23008_Nearshoring Report

NEARSHORING OPPORTUNITIES FOR REAL ESTATE IN EMEA INDUSTRIAL EVOLUTION

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P25

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CONTACTS APPENDIX 1 SECTORS

APPENDIX 2 COUNTRIES

CONCLUSIONS

WHY DID SO MUCH

WHAT IS CHANGING? WHY?

WHAT DOES IT MEAN FOR DIFFERENT SECTORS?

WHAT DOES IT MEAN FOR DIFFERENT COUNTRIES?

WHAT DOES IT MEAN FOR PROPERTY?

WHAT DOES THIS MEAN FOR PROPERTY STAKE- HOLDERS?

PRODUCTION MOVE FROM EUROPE TO OTHER LOCATIONS?

CONTENTS

INTRODUCTION For many years, businesses in Europe have offshored the manufacture of products, of all different types, to far-away locations, often in Asia Pacific.

Why have businesses chosen to locate their production facilities overseas in distant locations such as China and India? What advantages has this given them and why is this changing? And what does this mean for different types of businesses and the way in which they move products from source to end-destination? What does this mean for locations? And what does it mean for property? This report seeks to answer those questions and provide some insight on the trends influencing the future of nearshoring decisions – and how to recognise opportunities and consider risks.

Recent global economic shocks and supply chain disruption have illuminated the length and complexity of how we source the products we make, move and consume. In addition, the rising costs of labour in and transporting goods from Asia, as well as geopolitical factors and growing focus on sustainability and social impact, all add to the complexity and cost for manufacturers. These factors and more are driving businesses to examine their sourcing and supply chain strategies and they are increasingly considering nearshoring of production and supply.

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WHY DID SO MUCH

Over the past 40 years, global trade in goods boomed. Developments in logistics – including containerisation and the widespread adoption of ‘just in time’ (JIT) strategies and information and communication technology (ICT) – reduced transaction costs of doing business further away. Political factors such as the establishment of the World Trade Organisation, implementation of trade and investment agreements and encouragement of foreign direct investment meant that businesses have been able to expand their operations to wider geographies.

PRODUCTION MOVE FROM EUROPE TO OTHER LOCATIONS?

As a result, businesses in developed countries were able to reorganise their value chains on a global basis to enjoy the cost-saving that relocating manufacturing to lower-cost countries could bring. The commercial tension between increased working capital commitment from long lead times was more than offset by the lower unit costs from cheaper manufacturing.

GLOBAL TRADE IN GOODS AND SHARE OF TRADE FROM ASIA

25

100%

20

80%

USD TRILLION

15

60%

WORLD IMPORTS

WORLD EXPORTS

10

40%

SHARE OF GLOBAL EXPORTS FOR GOODS EXPORTED FROM EASTERN ASIAN COUNTRIES (RHS)

5

20%

0

0%

1950

1960

1970

1980

1990

2000

2010

2020

SOURCE: International Trade Centre

Key destinations for business investment and relationship development were in the Far East, particularly China, India, Malaysia, Taiwan and Vietnam. The primary advantage of these countries is the far lower unit cost of production – largely driven by far lower wages – than in ‘home’ countries such as in Europe and North America. Coupled with a plentiful and flexible supply of people and encouraging investment environment (including subsidies, tax incentives and less onerous regulatory environments), manufacturing businesses were encouraged to move production to lower cost geographies – above all else, cost reduction was everything.

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2021 MANUFACTURING WAGES

35

30

FAR EAST COUNTRIES

25

EUR PER HOUR

NON-EU NEARSHORING COUNTRIES

20

CEE COUNTRIES

WESTERN, SOUTHERN & NORTHERN EUROPE COUNTRIES

15

10

5

0

UK

ITALY

INDIA

SPAIN

CHINA

CZECH

SERBIA

FRANCE

POLAND

TÜRKIYE

SWEDEN

CROATIA

VIETNAM

ROMANIA

REPUBLIC

HUNGARY

SLOVAKIA

GERMANY

MALAYSIA

BULGARIA

THAILAND

MOROCCO

PORTUGAL

INDONESIA

NETHERLANDS

SOURCE: ILO, Eurostat, ONS, ERI

Alongside compelling production cost dynamics, the development of global logistics network s also benefited these new strategies. Transport networks, especially global shipping, became so efficient both in scale and scope that importers of finished goods were effectively able to move sufficient quantum of product that the cost per item was almost nothing. Developments in technologies particularly ICT and digital technologies also made monitoring both quality and timing of production and delivery over long distances far easier.

A lower regulatory environment in countries such as China, Vietnam, India and Bangladesh has meant that businesses have been able to set up operations more swiftly and less expensively in these countries. They are also more flexible and able to evolve (for example, upsizing or downsizing) more easily than in established markets especially where regulatory controls on factors like labour law, taxation and safety standards are more onerous. Additionally, environmental protection regulation has been less onerous in some countries which offers lower monetary costs (but at the expense of environmental impact).

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Similarly, where concentration of supply is limited to a small number of supplying countries – particularly in crucial raw materials or intermediate/component goods upon which downstream production systems rely – this creates a risk which was highlighted during the Covid-19 pandemic. Where a country or handful of countries are responsible for the supply of the majority of specific goods – such as semiconductors or the raw materials for pharmaceuticals production – companies in importing countries may be challenged to find alternatives should their primary supplier experience a major disruption. Another, which has become far more minded of late, is sustainability. Transporting goods over far longer distances creates a greater environmental challenges Whilst we are seeing the rise of alternative fuels and evolving transport strategies to lower the impact, these are unlikely to be fully effective, meaning longer supply chains present a higher level of environmental impact. The International Energy Agency estimates that as at 2021, shipping and aviation contribute around 4% of total global greenhouse gas emissions. Through the period of rapid globalisation,

Whilst offshoring manufacturing to these lowered cost and regulatory requirements, it meant other supply chain considerations were sacrificed. One of these is order lead times. ‘Farsourcing’ orders means ordering further in advance for goods to be made and then delivered due to the extended shipping period. But for some product types, their business models have evolved to require faster production and delivery to be able to refresh stock in a far shorter cycle. The widespread adoption of the JIT model which spread from manufacturers to nearly all parts of the economy dealing with movement of goods meant that the capital tied up in valuable inventory was driven down further and further and supply chains pushed ever leaner and leaner. Similarly, an issue that has been brought to the fore in recent years as a result of the massive global shock of the Covid-19 pandemic is supply chain resilience, that is, the ability to respond to and recover from unexpected events. The development of well functioning systems that can accommodate shocks – for example, a major weather event, natural disaster or man-made shock such as trade dispute or terrorism – is crucial for business continuity. Many shocks will be geographically specific, applying to only a discrete country or even sub region (such as flooding) others may be much more broadly felt. Recent history has been marked by not only global shocks which impact the world economy – such as the Global Financial Crisis (GFC) in 2007-2010 and the Covid-19 pandemic from 2020-2022 – but also by a growing frequency of natural disasters and climate change risks.

this negative externality was largely ignored in exchange for lower costs of production.

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Far-reaching disruptions have revealed that the length and

complexity of supply chains can make a massive difference when something – or lots of things – go wrong. Global trade started slowing in the late 2000s as a result of the GFC which revealed risks to the movement of financial interests over longer distances. As a result, businesses started to develop strategies to bring production closer to home markets, supported by national governments’ initiatives to protect their economies and industries active within their borders.

WHY IS CHANGING? WHY?

Commentators suggest that we are now “post-peak globalisation”. That is not to suggest that global trade will stop, but that we are unlikely to see global trade continue to grow as it has done in the past. Also, the nature of trade is changing: there has been significant growth in intraregional trade in recent years, particularly within the Asia Pacific region where trade has grown by over 400% in the past 20 years as consumers in Asia are consuming more of the product made within Asia.

WORLD TRADE IN MERCHANDISE AS % OF GDP

60%

PEAK OF GLOBAL TRADE

50%

40%

30%

20%

10%

0%

1960 1965 1970 1975 1980

1985 1990 1995 2000 2005 2010 2015 2020

SOURCE: World Bank

The Covid-19 pandemic and the huge disruption to supply chains across the world brought globalisation and the importance of well-functioning supply chains into sharper – and wider – focus. No longer was this an issue for just businesses to contend with as an operational or financial challenge, but something that we as consumers felt acutely. Governments also became far more aware of the economic, financial and social impact that disruption to supply chains can make – not least in the sourcing of medical devices, vaccines and PPE.

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Despite many of the major challenges of the pandemic – including the alleviation of shutdowns of key manufacturing areas and seaports in China, global shipping costs returning to more normal levels and re-opening of retail settings – having now mostly been resolved, supply chain challenges remain some of the top concerns for European businesses leaders.

CFOs HIGHEST CONCERNS FOR COMPANY'S GROWTH OVER THE NEXT 12 MONTHS

RISING INTEREST RATES INFLATION SUPPLY CHAIN DISRUPTIONS

GEOPOLITICAL INSTABILITY & CONFLICTS TRANSITIONS OF POLITICAL LEADERSHIP INCREASED ECONOMIC VOLATILITY CHANGES IN TRADE POLICY AND RELATIONSHIPS DOMESTIC POLITICAL CONFLICTS RISING INCOME INEQUALITY COVID-19 PANDEMIC INSUFFICIENT GOVERNMENT SUPPORT VOLATILE ENERGY PRICES

SOCIAL UNREST UNEMPLOYMENT WEAK DEMAND HIGH LEVELS OF NATIONAL DEBT LABOUR SHORTAGES ASSET BUBBLES

% OF RESPONDENTS 0 5 10 15 20 25 30 35 40 45 50

SOURCE: McKinsey Global Survey on the role of the CFO, Dec 2022 QUESTION: “What, if anything, do you see as the biggest potential risks to your company’s growth over the next 12 months?”

AS A RESULT, BUSINESSES ARE NOW ACTIVELY EXPLORING AND ACTIVATING STRATEGIES TO RESPOND TO THE CHANGING RISKS AND IMPACTS OF LONGER SUPPLY CHAINS.

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NEARSHORING that is, moving production or supply to locations closer to markets of consumption, is part of their considerations. This could involve reshoring (the movement of facilities that once were established in father away locations back to home or near-to-home markets) or new investment in home or near-to-home markets where previously a farther away location would have been considered. In a 2022 survey by ABB, 74% of European businesses are planning to re- or nearshore operations to “build their supply chain resilience in response to labour shortages, the need for a more sustainable global footprint and global uncertainty”. Moving production closer to markets of consumption becomes more attractive when the cost advantages of being offshore versus maintaining control and flexibility no longer favour farther away locations. This balance can also be disrupted when there is a change in company priorities, both economic/ operational (such as shorter lead times) and cultural/legal (such as worker safety and environmental protection or preferences for locally-made goods).

DRIVERS FOR NEARSHORING TEND TO COALESCE AROUND 3 KEY AREAS

ECONOMIC costs (including for labour and transport), business flexibility and supply chain resilience

POLITICAL where trade restrictions and tariffs make importing products from outside agreement areas challenging/costly; where encouraging development on regionalised manufacturing/ production capacity is seen as strategically important for economic, social and health reasons CULTURAL/SOCIETAL including sustainability, business culture (for example, expectations of worker welfare), customer preference (for example, choosing to buy products ‘Made In’ initiatives)

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SO, WHAT ARE THE FACTORS THAT ARE ACTUALLY DRIVING NEARSHORING?

SUPPLY CHAIN DISRUPTION

REGULATORY ENVIRONMENT

COST

Disruptions due to shutdowns in major production and manufacturing area in China, Taiwan, Vietnam and other Asian countries meant there were global shortages of goods – finished goods, intermediate goods or primary materials – being sent to markets of consumption. Added to this, this shutdowns at major export gateway ports (such as the ports of Shanghai, Yantian and Ningbo in China) meant the diversion of goods and ships to alternative ports which added time and cost. Companies are therefore now considering how they diversify their supplier base in order to reduce their exposure to risk of supply chain shocks. Strategies being considered include ‘China +’, whereby additional manufacturing locations are established elsewhere to complement production in China and help mitigate supply chain interruption risks, and fully locating production in locations closer to markets of consumption.

One of the biggest factors is that the cost arbitrage that offshoring offered has become smaller. Labour costs in particularly have been growing significantly in Far Eastern locations, especially China, as industrialisation in these countries moves into a new phase of higher value-added and therefore higher wages. And whilst they remain at a significant discount to many locations across Europe, the gap is not as compelling when considering other factors as well.

Another key factor is the cost of transportation. Whilst shipping costs were previously negligible when moving over long distances in bulk, in the lead up to the pandemic, costs had already begun rising and then skyrocketed to more than 900% higher than immediately before March 2020. Whilst they have moderated in the intervening years, the volatility of this previously mostly considered marginal cost has come into sharper focus as a cost risk.

Although a positive factor from a people and environment perspective, higher levels of regulation in farther-away production locations have made operations more costly and less flexible. Additionally, businesses in Europe and other mature markets are translating their expectations of workplace safety, worker welfare and environmental protection to farther away locations. In order to monitor this, many businesses are engaging in supplier workplace audits to ensure that they meet their standards, which can be challenging when located a long way away. With reporting requirements extending to now involve Scope 3 levels (that is, the environmental impact of entire supply chains right back to primary sourcing and transport by secondary and tertiary suppliers), this is even more challenging if suppliers are based in farther away locations.

MANUFACTURING ANNUAL WAGE IN CHINA

100000

80000

CHINESE YUAN

60000

40000

20000

0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

SOURCE: National Bureau of Statistics of China

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SO, WHAT ARE THE FACTORS THAT ARE ACTUALLY DRIVING NEARSHORING?

CAPITAL DEPLOYMENT

GEOPOLITICS

SUSTAINABILITY

In the face of rising economic challenges and geopolitical tensions, governments are becoming more protectionist about their own and their allies’ economic development – as well as restricting others. Trade ‘wars’, particularly between the US and China, have created challenging working conditions for businesses, particularly in Europe where business arrangements with partners in one country may impact their opportunity to work with companies in others. Governments are now increasingly focused on economic development (even protectionism) including productivity improvements and are increasingly coalescing their support around manufacturing as a “solid” form of growth, jobs and economic benefit. As a result, governments have been establishing more investment friendly policies, have been offering grants and tax incentives as well as creating hurdles or barriers for imported goods to be moved into their countries, particularly where there is potential erosion of domestic economic or technological industrial advantage.

As sustainability has become far more important for businesses and consumers, the impact of long, transport-heavy supply chains is shaping the locational choices that businesses are making. This is now increasingly in focus for businesses, particularly as the offset of low costs of production in farther away locations may be the loss of revenue through customers choosing to contract with or investors invest in competitors with more sustainably-minded practices. This will become even more important when the EU’s Carbon Border Adjustment Mechanism (CBAM) is introduced. This new initiative aims to “put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries”. The gradual introduction of the CBAM – with the transitional phase starting in 1 October 2023 and full implementation from 1 January 2026 – will mean that importers will need to pay for CBAM certificates corresponding to the the quantity of goods imported into the EU in the preceding year and their embedded greenhouse gas emissions.

Companies have also become increasingly focused on how their working capital is deployed. Having capital tied up in inventory moving over long distances over long periods of time can mean significant ‘hold time’ for cash outlay to suppliers compared to the receipt of funds from customers. This means that working capital ‘float time’ is extended. From a lean perspective, moving the point of production or sourcing closer to the location where the goods are needed means that the time between capital outlay to revenue receipt is reduced and can be beneficial to businesses’ financial strength (for example, by increasing working capital on balance sheet which can improve lending conditions).

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WHAT DOES IT MEAN FOR DIFFERENT SECTORS?

Which segments are more likely to consider nearshoring as an appropriate strategy? Not all businesses and product types will be affected in the same way by changing economic, geopolitical and socio-cultural factors.

First, which sectors are less likely to see movements to closer locations for production?

Sectors which rely on proximity to primary products especially where these are perishable such as fresh food. Processing of these products from field to transport-stable products (for example, fresh fruit and vegetables being picked and some processed into cooked versions and canned, jarred or bottled) are most appropriately and efficiently done near to where they are grown. Subsequent transformation of these products (for example, from a tinned tomato into a component of a ready-meal for sale in a supermarket) is most appropriately done near the point of consumption, especially where the secondary or tertiary product itself is perishable or where there are local market-specific demands from consumers (for example, a fruit juice drink in the Nordics may be very different to one in Southern Europe). Also transporting finished products can also be less effective volumetrically than shipping bulk product which can be transformed or processed closer to the markets of consumption.

Sectors which rely on labour-intensive transformation (that is, where the cost of labour is a far higher proportion of overall cost and therefore Far Eastern locations are in a far more competitive position) Sectors which require highly manual processes are less likely to make the economic case for nearshoring to higher labour cost locations stack up.

Sectors where there are prohibitively high costs of moving production which make it untenable – such is the level of sunk cost in existing facilities or within skills and commercial ecosystems, that to pick them up and move them nearer to home markets would actually be costlier than the entire value chain. However, it is worth noting that there may opportunities for nearshoring where there are compelling reasons other than cost to disrupt already-established operations. For example, the drive to create more sustainable ways to produce steel could result in relocation of plants/foundries in modern facilities in locations closer to the markets of consumption. Similarly, governments may feel that there are compelling social and political reasons to ensure a secure supply of pharmaceuticals and medical devices, particularly considering the recent healthcare emergency, which could lead to interventionist policies to support the location of production facilities within or close to home markets.

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So which sectors are more likely to look consider nearshoring? There are several distinct categories of product that may look to this strategy to create benefits:

Those where shorter journey times – and therefore proximity to destinations – is important. This includes products where lead times for delivery of product from design drawing board to shelf or rack is becoming shorter and shorter – this includes apparel (particularly spurred by the ‘fast fashion’ trend where speed is a key element of success). This also includes products where the economy of distance to final market of assembly or consumption is important (such as, automotive parts needed on a JIT basis for delivery to a primary automotive plant)

Those where consumer preferences or technical requirements for locally made products means nearer or onshore locations are more attractive. This is particularly the case where ‘Made In’ effects (where the product is made) has a bearing on consumer demand or where different countries/regions set specific quality or technical standards that must be met.

Those where supply of strategically important goods are constrained or restricted including products like semiconductors, which during the Covid-19 pandemic, suffered significant challenges to supply due to shutdowns in key manufacturing locations. This is driving decisions by both businesses (which are considering how to establish a more diverse, less concentrated supplier network) and governments (which are considering how to support the development key industries within their geographies)

Those which require capital intensive investment – particularly where production is highly automated with relatively lower labour-intensive requirements. Movement of these operations may be expensive in the short term but, for new investment, nearer-to-home locations are likely to appear more attractive

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So, what are the drivers and advantages of nearshoring for specific types of product segments? Focusing on those sectors where there are clear advantages to locating production closer to markets of consumption and where businesses have already been doing so, we have considered what is specifically driving nearshoring of manufacturing and in which countries these operations have tended to be located.

MACHINERY, ELECTRONICS & ELECTRICAL

APPAREL & TEXTILES

CONSUMER GOODS

AUTOMOTIVE

KEY FACTORS driving initiatives to nearshore production include: • Low labour costs in production locations such as Turkiye, Morocco and Central & Eastern European (CEE) countries • Being located closer to markets of consumption means shorter journey times and lower transport costs , shorter lead times for orders and greater flexibility and control • As impact of operations is an increasingly important driver for the textiles and apparel sector, closer production locations means easier oversight of conditions

KEY FACTORS include: • Legacy of sectors importance in major European manufacturing countries means that there are existing skills and knowledge networks • Lower costs, particularly labour costs in near-Europe and CEE, and transport costs especially for bulky, heavy goods • Products being made are specifically for the European market (both in terms of consumer preference and technical requirements) • High levels of automation mean operations are less exposed to wage costs generally • Key driver of growth for new facilities or transformation of existing ones is the need for more electric vehicles (EVs) and their components

KEY FACTORS include: • Where there are increased constraints, costs or challenges moving product from farther-away locations to markets of consumption, particularly during the recent shock of the Covid-19 pandemic • Shorter transport routes mean lower transport costs, greater flexibility (especially for supply of components for JIT production) and lower environmental impact • Lower wages in CEE and near-Europe locations like Türkiye mean operations are competitive with farther-away locations • Increased demand for products such as bicycles is being driven by increased focus on e-mobility and non-fossil fuel modes of transport

EQUIPMENT KEY FACTORS include: • Higher levels of automation within production processes, reducing exposure to labour cost differential • Closer proximity means increased flexibility and greater control, reduced lead times and improved communication and oversight to ensure quality control. • Supply chain resilience and security through development of localised/ regionalised supply especially of key products such as semiconductors • Geopolitical dynamics are also inflecting this through government incentives and support programmes designed to bolster technological sovereignty

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• Governments are also actively incentivising investment in new automotive technologies

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WHAT DOES IT MEAN FOR DIFFERENT COUNTRIES?

So which countries could benefit from nearshoring? And which ones will face challenges? Nearshoring has the potential to impact a range of countries within and near to Europe for a variety of reasons which we explore in the following section.

CENTRAL & EASTERN EUROPEAN COUNTRIES

• These countries – including Poland, Hungary, Czechia, Slovakia, Slovenia, Bulgaria, Romania, Serbia, Croatia, the Baltic States and the Western Balkans – are enjoying increasing interest from businesses considering nearshoring due to low labour costs relative to Western, Southern & Northern European countries and indeed relative to some Asia Pacific countries as well as close geographical proximity and strong transport links which mean shorter journey times, lower transport costs, shorter order lead times and greater flexibility in ordering.

• Low labour costs relative to Western, Southern & Northern European countries and indeed relative to some Asia Pacific countries • Close geographical proximity and strong transport links mean shorter journey times, lower transport costs, shorter order lead times and greater flexibility in ordering

• CEE countries are actively benefiting from the nearshoring phenomenon across a range of sectors. The automotive and machinery, electricals & electronics sectors in CEE look set to enjoy a focus of investment in these evolving segments, in part due to their proximity but also because geopolitical factors are creating strong incentives to locate within Europe. • Close proximity, low cost of labour, free and open trade and the potential for lower environmental and social impact mean that apparel and consumer goods businesses have also been choosing to invest in CEE countries.

• Key locations in the CEE are those located in proximity to the German and Austrian border but also those with good transport links and strong labour markets. As well as primary production locations, CEE countries also have the opportunity to offer key logistics hub locations; as the weight of production and movement of goods stretches eastwards, the operational and cost efficiency benefits to locate distribution centres along key transport corridors in CEE countries becomes more compelling.

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TÜRKIYE

• Similarly locating the manufacturing of machinery, electric & electronic goods in Türkiye has been driven by the lower transport costs (especially as these are often bulky and heavy items), shorter lead times and greater flexibility in ordering and specification, particularly as these products need to be built to specific technical standards for the European market and. • Turkiye has also benefited from growth in consumer goods manufacturing as part of strategies to diversify supply (either in whole or in part to add supply chain resilience and reliability) and the fact that it offers opportunities to reduce transport distances, environmental impact and cost. • Key locations for production operations are concentrated in the north of the country, as well as to the west and south

• Low costs, close proximity, free and open trade with Europe and an investment-supportive environment mean that Türkiye has secured significant investment from foreign businesses establishing production facilities and supplier relationships. • Türkiye is now one of the world’s largest producers and exporters of textiles and apparel with Europe its largest trade partner. Lower costs and close proximity (meaning shorter order lead times and transport times and lower transport costs) as well as the opportunity to more easily monitor for impact, including worker conditions and environmental impact of manufacturing operations make Turkiye attractive for this sector. • Exports of automotive products is now the largest element of trade between Türkiye and Europe. The growth in the making of vehicles in Türkiye for export has been driven by the lower costs and

• In terms of key transport gateways and corridors to and from Türkiye, goods will be moved in a combination of different modes and routes. Key seaports in Türkiye are located close to key production areas in the North, the West and the South. Gateway ports into Western, Southern & Northern Europe are within the Mediterranean as well as key Northern European ports. Rail connected warehouses in Türkiye could be attractive as an alternative to road particularly for heavy, bulky goods like machinery, electricals and automotive components. The majority of freight transported in Türkiye, however, is still moved by road . Goods moving from Türkiye by road will naturally pass along corridors leading through CEE countries and on to Western European countries. This increased volume of goods moving by land from Türkiye through CEE countries could well lead to strategies to locate or relocate major distribution hubs along these corridors

supportive investment environment but also the burgeoning production ecosystem of suppliers, knowledge and skills

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WESTERN, SOUTHERN & NORTHERN EUROPE

MOROCCO

• Machinery and electrical & electronic manufacturing has also evolved rapidly in Morocco, particularly as part of the wider network of suppliers to the automotive production sector. European, US, Far Eastern and other foreign investors have continued to invest in production facilities in Morocco as business and opportunities grow. • In terms of key locations , many production facilities making products for export are located in the north of the country, particularly around Casablanca, Tangier and Rabat. The majority of goods being moved from Morocco to Europe are transport by ship and key transport hubs are the ports of Casablanca and Tanger-Med (the largest port in Africa) with gateway

• These countries will also benefit where there is political support for

• Low costs and close proximity, coupled with government initiatives to support foreign direct investment in manufacturing specifically, have seen European and international companies set up operations or contract with suppliers in Morocco. • Automotive manufacturers, particularly from France, have established significant operations over the past 10-15 years and a strong automotive production and engineering ecosystem continues to grow • Apparel production has also attracted engagement by foreign businesses, especially major fashion retailers in Spain, and Moroccan suppliers now form a key part of the strategic sourcing of garments for Western European consumer markets.

• Countries in Western, Southern & Northern Europe continue to attract investment in nearshoring manufacturing where proximity is important – including

encouraging manufacturing investment, particularly in key sectors which help to preserve and enhance technological sovereignty (such as semiconductors) and advance opportunities to meet key strategic goals (such as EV and battery production and renewal energy technologies). Spain appears to be attempting to establish itself as a key location for EV battery production and is allocating funds to create incentives for investment. Other countries seeking to attract automotive manufacturing investment particularly in EV battery and other vehicle technology including the major vehicle producing nations of France, Germany, Italy, the UK and Sweden alongside CEE countries such as Slovakia, Czech Republic and Hungary.

where shorter journey times means shorter order lead times and lower transport costs.

• Portugal and Spain may offer attractive opportunities for businesses, particularly where cost, flexibility and shorter lead and journey times are important, such as in fast fashion, not least because the cost differential to CEE countries and even Asian locations is no longer as large as it has been in the recent past. • Nearshoring will also be attractive where production processes rely on degrees of automation (and are less dependent on (lower cost) labour). Particularly where the cost of investing in automation and technology is high, it may be preferable to locate these investments close by to mitigate other costs (such as transport) and also to maintain closer control and oversight of these facilities.

ports in Spain and France along the Mediterranean and Atlantic coasts.

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UNITED KINGDOM

• As a result, UK businesses are now seeking to source more products from suppliers within the UK , rather than importing from Europe. This represents opportunities for businesses looking to supply the UK to locate within the country. • With regard to moving goods as exports from the UK, the potential risk of “double dutying” has led the UK government to alleviate concerns with the implementation of freeports - areas designated with tariff-free status until goods leave the specific zones. Interest in locating in freeports seems to be growing but is still in early days.

• As a result of leaving the EU, the UK has somewhat unique drivers related to trade and nearshoring. The new arrangements for trade in goods across the UK-EU border comprise a comprehensive free-trade agreement but do not fully replace the near-frictionless processes pre-Brexit. UK businesses have found that importing goods from the EU comes with more complexity, time and cost.

• However, the UK will face challenges in convincing businesses considering setting up new operations in the UK to serve Europe in the post-Brexit environment. The new challenges to moving goods across the new UK-EU border attract complexity, limitations and cost and this is translating into lost opportunities for the UK.

• Key to the UK’s success post-Brexit will be the UK Government’s position and policies with regard to attracting and stimulating investment on its shores. To date, there is still more to for the government to do to put the UK in the same frame as the EU and US.

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N E A R S H O R I N G

WHAT DOES IT MEAN FOR PROPERTY?

LOCATIONS

Key considerations for choosing a location will be led by access to and the cost of appropriately skilled labour and proximity to good transport links. As discussed above, locations for investment in manufacturing locations are likely to be focussed in markets including:

There will also be the need for logistics facilities at key ports of entry and along logistics corridors including:

• Southern ports in Southern Spain, Portugal, France (Mediterranean and Atlantic coasts in particular) and Italy as receiving ports for goods moving from Northern Africa and Türkiye. For example, there has been investment in logistics projects in Southern Spanish locations such as Algeciras and Huelva and there are rail and road infrastructure improvement projects both in construction and consideration to connect Andalucia to the French border along the European TEN-T Mediterranean Corridor. • Northern ports such as Gdansk and Gdynia in Poland and Baltic Sea Ports, especially where there are advantages moving in volume by sea rather than road or to connections where sea is the most appropriate, including the UK and Nordic countries

• Along key motorway and multi-modal transport hubs along the routes from Türkiye and CEE countries to Western European destinations, particularly through Bulgaria, Romania, Serbia, Croatia, Hungary, Slovakia, Slovenia, Czech Republic and Poland. A major route emerging is the Via Carpatia, a road transportation corridor consisting of motorways and expressways leading from the port city of Klaipeda, Lithuania in the north through Poland, Slovakia, Hungary, Romania and Bulgaria to the port city of Thessaloniki in Greece in the south. This transnational highway route could be a significant supply chain conduit of goods moving through and between the CEE and Türkiye.

• Central & Eastern European countries – especially close to the border with Western Europe and in locations with access to major transport corridors • Türkiye – especially to the North and West of the country and selected areas to the South West

• Northern Africa, especially Morocco (particularly to the North of the country) but, over time, other Northern Africa and Middle Eastern location (including Tunisia, Algeria, Egypt and Saudi Arabia) as well as the wider African continent as opportunities mature • Western, Southern & Northern European countries, notably where there are key industries already in transformation, especially Germany, France, Italy, Spain and the Netherlands, or where there are compelling economic or geopolitical reasons for the development of domestic/regional supply capacity.

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ESTONIA

KEY EMERGING NEARSHORING OPPORTUNITY AREAS

LATVIA

LITHUANIA

CENTRAL & EASTERN EUROPE

NEAR-EUROPE (TURKIYE AND MOROCCO)

POLAND

UK: 12 FREEPORT AREAS

LOWER-COST SOUTHERN EUROPE

GATEWAY LOCATIONS WITH POTENTIAL DEMAND GROWTH

SLOVAKIA CZECH REPUBLIC

SPAIN

PORTUGAL

ROMANIA

SLOVENIA

SERBIA

BULGARIA

TÜRKIYE

CROATIA

HUNGARY

MOROCCO

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This is particularly the case when considering industries that are likely to included highly automated production elements – as discussed before, a key driver of nearshoring will be where production is less exposed to labour-intensive activities, and therefore more swayed by the cost of that labour. Our research has shown that businesses investing in automation have typically favoured high-quality, often new build facilities, as they are more capable of accommodating the sophisticated systems that manufacturers require.

These buildings, especially at the large end of the size spectrum, are also more likely to be built-to-suit. Typically we see production and manufacturing process optimisation driving ultimate facility design. This is likely to lead occupiers with significant plans for automation to commit to new and high-quality buildings – especially build-to-suit, on either an owner occupied or leasehold basis – rather than existing older assets. This will particularly be the case in markets where there is little existing stock. The often high occupier capex for new production tooling or automation and robotics can also mean extending lease lengths to permit depreciation, which may open up new transactional structures and opportunities, such as income strips or joint ventures.

REAL ESTATE

REAL ESTATE ASSETS PLAY A SIGNIFICANT YET TACTICAL ROLE IN THE DEVELOPMENT OF NEARSHORING STRATEGIES AND THE ABILITY TO ENSURE THAT PRODUCTION CAN BE ACHIEVED BOTH OPERATIONALLY- AND COST-EFFICIENTLY. Nearshoring, along with other investment decisions, has driven significant growth in occupier demand for floorspace. In 2022, manufacturing occupiers committed to nearly 10 million sqm of space, up 27% compared with 2017.

EUROPEAN LOGISTICS & INDUSTRIAL TAKE-UP BY OCCUPIER SECTOR

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OTHER

LOGISTICS

45

RETAIL

MANUFACTURING

40

MILLION SQM

35

30

25

20

15

10

5

0

2017

2018

2019

2020

2021

2022

SOURCE: Cushman & Wakefield Research

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Another key consideration will be access to power. Highly-automated production systems typically require a highly level of energy and materially more than more manual operations. Developers and landlords are already focused on the growing requirement of energy from logistics and industrial businesses within their estates but this could grow significantly as the nearshoring phenomenon gathers pace. Sourcing, securing and providing access to power will prove a significant differential for occupiers seeking new space and this will also increasingly need to be derived from sustainable sources. Diversity of power supply for critical manufacturing can also be important to some occupiers where there is any concern around business continuity. Sustainable energy generation has become a huge focus for logistics and industrial developers over the past several years as a compliment to national energy supply networks. Energy supply risk has been growing in some countries such as Germany, Italy and Bulgaria following the Ukraine-Russia conflict. As a result of the conflict, European countries imposed limitations on the importation of Russian fuels, whilst Russia has engaged in activities to limit supply including shutting down key export routes, including the Nord Stream natural gas pipeline.

Domestic energy resilience is therefore likely to propel the development of sustainably sourced energy, such as solar, wind and tidal, as well as nuclear sources. We are seeing the source of generation at a country level increasingly matter in macro level location decisions. The high intensity of coal use within CEE is a drag on its overall competitiveness as occupiers look to deliver Net Zero targets; that said actions are in place in the region to diversify from coal to more renewable power sources, which will support its attractive production cost position. At a park or even asset specific level, developers are increasingly offering or even including as standard elements such as photovoltaic (PV) cells, batteries for energy storage and onsite shared resources such as combined heat and power (CHP) plants for distribution to users on parks. These are likely to create attractive options for occupiers looking to include higher levels of automation especially when energy supply is volatile and expensive.

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N E A R S H O R I N G

WHAT DOES THIS MEAN FOR PROPERTY STAKEHOLDERS?

So what does all of this mean for real estate stakeholders? How does nearshoring represent a potential opportunity or possible risk?

FOR OCCUPIERS

FOR DEVELOPERS

• Businesses’ nearshoring plans could create opportunities to partner with investment capital: investors remain keen to explore investment into industrial and logistics property assets, particularly where occupier commitment is secure and where return profiles are attractive. New developments with strong commitments by established businesses could prove attractive to some investors, particularly in core countries in Western, Southern & Northern Europe where risk appetite is low and also in new geographies, which may represent higher returns for investors with higher risk appetites. • There are also growing opportunities to structure leases to include elements of operational capital investment, such as in logistics and manufacturing automation systems and technologies, within rental agreements. Capital contributions by landlords that can be rentalised over the term of a lease could prove attractive to occupiers given the typically longer period of write-down than within standard depreciation periods should the occupier have to capitalise the investment themselves.

• Developers could also look to explore relationships with local developers and contractors to ensure on-the ground capabilities in new geographies. This kind of collaboration could also bring larger developers’ experience and understanding of expected

• Opportunities to establish new facilities may lead occupiers into new geographies – carefully understanding the benefits and challenges of these locations will be crucial to integrating these new facilities and operations into supply chains. Locational analysis, supply chain mapping and scenario planning will help to inform occupiers how and where to best deploy their resources. We are increasingly seeing occupiers explore ‘Digital Twins’ of their supply chains to virtually walk through these changes before implementation. • Nearshoring could also mean expansion of existing facilities: this will require careful programming not only to plan, manage and deliver but also to ensure expansion does not interrupt the smooth operation of existing production lines. There could also be opportunities for improvement to existing assets , either through refurbishment or redevelopment but also the retrofitting of sustainable energy generation technologies, such as PV panels or air source heat pumps.

• Developers may have opportunities to leverage relationships with existing customers to explore collaborating on the delivery of new facilities . Having established, well-functioning relationships with occupiers could make the learning journey of locating, transacting and delivering new facilities easier for both parties when working together from a position of trust and understanding. • Developers also have the opportunity to deliver for occupiers the standard or specification of building that they are accustomed to receiving from development partners in established geographies. Knowing what they are going to get in terms of building design and quality could help to remove some of the ‘risk of the unknown’ for occupiers considering new markets for nearshoring. • Developers could look to secure land positions in key geographies, especially those where there is little international developer presence currently, in order to leverage opportunities to deliver new spaces for nearshored facilities.

building standards for occupiers to new geographies which could be transformational for the real estate environment in these countries.

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