Monthly Thematic Piece

US Manufacturing Enterprise Zones: Now Is the Time!
February 17, 2020
Products Mentioned:
Polymers; Chemicals
Companies Mentioned:
Dow; BP
Subjects Covered:
Trade; Logistic Costs; US Investment

C-MACC Perspectives No 3

US Manufacturing Enterprise Zones: Now Is the Time!

We had breakfast this week with Laique Rehman – currently running for Congress in the 7th District in Houston and a business owner focused in energy and chemicals. We like Laique because he understands the industries that make Houston work and he has a passion for helping small businesses.

One topic of discussion was one of Graham’s “soapbox” issues of the last several years – why isn’t the US creating “Enterprise Zones” or “Industry Parks” to help attract manufacturing – dependent on polymers and chemicals – back to the US? 

The Pitch

  • Every year the US exports millions of tons of plastics, and with the investments of the last 6 years, based on cheap shale gas, that export volume has risen steeply and is set to rise further. We highlight an ICIS presentation in LINK to provide context to the noted US cost advantage, and we also highlight a chart showing the widening spread between US plastics exports relative to imports – see in LINK.
  • Every year the US imports billions of dollars’ worth of goods from China and other countries entirely made from the plastic and chemicals, or partly made from the plastics and chemicals, that the US is exporting.
    • This arbitrage made sense when:
      • Labor in the manufacturing counties was much cheaper
      • Processes were more labor intensive
      • Shipping rates were low (low oil prices)
      • Logistics were not constrained.
  • The coronavirus will likely be the third time in the last ten years when supply chains from China have been disrupted – and while the impact will have working capital and cost impacts for US importers – ultimately selling on to Walmart, Home Depot, Bed Bath and Beyond, clothing and carpet suppliers etc. the bigger impact for all will be the supply reputation issues that they will create with their key customers.

Every US importer of goods from China is currently examining the logic of being overly reliant on China

  • As they go through that process, they will likely conclude the following:
    • The labor arbitrage has shrunk with the US
    • Most of the modern production processes are more mechanized
    • Freight rates and delays are a major cost and a volatile cost.
    • There is a significant carbon footprint associated with the shipping and the contract manufacturing and they have no control over it.
  • They can look at other emerging economies to try and exploit lower labor costs, and this will still make sense for many products, but for a very large subset, the more logical place to relocate is the US.
    • This likely makes more sense in clothing and other items that require significant man hours
  • What is needed is the right nudge – which could come in the form of dedicated “Enterprise Zones”
    • We always thought that this might begin with Andrew Liveris’ tenure on the US business/manufacturing councils set up first under the Obama Administration and then again in the early days of the Trump administration. Dow Chemical has been a pioneer in creating enterprise zones around large chemical and plastic investments in other parts of world, such as Eastern Germany and Saudi Arabia. BP and others have also “anchored” enterprise zones with large chemical and polymer projects in the past
    • But nothing has been done in the US. Despite a desire by almost every chemical and polymer producer to consume more US domestic production within the US.
  • It is likely that the reason for inactivity in the US is because it is not a Federal issue or opportunity – it is a State and local government opportunity and it requires organization and leadership (a champion).

What would an Effective US Manufacturing Enterprise Park Look Like?

Having visited sites (in Germany, China and Saudi Arabia) and watched progress in other parts of the world, we would offer up the following framework for anyone with the interest and the right connections:

  1. Significant parcels of land (more than 1000 acres each) located along the Gulf Coast chemical corridor
    1. There is room for more than one of these
  2. Proximity to water for barges is a nice to have – a deal with and proximity to rail is a must have.
  3. Close to a major road network
  4. State support – tax relief
  5. Municipality support – job creation – tax incentives where possible.
  6. An agreement with one or more utilities to provide attractive power and natural gas costs
  7. The support of several local polymer and chemical producers in terms of favorable contract terms for a number of years of operation.
  8. In today’s world a robust environmental and carbon plan.
    1. Note: not shipping the plastics to Asia and then shipping the goods back would automatically have a lower carbon footprint – but the park itself would have to have a “green” plan – including coordinated carbon capture.
  9. Labor may be an issue – and the coalition (government, landowner, utility, potential feedstock suppliers) might need to sponsor a skills-based training program as part of the pitch.

There are many other requirements that we have not listed but all can be solved with the right coalition, the right plan and the right leadership.   

The strikes at the US ports in 2015 caused companies to take a hard look at relocating to the US and some moves were made – the coronavirus will likely have the same effect – the opportunity is to tap into that interest and make the decision easier. 

We are happy to discuss this topic further with anyone interested

 

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