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Will onshoring solve our supply chain issues?

We all probably remember something that we couldn’t get during the height of the COVID-19 pandemic due to supply chain backlogs. Maybe it was a children’s bike, a skateboard, a laptop, or even a new car. Whatever it was, we all became experts in supply chain management and were suddenly versed in the real-time costs of moving a shipping container from China to the U.S. The supply chain disruptions stemming from the pandemic only worked to increase a trend that was well underway for several years - the regionalization of supply chains, or the shift from “offshoring” to “nearshoring” or from offshoring to “reshoring”.

Reports by Bank of America and McKinsey and others have documented how the supply chain crisis was the tipping point that spurred a growing number of industries and companies to bring production closer to home – home being the United States. The Bank of America report notes that companies like Ford and Boeing have “reshored” operations to nearby countries in Latin America and the Caribbean. But this has also happened in textiles, electronics and a range of other industries.

One of the biggest winners in this trend is Mexico, with its relatively cheap labour costs compared to the US, a well-educated and skilled workforce, and easy access to U.S. markets. A New York Times article recently noted that in October 2022, $27 billion worth of freight moved through the border town Laredo, Texas. This amount exceeded for the first time the flow through the twin seaports of Los Angeles and Long Beach, California, the heretofore primary gateway for American imports.

And while there has been a lot of ink spilled about this trend toward regional production, ESG is seldom the focus. But given that a lot of the change in production means moving production from China to Mexico, there is a potentially good ESG story here.

We wrote back in December 2021 that there is a strong moral imperative for investors to avoid investments in securities domiciled in authoritarian, dictatorial, or otherwise undemocratic countries, such as China. For companies, there is a strong argument for avoiding production arrangements and supply chain risk in these countries too.

While Mexico is far from a perfect state, and suffers from rampant corruption and serious violence from organized crime, it is at least mostly free and democratic, with power shifting between parties at the federal and state levels. Mexico gets a score of 60 out of 100 from Freedom House, whereas China gets a meager 9.

With respect to climate change, there are obvious advantages to shortening the supply chain transportation cycle. Furthermore, natural gas is the main source of electricity in Mexico (largely imported from the U.S.) and this compares favorably to China where over half of electricity is produced by coal.

While we know that China will remain a production powerhouse, for, well, perhaps, forever, those U.S and other North American companies that shift at least part of their production from China to Mexico or other Latin American and Caribbean destinations (or even Canada or the US) not only stand to benefit their bottom line, they stand to improve their ESG profile and therefore their attractiveness to investment managers like Honeytree.

[Image shows a birds eye view of a giant red cargo ship being loaded with containers by large cranes at a shipping port]


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