July 21, 2023 High Energy Costs Drive European Manufacturers to U.S.

As European manufacturers seek to relocate production abroad, the U.S. market is an attractive consideration.

By Sebastian Meis

As European manufacturers seek to relocate production abroad due to record high energy prices and economic instability, the U.S. market – with its competitive cost of doing business and government incentives such as the Inflation Reduction Act (IRA) – is an attractive consideration.

At the same time, the U.S. is facing its own challenge: available and qualified workforce, which should be addressed and prepared for before relocating.

Manufacturing relocation to the U.S. trend

More and more European companies are planning to expand their production in U.S. facilities or relocate their manufacturing to the U.S., especially for products requiring energy-intensive production.

European foreign direct investment (FDI) in the U.S. increased by over 40% between 2014 and 2020, rising to $3.19 trillion in 2021. For instance, 93% of German companies plan to grow their U.S. investments in the next three years, with construction, infrastructure and industrial manufacturing leading with the highest investments, according to the German American Chambers of Commerce.

Energy prices skyrocketing in Europe

Motivation for shifting production to the U.S. stems from record-high energy prices in the EU. The rise started in 2021 in the wake of the COVID-19 pandemic and amid growing international demand. Climate conditions and the removal of Russian natural gas supplies from European markets following Russia’s invasion of Ukraine have aggravating this. While the rise in import costs impacted both producers and consumers, domestic industrial manufacturers in particular suffered from increased prices.

Other factors reinforcing the relocation trend include economic insecurities in Europe, increasing regulations and bureaucracy, customer and supply chain partner demands, and U.S. government incentives, such as the IRA signed into law in August 2022.

Relocation considerations

Energy costs are among the factors motivating European companies to consider shifting their production abroad. However, while moving production to the U.S. to reduce energy costs and benefit from government incentives may, on its face, make economic sense, manufacturers need to weigh all the factors involved in a relocation. There are three areas that reflect the elements requiring thorough consideration: business consulting, legal advice and tax support.

Among other matters, business consulting involves site selection issues for a company’s production facility. New manufacturing plants require a significant capital investment, and the site selection impacts construction costs, long-term profitability and even the quality of the facility’s output. Site considerations include but are not limited to financial incentives, available land and buildings, infrastructure, environmental conditions, codes and regulations, and access to supply chain and customers.

While these are all critical factors, manufacturers must be aware of one key challenge to site selection in the U.S.: available and qualified workforce.

The challenge of available, qualified workforce

As European companies experience increasing labor issues in the U.S., assessing the availability of a qualified workforce is critical in identifying the ideal location for new projects. Depending on qualifications desired and the total number and timescale of workers needed, this can be a significant concern for companies considering moving production to the U.S.

Substantial governmental incentives become insignificant when a qualified workforce is unavailable and companies have to dedicate resources for more intensive recruiting. According to the German American Chambers of Commerce, building a sustainable workforce pipeline remains the No. 1 challenge for German companies in the U.S. for the second year in a row, with 78% reporting they’ve experienced difficulties attracting skilled workers in the U.S.

Call for actions from European manufacturers and U.S. government

The workforce issue must be addressed both by European manufacturers operating in the U.S. or seeking to relocate to the U.S. and by U.S. federal, state and local governments.

Companies should analyze the labor market to ascertain the availability of workers equipped with the skills necessary to meet current and future needs. Determining a location with a suitable labor pool and remaining competitive in attracting and retaining talent may be challenging, but it certainly is a crucial consideration during the site selection process.

State and local governments must also meet these challenges by launching education programs and reducing existing regulatory challenges. Recruiting, educating and upskilling the workforce through a system of apprenticeship programs also involves understanding what skills are needed for the jobs in demand. By expanding apprenticeship programs, local and state governments can partner with out-of-state businesses and institutions like the German American Chamber of Commerce to formulate training requirements that then make their way into community colleges.

The legal framework must also provide conditions to nourish the expansion of educational programs among students and workers at all stages of their careers. Regulations hindering recruitment and restricting workers from entering certain occupations, such as age requirements for apprenticeships, need to be reviewed and reformed.

Sebastian Meis is a cross-border transactional corporate attorney in Baker Donelson’s Atlanta office and a member of the firm’s Global Business Team.

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