More companies are adopting a “China-Plus-One” supply chain strategy, which shifts some production away from China to other lower-cost export countries, to protect the flow of international trade. The impetus for this is increased costs from higher U.S. tariffs on Chinese imports, coupled with certain supply chain disruptions that occurred at the onset of the COVID-19 pandemic. And labor costs in China have risen, reflecting the growth of the middle class and population migration to urban areas.
Figure 1: Average Yearly Manufacturing Wages Per Worker in Chinese Yuan
Source: National Bureau of Statistics China
Vietnam Positioned to Take Advantage
Vietnam has emerged as the biggest beneficiary of China-Plus-One strategies. It posted the largest year-over-year trade growth with the U.S. in 2019 of any Southeast Asian country and is one of the few countries in the world with positive trade growth with the U.S. through the first half of 2020.
The influx of foreign direct investment into Vietnam has made it one of Asia’s fastest-growing economies, with GDP up 7% in 2019. Vietnam's extensive coastline, proximity to China and large workforce make it one of the world's premier outsourcing destinations. Its 114 seaports give factories throughout the country convenient access to points of export.
Vietnam’s labor costs are relatively competitive with other Asian countries with comparable infrastructure; its minimum wage is between US$132 and US$190 per month compared with China (US$207), the Philippines (US$171-318) and Malaysia (US$270-295). The country levies a standard corporate income tax of 20%—on par with Thailand and Cambodia and lower than Malaysia (24%), Indonesia (25%) and the Philippines (30%).Vietnam currently has 13 free-trade agreements (FTAs) as a member of ASEAN and has six more pending.
Increased trade with Vietnam largely benefits U.S. West Coast ports, while also providing value to interior air-hub and East Coast ports. Through June 2020, total U.S. trade with Vietnam this year totaled $38.1 billion, up 7.2% compared with the same period a year ago. Vietnam is one of only seven countries that increased trade with the U.S. in 2020, with $13.6 billion or 36.1% flowing through the ports of Los Angeles and Long Beach. Other U.S. ports with strong trade activity with Vietnam include Dallas-Ft. Worth International Airport at $2.6 billion, the port of New York/New Jersey at $2.6 billion and Chicago O’Hare International Airport at $2.3 billion. The port of New York/New Jersey was the only one of the top five U.S. ports to increase trade with Vietnam compared with the same time a year ago, up to 12.4%.
Figure 2: Top 20 U.S. Trade Partners, Total Goods Trade, H1 2020 vs 2019
Source: U.S. Census Bureau, CBRE Research, Q2 2020.
How China-Plus-One Affects Industrial Site Selection
Imports from Asia have historically entered the U.S. through West Coast ports. But over the past few years, more companies have adopted a regional distribution model with warehouses near growing population centers for quicker deliveries and lower domestic transportation costs. The Southeast has been the major beneficiary of this strategy with Charleston, S.C. and Savannah both posting double-digit cargo growth in 2018 and 2019.
Once trade from China was disrupted at the onset of COVID-19, companies began diversifying their supply chains. A “China-Plus-One” strategy was widely adopted, whereby some companies that historically sourced products solely from China have added at least one secondary source in Asia.
While many factors determine the most cost-effective points of entry, the general rule of thumb from a location standpoint is that source countries west of Singapore, including Europe, use U.S. East Coast ports. Those east of Singapore use U.S. West Coast ports, and Central and South American source countries use U.S. ports in the Gulf of Mexico or the Southeast, especially Florida.
Asian routes to the U.S. East Coast through the Suez Canal generally have longer times in transit compared with routes to the West Coast. Some Asian importers located west of Singapore will take advantage of lower costs through the Suez Canal as well as significant improvements to many Southeast ports’ intermodal capabilities to distribute product to the interior U.S. This will be a demand driver for Southeast logistics markets including Charleston, Savannah, Atlanta, Greenville, S.C. and Florida’s I-4 Corridor.
Top Ports of Entry by Country
Source: WorldCity, CBRE Research, Q2 2020.
Who will benefit from nearshoring?
“Nearshoring”—the sourcing of products from exporting countries with shorter shipping times to points of entry—provides opportunities for domestic goods producers but has real estate, logistics, labor and cost challenges. It is unclear how much secondary sourcing in or near the U.S. will be added, but Mexico seems likely to benefit because of its lower cost of labor and proximity to the U.S. Mexico’s 14 free-trade-agreements (including the U.S.-Mexico-Canada Agreement) increase its chances of regional manufacturing growth.
Some goods can flow via water routes from Mexico to the U.S. as well as by rail and truck to provide additional speed when needed. These speedier options from Mexico will enable make-to-order manufacturing strategies. Onshoring of production to Mexico will benefit maquiladoras (manufacturing/warehouses run by foreign companies) and U.S. border distribution centers, including those in El Paso.
China-Plus-One will be a net positive for industrial real estate because it accelerates supply source diversification. This diversification of sourcing, along with rising domestic transportation costs and an increase in online sales, will require more distribution centers throughout the country and will be another catalyst for robust industrial real estate demand for the foreseeable future.