The corona crisis has accelerated several megatrends, yet it is unrealistic to think European production can be fully onshored, says Sean Rymell Real Estate & Private Markets Strategist at UBS Asset Management.
In the report 'Logistics post-COVID - has COVID-19 changed logistics forever' he investigates four reasons that will lead to deglobalization: self-reliance, digitalization, e-commerce 2.0 and sustainability. But there are several practical constraints to bringing production back on a large scale, he says.
"Europe is lagging behind many other global regions in terms of modern warehouse stock per capita, especially in the e-commerce sector. Planning authorities are generally reluctant to zone land for industrial uses as it provides less tax revenue than alternative uses and is unpopular with local residents due to its perceived 'dirty' status.”
Besides, China will soon be the world's largest economy and is gradually transitioning to a consumer-led model. According to Rymell, this will likely mean they will have greater needs in terms of provision of goods. "Yet, Asian companies will also benefit from local production capacity. Apart from that, you don't get a complicated logistic process back from China overnight".
These are the pull factors that may draw more activity back to Europe:
Self-reliance
A UBS- tool called Earnings Call Analyzer, which uses natural language processing algorithms to look at the frequency of certain terms used by CEOs and analysts in official company communications, revealed a 42% increase in terms related to supply chain diversification. While terms such as "onshoring" and "nearshoring" featured prominently, the largest increase by far was in the phrase "supply chain disruption." This introduces an interesting shift in the concept of global supply chains; having previously been driven by considerations of cost, the emphasis appears to now be on risk management.
Digitalization
The growth of the digital economy should have a transformative effect on European industrial markets as well. Many landlords have begun thinking about the future in terms of making sure warehouses have large power sources, charge points for electric cars, and ensuring warehouses have full connectivity to enable electronic tracking systems and other efficiency drivers. Over the short to medium-term, it is conceivable this could erode the cost benefit of outsourced production even further. Moreover, besides supporting traditional industrial, the digitalized economy has created demand for another type of warehouse: data centers. These facilities need to be present locally.
E-commerce 2.0
The pandemic has had a particularly devastating impact on physical retailers, with some commenting it has brought the demise of the high street forward by several years. There are question marks about the permanence of this shift, however, the evidence suggests occupiers are not viewing it as entirely temporary. 2Q20 set a new record for take-up in the UK logistics market, the lion's share of which was driven by ecommerce-related functions. More interestingly, only around one fifth (22%) of these were short-term lets (12 months or under). Additionally, of the 175,000 personnel hired by Amazon during the pandemic, 70% were on permanent contracts.
Sustainability
Consumers nowadays take a dimmer view of globalized supply chains and the greater associated carbon footprint. Another highly topical issue is that of food storage. Globally around 30% of food is lost across the supply chain, before you even account for products expiring following post-purchase. This has been a key focus especially as public awareness of food poverty has risen. To offset this, Europe will need more cold storage facilities and will also need to retrofit existing facilities to meet demand. Finally, warehouses typically rely on large pools of labor. Developing new large-format schemes in areas of high unemployment could allow some of this slack in the labor to be taken up and create new jobs locally for displaced workers.
Click here for the full report ‘Logistics post-COVID – Has COVID-19 changed logistics forever’ at UBS Asset Management.