on shore in the last year. He also committed to stopping the “financial engineering” of buybacks in lieu of investing in Intel’s productive facilities and capabilities.
So be prepared to see more on shoring in the future. Unfortunately, the on shoring will likely be much more automated.
Be smart, be well-read, be aware and be successful.
