AUGUST 2015

MANUFACTURING IN NORTH AMERICA

A Cushman & Wakefield Special Report

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EVOLVING LANDSCAPES MANUFACTURING IN NORTH AMERICA

ECONOMIC OVERVIEW HISTORICAL PERSPECTIVE

Manufacturing in North America continues to evolve and although its share of total economic output has fallen since its peak, the sector remains a driving force of innovation, jobs and prosperity. In this Special Report, we look at the status of manufacturing in the region, and explore some of the opportunities and risks that are likely to shape the sector’s future — and inform important real estate decisions.

The North American manufacturing sector hinges on the dominant U.S. economy, which accounts for 82% of the region’s economic output. The U.S. is by far the largest trading partner for both Mexico and Canada, accounting for almost 80% of each country’s exports. The manufacturing sector in the U.S. has not grown as fast as the rest of the economy and, as a result, its share of total output has fallen from 24% in 1970 to 12% currently. Nevertheless, the total value of U.S. manufacturing production reached a record of more than $2.0 trillion in 2014.

The North American Free Trade Agreement (NAFTA) brought with it a surge in manufacturing in Mexico after its passage in the mid-1990s. Output peaked at 18.7% of Mexican GDP in 2000. By 2014, that share had fallen to 16.2%. However, as in the U.S., strong overall economic growth has driven manufacturing production in Mexico to a record high.

The U.S. is by far the largest trading partner for both Mexico and Canada, accounting for almost 80% of each country’s exports.

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MANUFACTURING IN NORTH AMERICA

Canadian manufacturing also benefited from NAFTA, helping exports such as energy, motor vehicles and parts, industrial machinery, aircraft, telecommunications equipment, and electronics grow. However, since 2000, the share of economic activity represented by the sector has fallen from 14.8% to the current 10.6%.

As U.S. demand collapsed during the recession of 2008/09, industrial output plunged in North America with both Canada and the U.S. experiencing double-digit declines. The contraction was a bit less severe in Mexico. All three nations have experienced strong growth since that period. 80

100

90

110

2000 2002 2004 2006 2008 2010 2012 2014

INDUSTRIAL PRODUCTION INDEX

CANADA U.S. MEXICO

Source: Oxford Economics Base 2007=100

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UNITED STATES AT A GLANCEU.S. MANUFACTURING PRODUCTION INDEX

Source: U.S. Federal Reserve BoardBase 2007=100

Against the Wind

The U.S. manufacturing sector was hit hard by the 2008/09 recession. Total production fell by more than 20%, the largest drop in more than 60 years. While it took five years for the sector to recover, by November of 2014, the U.S. economy had roared back, adding more jobs than in any other year since 1999, fueling expectations for continuing growth. However, manufacturing got off to a weaker start than anticipated in early 2015. Growth was curbed by a variety of challenges including a second consecutive severe winter, slower GDP growth globally, the drop in global oil prices, and a strong dollar, making exports more expensive and imports more affordable. As of June 2015, manufacturing production was 0.2% below the November 2014 level.

60

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100

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

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MANUFACTURING IN NORTH AMERICA

General Electric’s announcement last April that it would create a simpler, more valuable company by reducing the size of its financial business and focus on industrial growth was a strong vote of confidence in favor of strategic investment in manufacturing.

Under the plan, GE expects that by 2018 more than 90% of its earnings will be generated by its high-return industrial side, up from 58% in 2014. The company is investing in the type of innovations that will drive cutting-edge manufacturing and economic growth.

Solid first-quarter profit growth was an encouraging sign that the global corporation is on the right track with its diversified portfolio of industrial businesses, supported by heavy investment in R&D, and guided by highly skilled managers.

GE STRATEGY: VOTE OF CONFIDENCE FOR MANUFACTURING

Reasons for Optimism

Manufacturers Mostly ConfidentEven though their outlook was somewhat muted by lingering challenges to the U.S. manufacturing sector, respondents to the Q1 2015 Association of Manufacturers (NAM)/IndustryWeek survey were mostly upbeat in their assessments of the economy. Nearly 89% said that they were either somewhat or very optimistic about their own company’s outlook. Medium-sized manufacturers (50 to 499 employees) were the most optimistic at 91%. Larger manufacturers (500 or more employees) were also largely encouraged about the future of the U.S. economy with 83.7% responding positively.

Employment Gains and Bullish ConsumersJuly’s unemployment rate remained at 5.3%, the lowest level since April 2008. A total of 215,000 non-farm jobs were added, maintaining the rebound from the weak first quarter. Real after-tax income also rose. In June 2015, inflation-adjusted after-tax income was 3.0% higher than one year earlier — the ninth consecutive month that growth reached this level. The economy has not experienced such sustained income growth since 2006. What’s more, U.S. consumers entered 2015 more optimistic than they had been in a decade. More jobs, greater disposable income, and strong consumer confidence are all positive signs for continued manufacturing growth.

Clearing HurdlesThe U.S. is now clear of some setbacks including the recent labor dispute at West Coast ports and challenging winter weather that depressed first-quarter output. Leading indicators of manufacturing are positive. According to an Institute for Supply Management report, 11 of 18 U.S. manufacturing industries expanded in July, led by producers of textiles, paper products, and apparel and leather products. Producers of primary metals and wood products were among the five industries that saw business contract. A majority of companies (56.5%) reported higher levels of new orders, suggesting that the softness in orders is abating. Additionally, a majority reported rising production, which points to higher manufacturing output.

OUTLOOK: Slow but SteadyDespite being walloped by a first-quarter drop in energy-related investment and a severe winter, the U.S. manufacturing sector stabilized in mid-2015 and is on track to record steady growth into 2016. Manufacturing is expected to grow by about 2.5% in 2015, which is in line with real GDP growth expectations. Solid gains in employment and income levels should boost domestic spending. However, slowing demand from Asia and continued sluggish European growth will act as a drag on this expansion.

2014

GE’s INDUSTRIAL BUSINESSES AS A PERCENTAGE OF EARNINGS

2018 (Projected)

58% 90%

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CANADA AT A GLANCEOil Shock Shifts Focus to Central CanadaCanada is the United States’ second largest trading partner after China, and its economy is closely linked to the economic health of the U.S. Since 2009, Canadian exports to the U.S. increased by more than 50%, reaching a record high in 2014. This demand has bolstered Canadian industrial production by more than 18% since the recovery began. With the low Canadian dollar enhancing the value of goods and services, U.S. demand for Canadian exports is expected to increase throughout the balance of 2015 and 2016.

Manufacturing Job GrowthCanada’s manufacturing sector, which got off to a dismal start in 2015, experienced a hiring surge in May, then slid back in June even as exports recorded the largest surplus in nearly a decade. Overall manufactured exports were up by nearly 7%. Most of the jobs were created in Ontario, which is expected to outpace the nation’s GDP growth in both 2015 and 2016.

Regional Power Shift Much hope is pinned on the manufacturing heartland of Canada — Ontario and Quebec — to lead economic growth and help compensate for the painful impact of sustained low oil prices in oil-producing provinces. Ontario represents about 46% of Canada’s total manufacturing sales and, combined with Quebec, the two provinces account for some 70% of total sales.

After a rough start to the year, output, new orders and employment levels all rebounded in June, suggesting that manufacturers are starting to experience a long-anticipated turnaround (RBC Canadian Manufacturing PMI June 2015). Ontario, which hasn’t led the country in 15 years, is expected to assume its former role as the engine of the economy at least until oil prices climb back to a level that restores investment in energy-based provinces. Like Ontario, Quebec is expected to see strong growth. Low oil prices, a sliding Canadian currency, and mounting U.S. demand are key factors expected to propel manufacturing and exporting sectors. British Columbia also is expected to reap the benefit of stronger exports, notably for forestry products given stronger U.S. housing demand.

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MANUFACTURING IN NORTH AMERICA

Oil Price Collapse Takes Heavy TollThe energy sector makes up roughly 10% of Canadian GDP, and nearly 30% of Alberta’s. The plunge in oil and other commodity prices since mid-2014 has caused companies to slash capital spending and thousands of jobs. Total oil and natural gas industry capital investment is forecast at $45 billion in 2015, down nearly 40% from $73 billion in 2014. In the oil sands, 2015 capital investment is forecast to fall by almost a third to $23 billion compared to $33 billion in 2014, according to the Canadian Association of Petroleum Producers. The oil shock has also contributed to the more than 12% fall of the Canadian dollar against the U.S. dollar. With the oil and gas industry struggling and exports not taking off as expected, the Bank of Canada cut its key interest rate in July by 0.25 % to just 0.5 % in an attempt to stimulate the economy.

Auto Sector Sales Up, Investment DownCanada’s share of North American production of cars and light trucks fell to 14.1% in 2014. Just five years ago, it stood at more than 17%. Mexico has surpassed Canada as the second largest producer in the region at 18.9%. Still, Canada’s auto sector achieved a high watermark in production and sales figures in the past two years. Thanks to record North American sales and the lower Canadian dollar, Canada’s auto manufacturers will likely see their highest profits in years in 2015, according to The Conference Board of Canada Spring 2015 Industrial Outlook.

Despite those positive earnings forecasts, RBC Economics reports that auto investment in 2013 was less than a third of what it was in 2007. In 2014 alone, Canada captured just $750 million in investment compared to the more than $7 billion Mexico won, according to the Center for Automotive Research.

OUTLOOK: Non-Energy Exports Lead the WayDespite a rough start to the year, the outlook for the Canadian economy for the second half of this year and in 2016 is much brighter, with average growth expected to head back toward the 2% mark and average 2.2% in 2016. Manufacturing and export-related industries will get a lift from an uptick in economic activity in the U.S. and the lower Canadian dollar, while the domestic sector will also chip in thanks to an extremely accommodative monetary policy.

Source: RBC Economics

Source: Statistics Canada

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0

PRICE EDWARD ISLAND

ONTARIO

BRITISH COLUMBIA

MANITOBA

NOVA SCOTIA

SASKATCHEWAN

QUEBEC

NEW BRUNSWICK

NEWFOUNDLAND AND LABRADOR

2015F

ALBERTA

REAL GDP GROWTH

2016F

PERCENT

Source: TD Economics

CANADA’S MANUFACTURING LEADERSGDP breakdown by product, May 2015 (in millions of dollars)

Clothing & Textile product mills - 461 - 0.4%Aerospace product & parts - 1,870 - 1.7%Computer, electronics & appliances - 1,908 - 1.7%Wood products - 2,068 - 1.9%Plastics and rubber - 2,244 - 2.1%Machinery - 2,761 - 2.5%Paper & Printing - 2,937 - 2.7%Chemicals - 3,936 - 3.6%

Misc. manufacturing - 4,259 - 3.9%Petroleum & coal - 5,482 - 5.0%Primary & fabricated metals - 6,651 - 6.1%Motor vehicle & trailer parts - 7,284 - 6.7%Food manufacturing - 7,786 - 7.1%Transportation eqpt - 9,680 - 8.9 %Non-durable goods - 23,921 - 21.9%Durable goods - 26,014 - 23.8%

23.8%

21.9%

8.9%7.1%

6.7%

6.1%

5.0%

3.9%

3.6%2.7%

2.5%2.1%

1.9%1.7%1.7%0.4%

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MEXICO AT A GLANCEShifting Into Higher Gear

Since the signing of NAFTA in 1994, Mexico’s real GDP has grown by about $383 billion to nearly $1.3 trillion. Thanks to this growth, Mexico’s GDP now ranks second in Latin America and 15th in the world. In 2014, the country achieved record-high industrial production and export volumes. While economies of regional competitors like Brazil and Argentina have slumped, Mexico has continued to see solid growth thanks to its close ties to the U.S. market, which is the destination for approximately 80% of exports. Comprised chiefly of manufactured goods (with a growing concentration in the motor vehicle sector), total exports to the U.S. have soared by more than 66% since 2009, an all-time high. As of early 2015, the value of the peso was at an all-time low against the U.S. dollar which has contributed to the boost in Mexican exports to the U.S.

MEXICO’S GDP

2NDin Latin America

in the world15TH

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Auto Industry AcceleratingSeveral Mexican industries have seen substantial development but perhaps none more visibly than the automotive industry, which has seen double-digit export growth every year since 2010. In early 2014, Mexico moved past Spain, France, and Brazil to become the world’s No. 7 automaker and the fourth largest auto exporter. As evidence of Mexico’s importance to global auto industry, the world’s leading carmakers have all established operations in country, including General Motors, Ford, Chrysler, Volkswagen, Nissan, Honda, BMW, Toyota, Volvo and Mercedes-Benz. Additionally, major OEMs have developed Mexican operations, making Mexico the sixth largest manufacturer of auto parts.

Other Growth IndustriesMexico’s manufacturing story goes beyond the auto sector. The plastics industry, for example, valued at more than $20 billion per year, has averaged 13.4% growth in exports over the past five years. Additionally, Mexico’s small but burgeoning aerospace industry has grown even faster in recent years. The city of Queretaro is an aerospace cluster, representing 36% of Mexico’s aerospace manufacturing, and home to companies such as Bombardier, General Electric, and Textron.

Labor AdvantageLow labor costs and an increasingly skilled workforce present powerful competitive advantages for manufacturers to invest in Mexico. Average labor costs are now almost 20% lower than China’s. Just over a decade ago, Mexican labor was almost 200% higher than China’s. Like other regions in the country, the southern part of Mexico has benefited from this labor cost reversal as the low-end manufacturing of goods such as clothing and textiles is expanding in cities like Campeche and Veracruz.

MANUFACTURING IN NORTH AMERICA

MEXICAN EXPORTS TO THE WORLD

Machinery & Appliances Electronics & Parts Aerospace Craft & Parts

$146

$29.0

$46.4

$438$29.1

$60.1

$1054

$60.3

$80.0

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80

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400

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Billions of US $

2004 2009 2014 2004 2009 2014

Millions of US $

OUTLOOK: Solid GrowthFor 2015, Mexican real GDP growth should range between 2.5% and 3.0%, and accelerate to 3.5% in 2016 on the back of increased U.S. demand. While weak domestic demand and planned cuts to government spending may temper overall growth, manufacturing output is projected to increase 4% to 4.5% through to 2016. A weaker peso and stronger U.S. economy will boost exports and the Boston Consulting Group expects that the sector could add $20 billion to $60 billion to Mexico’s economy through 2018.

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Manufacturers face a barrage of challenges as they navigate a changing world. Global economic and political upheaval are two constants and new technology demands continuing innovation. Skills shortages tied to demographics are growing and taxes and regulations are strangling progress. Still, North America offers many advantages over other global regions.

CHALLENGES TO MANUFACTURING GROWTH

UNITED STATES

Federal Regulation ComplianceManufacturers in the U.S. spend almost twice as much per employee as the average business on federal regulation compliance (which includes Economic, Environmental, Tax and OSHHS** costs). The burden is even heavier for small manufacturers, according to a study by the National Association of Manufacturers. While the average American employer spends $9,991 per employee each year on compliance, the average manufacturer pays $19,564. Manufacturers with fewer than 50 employees pay $34,671 per employee, chiefly because of scale issues, according to the report.

The $138.6 billion in total that manufacturers spend on compliance per year could instead go toward areas such as increasing employee compensation and hiring, investing in research and development, and reducing prices. All would help boost economic competitiveness and support job growth, according to the study.

COST PER EMPLOYEE FOR ALL BUSINESS TYPESTYPE OF REGULATION ALL FIRMS <50 EMPLOYEES 50-99 EMPLOYEES 100+ EMPLOYEES

All Federal Regulations $9,991 $11,724 $10,664 $9,083

Economic $6,381 $5,662 $7,464 $6,728

Environmental $1,889 $3,574 $1,338 $1,014

Tax Compliance $960 $1,518 $1,053 $694

OSHHS ** $761 $970 $809 $647

COST PER EMPLOYEE FOR MANUFACTURING SECTORTYPE OF REGULATION ALL FIRMS <50 EMPLOYEES 50-99 EMPLOYEES 100+ EMPLOYEES

All Federal Regulations $19,564 $34,671 $18,243 $13,750

Economic $7,958 $12,885 $9,399 $6,544

Environmental $10,497 $20,361 $7,625 $6,239

Tax Compliance $295 $378 $346 $269

OSHHS ** $813 $1,048 $873 $698

REGULATORY COST BY FIRM SIZE, 2012*

*Cost per Employee per Year in 2014 Dollars - The cost per employee for each firm-size category uses employment shares for the respective business sectors to compute the weighted averages.** OSHHS stands for occupational safety and health and homeland security regulationsSource: National Association of Manufacturers. Columns might not total due to rounding.

COMPARATIVE REGULATORY BURDEN

ON SMALL U.S. MANUFACTURERS

Greater than Large Manufacturers

Greater than theAverage U.S. Company

152%

247%

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MANUFACTURING IN NORTH AMERICA

LABOR & SITE SELECTION DECISIONS Historically, highway accessibility and labor costs have ranked as the top factors in site selection, according to Area Development’s Annual Survey of Corporate Executives. In their first quarter 2014 survey, the availability of skilled labor ranked #1, considered “very important” or “important” by 95.1% of the respondents.

In its 2015 survey, the availability of skilled labor ranked second behind highway accessibility in the separate “very important” category. An aging worker demographic, along with a lack of interest in manufacturing careers among young people, has put the issue at the top of site selectors’ priorities.

Workforce AvailabilityManufacturers are embracing new technologies to expand aggressively in core markets, and are investing in capital equipment, production capacity, optimizing manufacturing operations and upgraded facilities. Yet one of the biggest obstacles for growth is the aging workforce and the ability to attract the next generation of workers.

Over the coming decade, nearly 3.5 million manufacturing jobs in the U.S. may open and two million may go unfilled due to labor shortages. An estimated 2.7 million jobs will be vacated by retiring workers, while 700,000 jobs are likely to be created due to natural business growth, according to a study called Skills Gap by the Manufacturing Institute and Deloitte.

By 2030, more than 20% of Americans will be aged 65 and over, compared with 13% in 2010 and 9.8% in 1970 (U.S. Census Bureau). Retiring workers are expected to leave huge gaps especially in senior management positions. Skilled workers such as machinists, operators, and technicians will be in the greatest demand, according to manufacturing executives.

Adding to the challenge of worker shortages are negative perceptions among young people about industry jobs. While Americans value the contribution manufacturing makes to the economy, they rank it low as a career choice. Only 37% of respondents in a 2015 study indicated they would encourage their children to pursue a manufacturing career. In a poll conducted by the Foundation of Fabricators & Manufacturers Association, 52% of all teenagers said they have no interest in a manufacturing career and many of them saw such a job as working in a “dirty, dangerous place that requires little thinking or skill from its workers and offers minimal opportunity for personal growth or career advancement.”

For manufacturing positions today, production-level skills are not enough. Increasingly, basic STEM (science, technology, engineering, and math) coursework, technical training, business skills and apprenticeships are vital. There are many challenges involved in closing the skills gap, but by working together, manufacturers, educational institutions, communities, and government can make great strides in alleviating the situation.

52% of all teenagers said they have no interest in a manufacturing career and see it as a “dirty, dangerous place that requires little thinking”

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CANADA

Land Scarcity Causes Prices to Soar At the end of the first quarter of 2015 there was 15.3 msf of new industrial supply under construction across the country. Of that total, 85% was located in three major Canadian centers — Vancouver, Toronto, and Calgary.

The flurry of construction in Vancouver over the past few years has led to an acute industrial land shortage, causing developers, who are being forced to pay more to secure increasingly scarce large parcels of land, to raise per-square-foot rates for build-to-suit developments. After numerous studies led by Metro Vancouver it was determined that, depending on population and job growth, supply may run out by the mid-2020s.

In Calgary, where 3.4 msf of industrial product is under construction, both serviced and limited serviced land has become scarce. However, land prices are likely to hold steady, as Calgary’s largest land developer is the City of Calgary, which rarely increases prices. Of Canada’s three largest industrial markets, Calgary has the highest average warehouse construction costs. This holds true regardless of the size of the building.

In Toronto, developers are forging ahead with new developments — building today to capture the business tomorrow. There was 7.2 msf of large bay product under construction at the end of the first quarter of 2015, of which 5.0 msf is speculative. Acquisition and consolidation activity will remain buoyant and this will drive demand for new product. Asset owners will continue to look at creative ways of constructing new developments in order to minimize the impact of high development charges on new construction rental rates. Looking forward, the size of developments may shrink to accommodate the growing demand for properties less than 50,000-sf, due to the climbing costs.

50% of companies state they face labor shortages across a wide range of occupations.

Workforce ChallengesCanada’s manufacturing sector will need nearly 400,000 skilled workers by 2020 and so far the industry has had a difficult time convincing the next generation that a career in manufacturing is highly valued, highly paid and highly skilled, according to Canadian Manufacturers & Exporters.

Canada’s reputation for having a highly skilled workforce has always been a source of competitive advantage for its manufacturers. As in the U.S, this status is being challenged by changing demographics, competition from emerging markets, competition for talent, training and education funding shortfalls, technology advances, and persistent gaps in essential skill and productivity levels.

A national Management Issues Survey conducted by Canadian Manufacturers & Exporters in Spring 2012 found that nearly 50% of companies state they face labor shortages across a wide range of occupations over the next five years. Occupations such as sales and marketing, skilled production, general management, and engineering are all facing shortages.

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MANUFACTURING IN NORTH AMERICA

MEXICO

Cultural BarriersThe challenge of cultural and language differences remains a stumbling block for many business owners considering establishing production facilities in Mexico. Failure to understand these differences can derail near-shoring relationships, as personal relationships and trust are key priorities in Mexico’s business culture.

Capacity IssuesAs the manufacturing sector grows in Mexico, it is unclear whether the supply chain will scale quickly and efficiently enough to match demand. For every three trailers headed out of Mexico to the U.S. or Canada, one truck typically heads south, creating an imbalance that can make capacity an issue. Because LTL (Less than Truckload shipping) networks are not prevalent in Mexico, it can be costly and challenging to find carriers that can consolidate volumes from multiple suppliers and deliver them efficiently and economically.

Labor Challenges A shortage of domestic skilled labor could also be particularly challenging for international companies that will have to comply with Mexico’s workforce requirements. Federal law requires that at least 90% of a company’s workers, both skilled and unskilled, are Mexican nationals. Firms across Latin America are having difficulties recruiting workers with the technical skills their businesses demand. A lack of adequate skills is becoming a bottleneck for growth in technologically complex industries, deterring government efforts to increase investment in strategic sectors of the economy.

A lack of English language skills is another barrier that can inhibit international business investment. English classes offered in Mexican public schools are generally of very low quality and private classes are unaffordable for much of the population.

Crime and Violence While crime rates have fallen across Mexico in recent years, its challenges with violence and crime remain a serious problem. In 2014, The Institute for Economics and Peace estimates crime cost Mexico up to $233 billion. Some 1,500 freight hijackings are recorded each year, according to FreightWatch International.

Water ShortageMexico’s diminishing water availability could also become a long-term constraint in manufacturing development. Although average annual rainfall in Mexico is higher than both the U.S. and Canada, the availability of water per person is only one-twelfth that of Canada and about half that of the U.S. due to its high population density. Because water is critical in a variety of manufacturing operations, access and adequate supply will be factors in future investment.

Sustained Low Oil Prices Crude petroleum is Mexico’s largest export. As such, a rebound in pricing is key to its overall domestic economic performance. An extended period of low oil prices will be a significant challenge to the Mexican economy and weaker domestic demand for manufactured goods.

90% of a company’s workers, both skilled and unskilled, must be Mexican nationals

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OPPORTUNITIES FOR MANUFACTURING

The future of manufacturing in North America will depend on how well industries and governments work together to address the competitive challenges needed to “seize the moment” and take full advantage of the trends that favor North American production.

RESHORING: THE BUSINESS CASE GROWS

As has been widely reported, the financial incentives that drove manufacturers offshore are quickly disappearing. Start with wages. When China joined the WTO in 2001, its average manufacturing wage was $0.58 per hour. In 2005, U.S. wages were almost 25 times China’s, but with Chinese wages increasing at a compounded annual growth rate (CAGR) of 17% from 2001 to 2013, the gap has been steadily closing.

While labor costs in Mexico were roughly 200% higher than in China a decade ago, the gap has narrowed to nearly zero or less. Other traditional locations have also seen wage advantages shrink. Wages in India, for example, increased 20% annually from 2001 to 2013. During that same period, U.S. wages grew at a 3% rate.

While the narrowing wage gap has changed the economics of offshoring, locating production operations closer to customers in North America has several other benefits. Near-shored production helps manufacturers reach customers quickly, which is increasingly important in several industries. When manufacturing facilities are close to R&D functions, companies can streamline processes, reduce product development time and reduce intangible costs. Transportation costs are another area of savings gained by moving manufacturing operations closer to the end customer.

Mitigating risk is another factor. For example, recent port traffic delays on the U.S. West Coast underlined the exposure associated with shipping product across an ocean. According to consulting firm Kurt Salmon, port delays could cost retailers as much as $3.8 billion in 2015. Rerouting, carrying costs and other expenses could bring the total number to $7 billion.

MANUFACTURING JOB GROWTH - TOP U.S.CITIES

December 2013 - December 2014 (Thousands)

17.2DETROITHOUSTON

MINNEAPOLISSAN JOSE

PORTLANDSAN FRANCISCO

ATLANTADALLAS

NASHVILLEDENVER

6.76.15.4

3.33.02.72.72.62.5

When transportation, duties, supply chain risks, industrial real estate, speed-to-market, and other variables are fully weighed, reshoring can make good business sense.

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According to the Cushman & Wakefield report “Where In The World: Manufacturing Index 2015”, the United States ranked highest in the Americas and 4th globally a desirable manufacturing location thanks in part to its low-risk environment. Canada and Mexico also ranked high, finishing 6th and 14th respectively.

A growing number of companies are reinvesting in U.S. plants and equipment and relocating manufacturing facilities stateside. Nike Inc., for example, announced it could create up to 10,000 manufacturing jobs in the U.S. The athletic shoemaker joined Walmart Stores Inc., Apple Inc., General Electric Co and Ford Motor Co., and other U.S. businesses in deciding to relocate and create jobs back home. Walmart is also on track with its plan to buy an estimated $250 billion in U.S.-made goods from 2013 to 2023.

MANUFACTURING IN NORTH AMERICA

LOCATION INCENTIVES: A MOVING TARGET

The range of incentives used by markets to attract top manufacturers is rapidly evolving as the needs of manufacturers change and public purse strings tighten. Today, more transparency is expected from incentive packages than ever before, with U.S. states and communities requiring companies to deliver on investment and job targets. To ensure accountability, more information is required in the application process, annual reporting is more stringent, and officers of the company must sign off on all information provided to vouch for its truth and accuracy. Additionally, more and more states are requiring the certification of investment and job numbers.

Incentives for advanced manufacturers go far beyond tax breaks and are different market by market. Capital expenditure or CAPEX incentives, for example, are used to acquire fixed assets such as equipment, property or industrial buildings, or to add to the value to assets with a useful life extending beyond the taxable year. Expansion incentives are also popular. They help companies grow their physical footprint and workforce in existing locations by supporting the construction of buildings and related infrastructure through funding or tax abatements.

About $610-million worth in tax incentives were handed out to manufacturing companies in 2014 by California, Illinois, Texas, Georgia, and New Jersey—the top U.S. industrial markets. Such incentives helped these states attract industrial tenants who created close to 10,000 jobs. Illinois alone awarded $1.5 billion in CAPEX incentives.

Companies that benefited from incentive programs last year included: Graphic Packing International, Costco Wholesale, Kumho Tire, and Weber-Stephen Products.

BACK IN THE U.S.A.: COMPANIES REINVEST IN PLANTS AND EQUIPMENT

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NEVADA INCENTIVES NAIL DOWN FACTORY – AND HELP BUILD AN INDUSTRYTesla Motors Inc. will build a $5-billion advanced battery factory in Nevada, which is expected to have a $100-billion economic impact over the next 20 years. This is big news for a state whose manufacturing annual output totaled $5.5 billion in 2012, according to the National Association of Manufacturers, and which employs 40,500 people in the sector, just 3.4% of its total workforce. Tesla will receive between $750 million and $1 billion in tax abatements and $195 million in tax credits. In return, Nevada anticipates that over a 20-year span the plant will generate $1.9 billion in tax revenue. The automaker has pledged to employ up to 6,500 workers and produce 35 gigawatt hours of battery cells annually in its so-called giga factory.

New Jersey topped the list for incentives in 2014. On the receiving end were companies like Wenner Bread Products, which leased a 301,630-sq. ft. manufacturing facility in New Brunswick. Awarded state incentives through the New Jersey Economic Development Authority’s Grow NJ Program, the company will receive $30.3 million in tax credits over a ten-year period, providing it meets capital investment and job creation targets. Other awards dispensed by the state topped the $100 million value mark.

Although California enjoys the highest level of industrial leasing activity in the U.S., the state has traditionally awarded the fewest tax dollars for incentives. Just $6.5 million was dispensed to 10 industrial tenants last year. For years, California has operated under the assumption that it doesn’t need to offer incentives because corporations want to be there. While true for technology companies, manufacturers have been exiting the state for the last ten years—mostly to escape its strict regulatory environment. California has the highest emission standards in the U.S., and its wages are higher than in states such as Colorado, Arizona, Texas, and New Mexico. Whether the state will loosen its purse strings to win new business remains to be seen.

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MANUFACTURING IN NORTH AMERICA

GROWTH MARKETS: AUTO INDUSTRY’S DRIVE TO SOUTHERN STATES AND MEXICO

The U.S. and Mexico are becoming increasingly attractive destinations for auto investment, partly due to a resurgence of re-shoring since the global financial crisis in 2008/09. A U.S. renaissance in manufacturing has been championed by governments at all levels. Indeed, Michigan recently overtook Ontario as the preeminent auto-producing jurisdiction in North America, displacing the Canadian province from a position it held for a decade.

Mexico Leading GrowthIn the past two years, eight automakers have opened or announced new plants or expansions in Mexico. In April, Toyota announced it plans to build a $1-billion new plant in Guanajuato to build the popular Corolla, work now done in Canada. The Mexican plant will create 2,000 jobs and represents Toyota’s largest investment in Mexico to date. Also in April, Ford unveiled plans for two new factories in Mexico that will produce small engines and transmissions.

Low labor costs, fewer tariffs and trade agreements are the swing factors. A worker in Mexico costs car companies an average of $8 an hour, including wages and benefits. That compares with $58 in the U.S. for General Motors and $38 at Volkswagen’s factory in Tennessee, the lowest hourly cost in the U.S., according to the Center for Automotive Research, an industry think-tank in Ann Arbor, Michigan. German autoworkers cost about $52 an hour.

In the next six years, Mexico’s auto production will reach more than a quarter of the North American market, according to industry consultant IHS Inc. The wave of investment has turned Mexico into the world’s seventh-largest producer of cars—it passed Brazil last year—and the fourth-largest exporter after Germany, Japan and South Korea. Mexico has just eclipsed Japan to become the No. 2 supplier of vehicles to the U.S. market after Canada. Industry analysts see Mexico’s current annual production of 3.2 million cars and light trucks rising more than 50% to five million by 2018.

The Southeast Swing in the U.S. Even at an annual production 50% greater than its current level, Mexico’s output would still be far below the 11.4 million units in the United States. The automotive industry in North America still remains strongly centered in the U.S. Midwest, clustering in the Great Lakes region and moving south to the Gulf Coast. For decades, Michigan, Ohio, and Indiana have dominated the industry, accounting for half of the automotive jobs in 1980. While still generating the bulk of jobs in 2014 (40%), automakers began scaling up operations in the Southeast in the 1980s, attracted to its largely nonunion labor, and good transportation and energy grids. Now six Southeastern states produce about 3.9 million units of the U.S. total 11.4 units.

Essentially we see two parallel expansions, one based around the revival of U.S. automakers and their suppliers, particularly around the Great Lakes, and another that’s led by foreign-based firms, particularly in the Mid-South and Southeast. Southern states continue to increase their competitiveness against traditional automotive hubs, as well as competing directly with Mexico. Along with generous tax incentives, simplified logistics, modern and well-maintained infrastructure, and cost-of-living advantages compared to Northern states, many states are putting money into the livability of cities that are attracting high-quality white collar employees working in R&D. Couple this with stable workforce dynamics and existing market potential within the U.S., and the Southern U.S. has numerous advantages that will be increasingly exploited in the coming years.

Six Southeastern states now produce about 3.9 million of the total 11.4 million units produced in the U.S.

AVERAGE WAGES FOR AUTOMOTIVE WORKERS

$52/hr

$38-58/hr

$16-30/hr

$8/hr

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It’s likely the manufacturing sector in North America will never play as large a role in the regional economy as it once did. The outlook is encouraging, however. On the heels of a steady decline that seemed a permanent trend, the manufacturing story is one that some would have doubted was possible just a few short years ago. Competitive disadvantages of the past that hurt the North American region have been muted and in some cases have flipped over to the positive side. Many critical factors, such as labor costs, proximity to customers, time to market, currency volatility, and transportation concerns are now bigger assets for this region. In particular, though, for those manufacturers who want to access the coveted U.S. consumer market, North American locations are enticingly close, and no longer disproportionately expensive.

As the global manufacturing landscape changes, shifts within the region will also continue. In the U.S., the Midwest will remain a vital part of the manufacturing industry but the Southeast and Mid-south will also capture a significant share of manufacturing investment. In Canada, non-energy goods produced and exported from Central Canada, British Columbia and other oil-consuming provinces are expected to lead growth, while oil-producing provinces wait for oil price recovery in order to resume investment.

Through the balance of this year and into 2016, we expect the recent momentum of manufacturing recovery in the region to continue at a modest but steady rate.The industry will benefit from anticipated gains in employment in the U.S. and a further upticks in consumer spending—a net benefit to both Canada and Mexico. At the same time, the sector will also face uncertainty, and undoubtedly headwinds, from declining Asian demand and continued sluggishness in Europe. Long term, however, the manufacturing industry in North America stands in a better position to compete globally for investment and jobs than it has in decades.

ENCOURAGING OUTLOOK

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Tina ArambuloManaging Director U.S. Industrial Research tina.arambulo@cushwake.com+1 (310) 525-1918

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