Why are US companies bringing manufacturing back to America? Part 1 | Top of Mind Series

Today we're going to focus on why US companies are bringing manufacturing back to the US. And so this kind of goes against, you know, contrary popular opinion of, you know, globalization and outsourcing all manufacturing overseas into third world or developing countries. And it's really a trend that has kind of taken a quick reversal in really the past 2 years. And ever since COVID kind of changed a lot of things. So we wanted to kind of dive into this, talk about what's driving this. And really as investors, again, our whole goal with this podcast is to find these trends that may be under the radar that are creating opportunities for investors. And we feel like this may be something that investors need to pay attention to.

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Welcome back to the Invest Like a Billionaire podcast. I'm your co-host Ben Fraser, joined by fellow co-host Bob Fraser. And today we've got a Top of Mind episode for you. So in this series, we do short snippets and look at different things that are going on in the economy, in different asset classes, different trends that we're seeing and picking up on that we feel are noteworthy and worthy of investigation and want to share with our listeners. And it's usually a little more short soundbites. And I'm really excited about today because Bob has some pretty cool information that he's going to talk a little bit about related to the industrial real estate space. And this is something we've been tracking with for a little bit ever since COVID kind of upended the entire global supply chain and is really kind of rewriting kind of the whole space in the industrial world. We've been digging into some of these trends. And excited to share some of these little snippets. We're going to have a lot more to share in the coming few weeks.

It's an amazing time, right? There's all this fear out there, you know, which is great because fear creates opportunities. And we are also at the front end of some major, major shifts in trends. And And that is the best time to get involved. So, you know, we're, we've identified kind of a, a key trend here that we're very, very, very excited about. This is a long-term trend. I, when I get excited, but it's not a trend that's going to be a 6-month trend, right? That's not a trend. I'm interested in a trend that's going to go on for the next 10 to 20 years. That's going to create billions and trillions of dollars in value. That's what, that's we're interested in. We're, we're very pumped about, about this reality that, that this niche that, that is pretty clearly going to be a major win. And it's, it's this, this idea of the reshoring of, of, of US companies. And, and it's a very, very, very big deal. And you ask, you know, why, you know, why are companies doing it? Let me show you one chart that is just kind of a little bit of a a little bit of a mind blower here. This is, can we see this? You got this chart there, Ben?

Got it.

Okay, so this is a mind blower. This is the manufacturing average wage in US dollars, and the red line is China. And so look what's happened to Chinese wages, a 15-fold increase in basically since 1999. And so Chinese wages are higher than Mexico. They're higher than every other country. In fact, right now China's very desperately trying to automate, and they're the number one purchaser of robots right now in robotic manufacturing. So people think China's this great cheap thing. It's not, it's actually just as cost-effective to manufacture in the United States today if you count the cost of transportation, if you add in robotics and automation, and if you add in, you know, transportation costs, and if you throw in energy, it's a whole different wild card.

Yeah. Okay. I got to pause you there because that is nuts. So for those that are not watching this on YouTube or listening to it, the chart that Bob Fraser has pulled up here is over the last 20 years, what is the average wage in different primary manufacturing companies and has it stayed flat or has it gone up? So in most of these places, it's kind of trended up slightly, but in China, which has been a mega manufacturing titan, they have, the average wage has increased 15-fold, 15x.

So most investors are thinking their data's 10, 15 years old. So you're thinking China's this great manufacturing destination. Well, it was, You know, and the issue is it's just not anymore, you know, and you add the geopolitical risk, you add the fact that they're throwing people in prison for, you know, political disagreements. You know, this is not, there's no future. And then what very few people realize is that China's actually in their working age population is actually declining and has been for 5 years. And so they're actually, the number of people working in China is decreasing because of their one-child policy. Right. And so China is a declining power and they're, they, they're, and what's happened when you decrease the number of workers, guess what happens to the wage? And so it, so it's no big mystery. So, so, so China is, its days as a superpower, as a manufacturing superpower, it's not going to disappear, but it's not going to dominate the world scene. And I'm just saying, I'm not saying next year, I'm saying the next 10, 20 years, right? So this is a very big deal. And so why are people coming back to America? I'll show you, I'll show you another couple slides here. Hold on, let me pull it up. So—

And what's really interesting too, which we're going to talk more about in future episodes, but we're really seeing you know, the trend for globalization, which when I was in school, you know, 15 years ago in business school, that was the big trend, right? All these companies, these big companies go and drive, you know, higher profit margins to the bottom line by outsourcing, you know, to developing countries, different manufacturing, different parts of the supply chain so that they can increase profit margins. What's really happening is we're seeing since COVID the opposite trend has happened and it's actually deglobalization. And we'll talk about more, more of that, that here soon. But it's, it's interesting too, if you kind of zoom out a little bit over longer periods of time and data, it actually kind of oscillates back and forth, right? As different factors impact the costs for outsourcing manufacturing versus keeping it in-house or domestic. And so it's, it's, the tides are shifting here and it's pretty apparent and it's going to be a pretty mega trend as, as you know, we'll be talking about.

The globalization trend started when China entered the World Trade Organization in 1990 and they brought in this massive, you know, hundreds of millions of cheap labor force into the world system. And they were, you know, politically liberalizing And so, you know, the Western countries had no problem, you know, going there for manufacturing and they aggressively invested in their manufacturing capacity and it began this global, a global trend towards globalization. And it's now over. Globalization is dead. And there's a number of reasons, but suddenly the world has woken up to political risk. Now, I'm going to back up here for a sec. And so we've seen, you, you've seen warehouses and warehouse space across the United States and distribution, et cetera, and manufacturing. Huge, huge demand has been growing really for the last, you know, 10 years. And I have the chart here of shows e-commerce growth and it's just, it's just been ramping up higher and higher. Well, of course, here's the COVID spike. You can see the April of '20, e-commerce growth maxed. But what you've seen is a flattening. And so we believe that the e-commerce trend, it's not dead, but the growth is, the bulk of the growth is over, right? We're not going to see a lot of growth. So it would tell you maybe to not, you know, to not trying to invest in industrial or, you know, big box industrial space, you know, warehouses and manufacturing. And, but it's actually what's happened is since COVID is what's happened is companies have suddenly realized that there is a supply chain and there is supply chain risk. And two things, they want to have inventory and where in the past inventory was considered evil. There was a, you know, in the 1980s, the whole world went to what's called just-in-time manufacturing. And the idea is this, is you want inventory to be delivered the moment, or you want inputs to your manufacturing process to be delivered the moment they're needed and not a day before, right? And so, so inventory was evil and because inventory costs money and, and so you had this just-in-time manufacturing, et cetera. That's all out the window now. Everybody wants inventory now. And because they understand supply chain risk, And then, so you add, you have the COVID supply chain risk, and now you add the fact that the world is waking up that there really are really bad actors on the global stage. Okay. And including, you look at what, what, you know, Putin is doing, of course. And, and all of a sudden they're creating, people are waking up and going, you know, you know, this is bad. We don't want anything to do with Russia. And yet they're the major suppliers of many metals and industrial inputs, including fertilizers and metals, all kinds of resources. What are we going to do? Well, we better figure that out. You look at China and their repression of what's, you know, of free speech and human rights abuses, all just, you know, and people are rising. Wait a minute. And now they're, you know, we, you know, we think they have ambitions on Taiwan, of course, you know, How much work, how much do we really want to be doing with these guys? And if there is hostilities that break out, what's going to happen to your supply chains? Well, exactly. These are things that we absolutely can't ignore. And so all of a sudden the world woke up, wait a minute, there is risk. And so everybody's wanting to bring them back. Add the fact that there doesn't even cost that much more. And so you're seeing a massive trend towards reshoring and reinventorying and building inventory. And reshoring to the US. I have a couple charts here. I'll show. So this is the red line here shows, so the blue line, this blue line is inflation. The red line is actually industrial real estate. So you can see it's been on a tear. And this is so interesting. So look at, look at what's happening in the, the little dark, oh, I don't know what color that is. The, the dark gray. Yes. The number, the amount of industrial space completed, and you can see it's, it's really high. So we're seeing lots of completions, 300 million square feet, 300 million square feet in '18, another 300 million square feet in '19, another 350,000 square feet in '20, you know, looks like '23 is about the same. And then almost 400,000, 400 million square feet of industrial space completed in '22 is anticipated. But look at the absorption.

Yeah.

Look at the absorption. And so, so during '21, some 300 million square feet of industrial space completed and the vacancy rate dropped from 4.9% to, to, I think it's 2.9% today. And so we're seeing massive amount of space being built and yet it's being absorbed as rapidly as it's being built. And so it's just amazing. This is from a latest demand estimate rises by 800 million square feet. This is from Prologis, which is one of the largest industrial management companies. And they have 5,800 customers. Who lease industrial space. And they're saying they're seeing demand of 138,000 square feet per client, increased demand of that's 800 million, 800 million square feet of demand that's being asked of these managers right now.

And this is just of this one firm's clients.

Yeah, they're big though. And then, so you look here, this was just in the Wall Street Journal recently, this article, high natural gas prices push European manufacturers to ship to the US. So this, this is the killer. We are, we are in the middle of a pretty massive energy crisis and this is not going away. And this, we need to do another Top of Mind on, on energy. And we, I, I think we've covered some of this in previous podcasts, but, but what's happened in 2015, there emerged this narrative that fossil fuels were dead and we don't want to invest in fossil fuels anymore. And so they, so the world been investing in fossil fuels to the tune of— it's dropped about 60%, the amount of money being invested to develop fossil fuel resources. And fossil fuels are unique in that if you don't put money in, it declines every year. And so, and it's too late now. That money that was never spent means those projects were never developed. You can't— there's no levers to turn and no buttons to push to boost energy production right now. And so what's happened, America is in a very unique situation. We're the only country in the world that has energy availability in the same locale as industrial demand. So supply and demand are literally geographically co-located.

Right.

You know, China doesn't have any energy. They import all of it. Japan doesn't have any energy. Europe doesn't have any energy. I mean, not any, not much, or not enough, right? Support the demand. It's, they're importing. America is the only country, America is actually a net exporter of fossil fuels. And it's because of the Shell Revolution and our natural gas is literally 5 times cheaper than in Europe or Asia. And you know, well, what does that do? Well, if you have an energy-intensive industry, there's only one place in the planet you want to be, and that's America. You know, so, so we, we have a massive, massive megatrend of reshoring, reinventory that is just getting started right now. We've got probably 20 to 30 years of runway in this, just like the e-commerce trend that's run its course. Now there's kind of wave 2 of, of the reindustrialization of America. That is yet to hit.

Yeah, I know. It's so fascinating. I mean, you think about, like you just showed in the e-commerce trend, there's been a huge driver of industrial space with the shift to online sales and needing to have big warehouses. And Amazon's been a big driver of that, but it seems like it's almost accelerated if you look at that chart of absorption the past few years. Because not only just, you know, there's kind of two big you know, slices within industrial. One is warehousing and one is manufacturing. And warehousing has been, you know, a big driver of industrial growth space, but now it's actually increasing.

Manufacturing that's coming. And you're saying that chip manufacturers are announcing major new builds. You know, they just passed, Congress just passed that law to basically bring chip manufacturing back to America. Of course it takes, you know, years and years to develop that, but you think about these car manufacturers, you can't ship a car because it lacks a $2 chip. You know, would they be willing to pay $4 for that chip? Hell yes. You know, and it's, and get it made in America, right? You know, so, you know, here's another, this is from the Wall Street Journal also. US companies on pace to bring home record number of overseas jobs. Look at what's projected, 350,000 jobs and job announcements. That have been projected just for this year. And so you see a massive trend. This is actually, you're seeing manufacturing employment, you know, has been on the decline since 2010, but all of a sudden it's on the incline now. We're seeing manufacturing employment going up. And of course the new systems are largely automated, so employment is never going to be higher. But You know, and I'll just, I'll just make a shameless kind of, you know, call it political if you want, but we need to open our borders and we need to bring in workers and, you know, and we need a smart, a smart, intelligent immigration policy that helps America, right? You know, and brings in workers. So, you know, you know, the idea that, you know, I think both wings are wrong, right? The left and the right, they're just both wrong. We need, we need good, smart immigration. We don't need stupid immigration. Right. You know, so let's fix some of these things. So here's some of the reasons.

Talk a little bit, talk about why this is a megatrend, right? Why is this something that's going to take place over the next decade, if not even longer? Why is this not just a little blip in the—

This stuff takes massive amounts of time to build the warehouses, to get them the energy going, to shift, you know, cancel contracts, maybe a 5-year manufacturing contract with a contractor in China. It just takes a long, long, long time for this to end. Some companies, it'll take them 5 years to decide, hey, we have to do this just to make a decision. I think 5 years, you know, it just takes a long time for, you know, you know, 100,000 companies to decide they're going to do this. They have to do this. And there's the early adopters and there's the late adopters who just, it's just going to take time. And it, and it's, the pain is going to get worse and worse. Right. And so it is massively accelerated because of the pain of COVID where a lot of companies really lost everything because they couldn't get parts. And they're not going to forget that. They're not going to forget that. Right. Right now, if you have any inputs coming from Russia, you're really thinking about what to do. Right. And they're the largest supplier of a whole, of the platinum group metals of uranium, of fertilizers, all from Russia, number one exporter in the world. And if you're, what are you going to do? You better, you got to figure out another source. So he, here's some of the main reasons why, you know, if this is from reshoring.org report, some of the main reasons why people are reshoring and then the factors trending up, social and ethical concerns are number one. You know, so it's like people are saying, I don't want to have anything to do with Russia or Xi who is, you know, throwing, you know, democracy advocates in prison. You know, I don't want anything to do with that. And number, that's interesting. That's number 1, right? Number 2 was Walmart. You know, $350 billion made in America campaign, right? Inventory. They want more inventory. That not up 300%, and this is in their survey, was the price of electricity and gas.

Wow.

And, you know, and I actually predicted, I don't know if you remember the conversation, Ben, it was 6 to 9 months ago. I said energy is going to be the main driver, driving companies to America. And it is. We are an energy superpower. America is an energy superpower. And we're the Saudi Arabia of coal and Saudi Arabia of natural gas. We've got a ton of it. I mean, so much so that they're flaring off natural gas and that's because it's so cheap. It's like, don't know what to do with it, so we'll just burn it off. And you know, that needs to stop.

But you know, yeah, it's, it's interesting to me. It seems like this, the kind of trend that, that, that drove globalization accounted for certain factors that up to that point were difficult to quantify. You know, basically supply chain risk and energy price, you know, risk. And up until COVID, those kind of worked great. And, you know, in school, as always, just-in-time inventory was such a cool concept, right? That you could have something arrive right when you needed it. And all these systems—

A lot of concepts that are great. Right.

And they work together perfectly to get it right when you need it there. And it's interesting how, the, you know, COVID exposed a lot of these shortcomings in how the global system has been set up and it basically really underpriced the risks of that.

Exactly right. Yeah, that's exactly right, Ben. Well said. And it's, we've been over-globalized.

Yeah.

Okay. The risks were massively underestimated and what happened is COVID exposed it. Expose the risks. And so it's a lot of times, so these world crises don't a lot of times, you know, kill things. You know, they just push corpses off the cliff is what they do, you know? And that's really what happened here. The COVID exposed this massive risk in supply chains and this over-globalization, this far too aggressive globalization. And, you know, so it's all changing, you know, look at this warehouse and distribution space chart of real estate. And you look at, here's what says, so the vacancy, look at the vacancy rate dropping right now, it's 2.9%. And if you look at the effective rent growth is peaking. So it just shows there's a squeeze. You know, and I'm actually super excited because this is a, this is a massive mega trend. This is a 20 to 30-year mega trend, right? But what we're seeing now is because of this fear of recession, we're seeing a counter trend to the mega trend, right? It's a, and that is perfect. That is exactly what you want because now's the time to buy. So right now we're going to be seeing great bargains coming in industrial real estate and everything, you know, if as people fear recession, as the banks tighten their lending, which you already see, you know, it's going to cause prices to come down. And so it's going to be perfect. So I love in the beginning of these megatrends to have a, a, a countertrend, right? Going against the megatrend, the opposite way of the megatrend. Those are perfect buying opportunities. Yeah.

So it's exciting. So, For all of you that are interested by this and intrigued by some of this data, we're going to dive into this a little bit more in future episodes. And we've got a lot more data that we're excited to share. And Bob's actually been, you know, trying to hold it in because there's a lot of information here he's been doing research on and he's been doing this presentation on megatrends at a few different places and excited to kind of share more of this with you. But it's, yeah, it's really interesting at what's driving, you know, manufacturing coming back to the US. It seems very, Contrarian to what we've been hearing for the past 20 years and expecting. And so definitely see some opportunities here. And so please stay tuned. We've got a lot more that are exciting.

Yeah, we're going to be, we've got industrial opportunity coming, but we're going to be looking for more. So we're actively kind of seeking out the best way to place capital right now and looking for the best ways to do this. So, but we're not in any giant rush. We think the next 6 to 9 months and even 12 months might be ideal for investing in this market. So, so, um, can't wait. So to jump in.

All right. Well, thank you so much for listening. Please stay tuned for future episodes. And as always, we appreciate your support. Thank you for all the reviews and sharing this with, with friends and family and, uh, Thank you to our listeners.