Foreign manufacturers are increasingly focused on how evolving “Buy American” requirements may impact them. And like most U.S. domestic manufacturers, foreign manufacturers continue facing challenges with supply chain disruption, with the grounding of the Ever Given in the Suez Canal as just the latest headache. In order to mitigate risks associated with more restrictive local sourcing requirements and complex logistical challenges, foreign manufacturers are revisiting the localization of distribution, assembly and production activities in the U.S.
Those are a few takeaways from our conversations over the past three months with dozens of business leaders from the UK, Germany, Austria, Italy, India, China, South Korea, Mexico and other countries around the world. The focus of those conversations has been navigating foreign direct investment (FDI) and supply chain disruption amid the pandemic. Below are some of the main trends we are seeing and examples of how companies are adapting.
Evolving Content Requirements
There is an increasing awareness of the risk manufacturers face tied to changing content requirements in the U.S. These risks are not totally new. However, the Biden administration is signaling that the U.S. will continue increased focus on this issue, which is expected to impact several industry sectors in particular.
On January 25, President Biden signed an executive order aimed at long-standing “Buy American” provisions the U.S. government follows in its own procurement process. The Biden order instructed the Federal Acquisition Regulatory (FAR) Council to come up with new regulations increasing the Buy American requirements and changing the way those requirements are measured. However, the Biden order does not specify how much to increase content requirements – that will be up to the FAR Council to decide by late July 2021. In the meantime, the U.S. government is already tightening its waiver process that is used to allow certain types of procurement projects to receive exceptions to some “Buy American” requirements.
Combined with higher North American content requirements in the United States-Mexico-Canada Agreement (USMCA), more foreign companies are finding themselves grappling with this issue depending on their industry sector. Those involved in government contracting are right in the crosshairs, and the building materials and information technology industries are likely to see the largest impacts. And the importance of this issue will increase if President Biden’s infrastructure legislation passes Congress.
Those content requirements are contributing to a longer-term trend: more industries are moving manufacturing into the United States. Business leaders say they have several strategic reasons for this, including improved logistics and US content requirements, but also proximity to key customers and reduced currency risks. We also continue to hear interest in Mexico as an alternative to the U.S. While USMCA’s content and wage requirements may shift some Mexican manufacturing to the U.S., Mexico is still very much in play for FDI projects considering North America.
Moving Forward With Site Selection Amid the Pandemic
While the pandemic has made site selection difficult, many companies that are making strategic investments like those mentioned above are finding ways to carry out their location projects. However, although some travel opened up for business travelers in the 1st quarter of 2021, COVID-19 continued to disrupt many plans.
For example, several leaders of a South Korean business recently traveled to North and South Carolina for a site visit. But after their first meeting, they found out an economic developer in that meeting tested positive for COVID-19. As a result, the South Koreans had to quarantine in their hotel and conduct the remaining meetings virtually – with people who were right down the street.
We know of two other instances in the first quarter where a COVID-19 diagnosis, one in the home-country and one in the U.S. after landing, wrecked a site visit. That is part of the reason many of the visits still happening in the U.S. involve companies that already have an American presence, as travel is easier for their personnel.
Still, while international travel is down, international projects are moving forward. The key is the rapid improvement of virtual tools during the pandemic, including virtual showcases that incorporate GIS mapping data, drone footage, and other elements to help with due diligence. While companies are finding these tools extremely useful, they are also finding it more important than ever to have trusted professionals, including legal counsel, on the ground in the locations they are considering. (You can learn more about navigating virtual site selection here.) By combining the advantages of virtual site selection with an expected increase in the ability to travel this summer due to vaccinations in the U.S., foreign companies can move forward with their site selection.
Dealing With Supply Chain Disruption
There may be no clearer image of supply chain disruption than a 1,300-foot container ship walling-off the Suez Canal. But the Ever Given running aground was simply the latest example of the difficulties companies have faced for more than a year now. Manufacturers and the logistics companies serving them say the cost of shipping goods and the ability to get space for those goods have become terribly challenging.
Much of this still goes back to the inability to get products from the source, whether those products are microchips or wood. While there are fewer lockdowns worldwide now than there were last year, many plants continue operating at low capacity or are struggling to catch up to demand.
Marbach Group, a global manufacturer and supplier of die-cutting tools and equipment based in Germany with more than 20 locations worldwide, has been constantly adapting through the pandemic to address these challenges. The February freeze in Texas, for instance, contributed to a shortage of low-grade plywood that Marbach would typically use to make crates for the transportation of its products.
“In turn we had to use our own manufacturing wood for our products to build crates,” Marbach America CEO Fernando Pires says. “Since the lower-grade wood was not available, we increased our cost margins by having to use higher-grade materials for a simple transfer box for our products.”
That’s just to get their products ready for shipping. Pires has many more examples of challenges the company has faced after its products are shipped.
One-way Marbach and other companies have responded is by building up inventory. (Pires jokes his head of purchasing must have had a crystal ball, as Marbach started increasing its stock levels in January 2020.) Marbach reflects an uptick in interest for distribution and warehouse space in the Southeastern U.S., which is evidenced by the significant construction of new warehouse space in the region. Some companies are temporarily leasing warehouses so they can stock up on raw materials and finished goods to avoid shortages when supply chains are not working correctly.
Foreign manufacturers are also diversifying their supply chains and service capabilities. Some companies that traditionally had one or two suppliers of a certain type of component are now adding additional suppliers of the same component for more robust redundancy in the supply chain. Others whose supply chains were concentrated in one part of the world are looking to add geographic diversity – so the next time a country has a COVID-19 problem, they won’t be so dependent on that one area.
Likewise, companies are diversifying their service capabilities and know-how. Many foreign companies rely on key personnel from their headquarters to fly elsewhere and solve problems when needed. That’s become more challenging with COVID-19 travel restrictions, so companies are diversifying their training programs. One executive described it as onshoring skills.
Surging FDI Down the Road?
The final thing that stood out to us amid conversations with foreign business leaders in the first quarter of 2021 is the potential for a surge in FDI coming out of the pandemic. This potential comes from two key factors.
First (and as noted above), many companies remain committed to their strategic growth plans, although the pandemic may temporarily slow the pace of their investments. Second, companies have been in cash-preservation mode and have cheap borrowing options at the moment. In addition to cheap debt for expansion, investors are also hungry for higher returns and are seeking to invest in innovative foreign companies who have growth potential in markets like the U.S.
For companies that have been able to avoid a severe hit to their financial position, all of these conditions are ripe to create a jolt in FDI as the pandemic subsides.
Sam Moses and Al Guarnieri are leaders in Parker Poe’s Manufacturing & Distribution Industry Team. Sam is based in Columbia, South Carolina, and Al is based in Charlotte, North Carolina. They can be reached at firstname.lastname@example.org and email@example.com