Powershoring II

Europe is witnessing a growing number of industrial companies struggling to overcome the serious energy price and supply crisis, which is associated with the strong dependence on this imported input. The crisis had been looming over the horizon since before the Ukraine war, but it has accelerated since then. While several companies are reducing production, others, especially the small and medium-sized ones, are closing their doors and many others are laying off employees and relocating part of their operations abroad as a way of dealing with the situation.

In fact, surveys by industrial associations point to a growing interest of companies in transferring plants to other countries and analysts are already talking about an “accelerated deindustrialization of Europe”. As an example, an important producer of electrical wires and cables based in Germany saw, throughout 2022, its annual energy cost multiply by six in relation to 2020 and the perspective is of more increases in 2023 and more problems of supply. This conjunction affects contracts and deals, with deleterious implications for market share. Energy has definitely ceased to be an additional cost item to become a critical factor in the fate of industrial operations. The relocation movement is expected to advance in the coming years, especially among companies in energy-intensive sectors.

The uncertainty, cost and energy insecurity associated with geopolitics are not the only factors affecting the geography of investments, whether in Europe or elsewhere. Extreme weather phenomena are leading to energy shortages, blackouts and lockdowns and are also forcing the reduction of production and even the closure of factories, as seen recently in Asia and the United States, which is leading to revisionism about the advantages and risks of geographical concentration of production. Added to this are environmental regulations and corporate commitments to decarbonization, both especially relevant for companies that are more exposed to government, public and investor scrutiny, which is also leading to revisionism on industrial location. For China, green and geopolitical protectionism are added to the above factors.

All of this alters the return on investments and highlights the relevance of powershoring as a strategy to protect competitiveness and productivity, ensure production security and ensure compliance with the environmental agenda. Powershoring refers to the decentralization of production to countries close to consumption centers that offer clean, safe, cheap and abundant energy, in addition to other virtues for attracting industrial investment. Powershoring is already becoming one of the main determinants of industrial location in the 21st century.

But, would the factors that encourage powershoring be transitory or permanent? The insecurity and prices of fossil energies will remain complicated for a long time, whether for geopolitical or regulatory reasons or lack of investment in specific infrastructures. Dependence on imported fossil energy should decrease over time with the entry into service of renewable energy stations, but the greening of the energy matrices of the large energy importing economies will still take a long time. Carbon regulations and taxes are expected to advance in Europe, raising domestic costs and affecting business competitiveness. 

Therefore, it seems reasonable to state that those incentives are rooted in permanent or almost permanent and not transitory factors, and that powershoring would be a mitigation strategy for those “market gaps”. After all, powershoring reduces costs, increases efficiency and production security, improves resource allocation, protects competitiveness, accelerates decarbonization in the country of origin and contributes to companies' compliance with the environmental agenda.

Latin America and the Caribbean (LAC) is especially well-positioned to be the destination for companies in need of powershoring. Among the immediate enabling factors are the already green or very 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 growing hardening of environmental compliance and ESG standards and investments in ports and industrial zones.

But, to leverage powershoring and occupy spaces, the region will have to move forward with ambition and determination in a regulation agenda and incentives to stimulate investment in renewable energy and in transmission and distribution networks; make available de-risking instruments to attract investments, especially in projects with the highest impact on production chains and on adding value; ensure regulatory stability; approve tax laws that encourage industrial production for export; increase investments in ports and industrial zones; promote investment and trade agreements; encourage self-production of clean energy; train human resources; encourage fast track mechanisms for environmental licensing and one-stop shop; train and equip investment promotion agencies; and provide information to investors, especially those in sectors with greater potential interest. And, finally, 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 convert the region's comparative advantage in green energy and distance from the geopolitical agenda into strong instruments to promote economic and social development. Powershoring will have important effects on productivity, competitiveness, technology, and innovation and will contribute to the formation and consolidation of regional value chains. Certainly, powershoring will be very useful and beneficial for the region, but it will be even more useful for companies that understand the benefits of this strategy.