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Regional Report: A Resurgence of U.S. Manufacturing

A GPEC Virtual Series

The Greater Phoenix Economic Council (GPEC) hosted the latest installment of its virtual series, ‘Regional Report,’ where a panel of experts discuss industries throughout Greater Phoenix impacted by the COVID-19 pandemic. This week’s hour-long webinar centered on a potential resurgence of U.S. manufacturing and how Greater Phoenix may benefit from companies “re-shoring” operations back to North America from around the world. The conversation featured commentary from Chris Camacho, president & CEO at GPEC; Greg Healy, SVP of Labor Analytics & Supply Chain at Colliers International; Paul Laudicina, chairman emeritus at Kearney; and Luis Ramirez, president of Ramirez Advisors International.

Global manufacturing is important to any healthy economy and it’s certainly critical for Greater Phoenix’s. The region is a leading market in the Mountain West for manufacturing operations due to having the third largest labor pool and some of the most competitive labor costs in the western U.S. Greater Phoenix features an affordable operating environment and access to a large consumer base. The region typically has 1,200 daily domestic and international flights from Sky Harbor International Airport, more than 33 million consumers can be served within a single day’s truck haul, and shipping costs from Greater Phoenix to California are up to 75% cheaper than other Mountain West markets.

“I do feel like Arizona could be very well situated post-COVID by partnering with our neighboring states and countries to create really a global manufacturing powerhouse,” says Chris Camacho, president & CEO of GPEC. “There are a massive number of industries that have value-laden goods that could potentially ‘re-shore’ to the United States.”

Camacho clarified that while there may be a significant “re-shoring” of manufacturing operations, that doesn’t necessarily equate to job creation, he explained. Because of mechanization, automated manufacturing facilities could come back to the U.S. in some capacity.

Related to the price index comparison between China and other Asian markets, North America is becoming increasingly more competitive as an emerging market. When factoring in the multitude of operational cost facets, the U.S. has closed the gap when it comes to the labor costs differential.

Paul Laudicina, chairman emeritus at Kearney, a global management consulting firm, contextualized the conversation around the global pandemic, but pointed out trends that preceded COVID-19.

“I believe there has been a fairly dramatic rethink by major global companies, of global supply chains, that has already been underway,”says Laudicina.

Growing consumer demand for customized and personalized products required global supply chains to be reorganized with centers of manufacturing closer to the end consumer, he says.

From 2018 to 2019, the U.S. gross manufacturing output held steady. Because of the trade war, manufactured imports from low-cost Asian countries fell 7% from $816 billion to $757 billion over the last year. Laudicina says the contraction is a result of a contraction in Chinese imports, which declined 17% in 2019.

“The news is positive for the U.S. manufacturing. The limitations which held [the] manufacturing world flat in 2019, even as the trade war with China put Chinese manufacturing at a disadvantage, I believe we’ll continue to dampen to a significant revival in U.S. manufacturing until such time as those issues are addressed,” says Laudicina.

Laudicina also iterated the U.S. needs to capitalize on very high-tech segments where there is a pronounced labor shortage and a long-promised productivity boom in automation.

While there is room for optimism, Greg Healy, VP of Labor Analytics & Supply Chain at Colliers International, illustrated that despite massive population growth, the U.S. had roughly the same number of manufacturing jobs in 2010 as it did in 1946.

“We see it [manufacturing jobs] going up slightly from 2010, which is interesting because it parallels the growth of E-commerce to a degree,” says Healy.

The “re-shoring” trend followed a similar trajectory starting in 2010 and continued through 2018 with a majority of those jobs related to transportation. Arizona ranked 15th in manufacturing jobs added between 2010 and 2018 with nearly 18,000.

Healy discussed that executives used to prioritize cost and speed as the primary drivers of facility locates, and while those two factors are still paramount, mitigating supply chain disruption risk is also a driver.

Ease of congestion and lack of natural disasters provide Greater Phoenix with optimal position because run times stay high. The region doesn’t encounter blackouts or brownouts like California, tornadoes like you see in Texas, or flooding prevalent in gulf states. Natural disasters have huge impacts on supply chains and Greater Phoenix is absent of these catastrophes.

Proximity is also advantageous for the region.

“Arizona specifically, the advantage you have is that binational agreement with Mexico. Being so close to the major manufacturing locations,” says Healy. “They’re [companies] looking for locations which are a little bit lower cost, but still close to markets. Arizona is nicely situated geographically.”

Luis Ramirez, president of Ramirez Advisors International, spoke to Mexico’s dyer economic situation with projections as much as negative 12% growth for the Mexican economy.

“Mexico is looking for a way out of this economic downfall,” he says. “A close working and trade relationship with the United States, with Canada, I think presents a tremendous opportunity for Mexico.”

In the first quarter of 2020 alone, $6 billion worth of trade commenced between the U.S. and Mexico, but COVID-19 has had a dramatic impact.

“Because of COVID, 66% of Sonora’s [Mexico] manufacturing sector was shutdown. There is a possibility another 12% may open up by next Monday, but these negotiations are ongoing,” says Ramirez.

Being closer to the end consumer was also a point that resurfaced during Ramirez’s comments.

“Chinese companies are now recognizing that in order to continue to sell to the North American market, they just focus on shortening the supply chain,” he says. “They can no longer rely on themselves, on Chinese supply.”

Noting that while regional manufacturing is taking a hit because of the pandemic, Ramirez believes North America is poised for a prompt recovery.

“There is all this potential of manufacturing capability just across the border from us that is chomping at the bit to get back into operations,” he says. “I think it will be gradual, but tremendous opportunity for future short-term and long-term manufacturing operations.

Ramirez’s optimism for a manufacturing shift from Asian markets is also positive.

“I think Chinese companies are now looking at North America with a different light. They’re no longer just looking to manufacture the cheapest. They’re now looking at what we’re discussing earlier – the risk factors, the costs factors of getting their product to the U.S. market. If you want to sell into the North American market, you need to manufacture in North America.”

Moderator Eric Sperling, managing director of The Social Television Network, synthesized the conversations as ‘good news.’ Highlighting commonalities amongst the speakers with use of terms like “catalyst,” “ushering in a new era of localism,” and noting “Arizona seems to be well-positioned.”

GPEC president & CEO Chris Camacho agrees.

“I am really optimistic about the near-term opportunities for Arizona…binational partnership with Mexico, because we could really position ourselves very, very favorably, taking advantage of all the assets that exist in the Southwestern region,” he says.

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