In 1983, Tom Linton took a ferry from Hong Kong to the People’s Republic of China, then bounced along a dirt road in a van to reach a factory in Shenzhen that offered lower costs for the parts he sought. In the decades since, Linton and his teams at IBM, LG, Flex and other companies have driven billions in annual procurement to China and other Asian countries, helping to create the Asia-centric manufacturing supply chains of today.
Now, Linton believes those supply chains must change. To create more secure, resilient, and cost-efficient supply chains for the future, firms and government agencies should invest to expand manufacturing and logistics infrastructure in Latin America. “We need to start putting the ingredients in place today,” Linton said in a July 15 webinar: The Case for a Pan American Manufacturing Ecosystem. The live discussion, moderated by Resilinc CEO Bindiya Vakil, also included Arizona State University Professor of Supply Chain Management Dale Rogers.
This trio of supply chain experts began advocating earlier this year for public and private investment in what they call the Pan-American Manufacturing Ecosystem year (see their June guest article in Harvard Business Review). It’s a viewpoint that many in supply chains and government have come to share after long-simmering concerns about dependency on Asian suppliers came to a boil early in the pandemic because of shortages of critical medical supplies. “The common theme of the last year-and-a-half has been how to redesign supply chains for greater sustainability and resilience,” said Vakil.
To support “Buy American,” buy Pan American
The quest for greater supply chain resilience will involve some re-shoring of manufacturing to the United States, as advocated by the Biden Administration in its recent recommendations for securing supplies of key materials and products. But U.S.-based manufacturers will still need a strong supply base from friendly countries. Mexico, Central, and South American countries represent some of the best options, according to Linton, Rogers, and Vakil. Mexico already hosts a robust cluster of auto parts manufacturers that U.S. and European automakers depend upon—and that sector is poised to grow with the trade certainty bestowed by the USMCA (see How USMCA is creating trade certainty)
Increasing Pan-American manufacturing would address a critical obstacle in the drive to rebuild American manufacturing. “We simply don’t have the workforce to support large growth in manufacturing,” Vakil said. “In Mexico and Central America, the median age is more than 10 years younger than in the U.S. I see great opportunities to expand the U.S. manufacturing supply chain there.”
Increased manufacturing employment could also reduce the pressure on poor people—especially in Central America—to migrate. “It’s a tragedy that people are marching up from Honduras to the U.S. because they can’t find opportunities at home,” said Linton. “We’re spending billions to [secure the border] while a lack of labor is shutting down growth opportunities in America.”
Proximity = lower costs and lower carbon
Closer proximity—as compared to Asia—alone could reduce shipping times and inventory costs, as well as the greenhouse gas emissions from ocean and air freight, according to the three. Shifts in consumer buying habits are changing distribution and logistics make the business case for shorter supply chains even stronger.
“For the last 30 years, old professors like me have been saying that it made sense to consolidate distribution centers,” said Rogers. But instead, to meet consumer demand for fast deliveries, DCs have proliferated. “That has dramatically increased the cash tied up in inventory,” said Rogers. “Companies have to look for ways to ameliorate that, such as reducing long transit times.”
“Less time spent in transit means less cash tied up in inventory, and that means reduced working capital requirements and healthier balance sheets,” agreed Linton.
Logistics infrastructure needed
Linton, Rogers and Vakil acknowledge that many challenges must be overcome to sharply increase manufacturing in Latin America. As pointed out in a recent Economist Intelligence Unit report, while Mexico’s production costs are competitive with Vietnam, Thailand, Malaysia and Indonesia—and lower than China’s and Taiwan’s—Taiwan and South Korea dominate the critical semiconductor industry, “leaving little industrial foundation in Mexico on which to build [chip production].”
Rogers said he doesn’t expect semiconductor fabricators to locate in Mexico or elsewhere in Latin America, but rather the downstream manufacturers who assemble, test and manufacture products with semiconductors. “You could move a lot of the downstream manufacturing to Latin America,” said Rogers. “There’s already some of that in Puerto Rico and Brazil.”
One of the greatest challenges, however, is not even mentioned in the EIU report: enhancing the transportation and logistics infrastructure in Latin America countries. “A lot of logistics professionals say the rail and road systems in Latin America are already overwhelmed, especially in Mexico,” said Rogers.
Given current road and rail conditions, a great deal of exports move north via ocean ships, which undermines the value of shifting supplier networks from Asia. “Ocean shipping also creates situations where ports can become a single point of failure,” said Vakil, noting the congestion and container shortages that have plagued Pacific Ocean ports over the last year.
The Mexico-US-Canada rail network envisioned in the pending merger of Kansas City Southern with Canadian National would help. But Linton, Rogers and Vakil advocate a public-private investment initiative on the scale of China’s Belt and Road Initiative. “For a Pan-American manufacturing supply chain to be a sustainable alternative, there will have to be greater investment in roads and rails and other logistics infrastructure,” said Rogers.
Vakil added that the United States is already behind China in Latin American logistics investments. “Belt and Road has arrived in Latin America, investing in ports and roads and industrial parks,” she said. “In our own backyard, we have a country with very different interests making large infrastructure investments.”
The vehicle for a Belt and Road-scale of investment may be the U.S. International Development Finance Corp., which congressional leaders from both parties and the Biden Administration. “To counter China’s rising global economic influence, Washington has taken a new direction with foreign assistance,” reported the Wall Street Journal on July 15. “Rather than just lend money or promote trade … the U.S. is now investing dollars overseas to advance American national-security interests [and keep] ports, cellular networks and other strategic assets … in friendly hands.”
A long-term vision
In the view of Linton, who facilitated the explosion of Asian manufacturing over almost four decades, the transition to a Latin American manufacturing supply base will take at least 20 years…if the strategy is widely adopted now. “Development of the Pan-American manufacturing ecosystems make sense for a lot of reasons and will have a lot of benefits. But it won’t happen unless we start working on it today.”