Logistics Special: Global events highlight the need to rethink supply chains
Garbe Industrial Real Estate head of research Tobias Kassner tells Paul Strohm how deglobalisation and nearshoring will inform logistics markets in the coming years.
The conditions in which supply chains operate have changed fundamentally over the last few years and, as recent geopolitical events have emphasised, that change is still underway with huge potential implications for logistics and industrial real estate.
Obviously, the pandemic highlighted the rise of online retailing in particular and the lockdowns that occurred worldwide gave e-retailing an even more significant role than it had already achieved. But, as Garbe Industrial Real Estate’s head of research, Tobias Kassner, emphasises, retailing is only one aspect of logistics property demand.
The pandemic accelerated a shift that was already in train, but other events have similarly pushed trends that were emerging, while demonstrating the fragility of the supply chain model that has been adopted over the past few decades.
When the container ship Ever Given blocked the Suez Canal in a cartoon-like mishap in March 2021, it was a subject of jokes. But when the impact on supply chains and the resultant cost of what turned into a six-day hold-up was calculated, concern replaced humour. The fragility of a model that, broadly speaking, manufactures much in the East for assembly and consumption in the West, was laid out for all to see.
Russia’s invasion of Ukraine and the subsequent war has further emphasised the vulnerability of the just-in-time supply chain paradigm – particularly beloved by the automotive sector – in which minimal capital is tied up holding stock in warehouses.
The idea, of course, is to have fluid, efficient supply chains. But events such as the coronavirus pandemic, the war in Ukraine and, for the UK, Brexit, have demonstrated the weakness of the model. “What is happening in Ukraine is forcing us to think about re-shoring and near-shoring even more than was the case before, despite the higher energy and labour costs that are implied,” Kassner says.
Europe’s reshoring and nearshoring potential on a small-scale level
Chip industry growing again
The current dearth of semiconductors has brought this point home very publicly. It has affected the automotive industry severely and the supply of new cars has virtually dried up. “It used to be unthinkable to consider building new plants for producing chips – so-called ‘wafer fabs’ – in Europe because of the production costs,” notes Kassner. “But now, a new wafer fab is being built in Magdeburg, Germany, there is a huge expansion of an existing plant in Ireland, and there are several others in Europe, so the chip industry is growing again.”
“Controlling costs is still a very important issue, but strategic considerations may now cause producers to accept higher labour or energy costs to avoid production interruptions,” continues Kassner. “The just-in time paradigm used by the automotive industry and other industry sectors in the last decade, doesn’t work as reliably anymore, so industry has to react. Securing supply chains as a strategic necessity is becoming more and more important.
“When the pandemic started, everyone saw the pictures of empty shelves in supermarkets. It was a real topic for consumers who asked how it could happen. For many years it has been imperative to reduce storage space as much as possible. The effect of the pandemic on medical and pharmaceutical supplies showed how reliant we are on maintaining the total efficiency of the supply chain. But if supply chains are being distorted or not working and the global environment prevents us from building a really effective logistics network anymore, a different approach is necessary.”
‘The just-in-time paradigm used by the automotive industry and other industry sectors in the last decade, doesn’t work as reliably anymore, so industry has to react.’
Tobias Kassner, Garbe Industrial Real Estate
A just-in-case model needs to replace its just-in-time forerunner, he says. “Until the war in the Ukraine started, many would have said ‘okay, this will take a few years for everything to get back to normal’. But the pandemic isn’t over. We can see it in the soaring number of cases in China and the complete lockdown of Shanghai, which is responsible for the shipment of 20% of outbound goods from China. If this port is locked down again, then the world has a problem.”
The war in the Ukraine is creating similar problems. The country has been an important source of steel and automotive parts as well as agricultural products including wheat, edible oils and fertiliser needed worldwide. If the global division of effort that supply chains have supported is no longer working then the implication is that the re-shoring and near-shoring trends in Europe, already evident to a limited extent, will now become stronger.
“Deglobalisation and the decoupling of markets is not occurring, but the suggestion that it could happen does hang over our economies like a sword of Damocles,” Kassner says. “Politically speaking, there is a cooler relationship between the West and China, but economically both are aware that good trade relations are mutually beneficial.”
But the present fragility of the supply chain does necessitate a re-examination and Garbe is currently researching the changing demand for logistics real estate given the shifts in demand likely to result from these emergent trends and the inherent differences that distinguish Europe’s various markets. “Energy costs, labour costs, the availability of a workforce, the availability of space or sites to develop and the infrastructure with which to move goods to other locations are all critical factors and all European countries have different qualities,” Kassner points out.
He explains, for instance, that although Germany lies in the urbanised arc linking Milan and Liverpool often referred to as the ‘blue banana’, and has efficient transport infrastructure, its manufacturing activity is densely distributed, but vacant space is scarce and finding skilled staff is problematic. “And, of course, labour costs, energy costs, and several other costs are higher than elsewhere,” Kassner adds.
“We are calculating where in Europe nearshoring is potentially most likely to occur by examining the increased demand generated by the tendency to hold more stock and the shift from just-in-time production to just-in-case production. And of course, e-commerce penetration is different in every country and some countries have the potential for this to grow, which also has implications for demand,” Kassner says.
Early indications from Garbe’s research confirm that nearshoring potential is strongest in the Czech Republic, Poland and northern Italy, for example. Increased stockholding for traders makes most sense in the Benelux countries and just-in-case manufacturing processes are best suited to ‘blue banana’ locations, particularly northern Italy.
Meanwhile, e-commerce will continue to become more significant throughout Europe but Garbe’s research indicates that the Nordics, Benelux countries and the UK still offer optimal conditions.
Garbe’s research continues and Kassner explains that the objective is to create a highly granular picture of European logistics under the new conditions. But he stresses that the objective is not to create a guide for landbanking.
“That is anyway perhaps something too sophisticated, but this research project will give us objective information about the future of different industries in the countries of Europe and an indication of where the focus should be for logistics developments.”