Jorge Arbache
Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-
Europe is seeing a growing number of industrial companies struggling to overcome the severe crisis in energy supply and prices, attributed to heavy dependence on imported energy. The crisis was looming on the horizon even before the war in Ukraine, but it has picked up pace since then. While several companies are cutting down production, others—especially small and medium-sized businesses—, are shutting down and many others are laying off staff and relocating part of their operations abroad as a way to cope.
In fact, surveys by industry associations show a growing interest of companies in moving factories to other countries, and analysts are already talking about “Europe’s accelerated deindustrialization.” As an example, a major Germany-based producer of electrical wires and cables saw in 2022 its annual energy cost increase sixfold from 2020, and the prospect is for further increases in 2023 and more supply problems. This situation affects contracts and businesses, with detrimental implications for market share. Energy has ceased to be an additional cost element to become a critical factor in the fate of industrial operations. The offshoring movement is expected to expand in the coming years, especially among companies in energy-intensive sectors.
The uncertainty, energy and cost insecurity associated with geopolitics are not the only factors affecting the geography of investments, whether in Europe or elsewhere. Extreme weather events are causing power shortages, blackouts and lockdowns, and are also forcing production cutbacks and even factory shutdowns, as seen recently in Asia and the United States. This is prompting a revisionism about the advantages and risks of geographical concentration of production. In addition, there are environmental regulations and corporate commitments to decarbonization, which are especially relevant for companies most exposed to scrutiny from government, the public and investors, which is also leading to revisionism of industrial location. In the case of China, additional factors include green and geopolitical protectionism.
This alters the return on investments and highlights the relevance of powershoring as a strategy to protect competitiveness and productivity, guarantee productive security and ensure compliance with the environmental agenda. Powershoring refers to the decentralization of production to countries are close to large centers of consumption and offer clean, safe, cheap and abundant energy, in addition to other virtues to attract industrial investment. Powershoring is already becoming one of the main determining factors of industrial location in the 21st century.
But, will the factors that encourage powershoring be transitory or permanent? The precariousness and prices of fossil fuels will remain a complex issue for a long time, whether for geopolitical reasons, regulatory issues or due to lack of investment in specific infrastructure. Dependence on imported fossil energy should wind down over time with the commissioning of renewable energy plants, but greening the energy matrices of large importing economies will still take many years. Carbon regulations and taxes are expected to expand in Europe, thus raising domestic costs and affecting business competitiveness. And the energy insecurity associated with extreme weather events will continue to take its tollTherefore, it seems reasonable to suggest that these incentives are rooted in permanent or near-permanent rather than transitory factors, and that powershoring would be a strategy to mitigate such “market failures.” After all, powershoring reduces costs, increases efficiency and safety in production, improves resource allocation, protects competitiveness, accelerates decarbonization in the country of origin, and helps companies comply with the environmental agenda.
Latin America and the Caribbean (LAC) is especially well positioned to be the destination for companies in need of empowerment. The immediate enablers include the already green or highly green energy matrix, the increase in the supply of renewable energy projects with decreasing marginal costs, the implementation of green hydrogen production projects, the low exposure to geopolitical tensions, the increasingly stricter environmental compliance and ESG standards and investments in ports and industrial zones.
But, to take advantage of powershoring and occupy spaces, the region must move forward with ambition and determination on a regulatory and incentive agenda to stimulate investment in renewable energies and transmission and distribution networks; make available risk reduction instruments to attract investment, especially in projects with a greater impact on production chains and value added; ensure regulatory stability; pass tax laws that encourage industrial production for export; increase investment in ports and industrial zones; promote trade and investment agreements; promote self-production of clean energy; train human resources; promote fast-track environmental licensing mechanisms and a one-stop shop; training and equipping investment promotion agencies; and provide information to investors, especially those in sectors with greater potential interest. And lastly, promote and build processes for combined powershoring and carbon market agendas. After all, these are two sides of the same coin.
Powershoring is a unique opportunity to turn the region’s comparative advantage into green energy, and the distance from the geopolitical agenda into powerful instruments to foster economic and social development. Powershoring will have a tremendous impact on productivity, competitiveness, technology and innovation, and will surely contribute to the creation and consolidation of regional value chains. Powershoring will certainly be quite useful and beneficial for the region, but it will be even more useful for companies that understand the virtues of such a strategy.
