A confluence of factors is leading investing companies to restructure their global operations, leading many to divest from one location and invest into another. As evidenced by Honda’s exit from Swindon in the UK, this can have a huge impact on local economies.
James Zhan, the director of investment and enterprise at the UN Conference on Trade and Development (Unctad), talks with fDi about the drivers and impacts of the rising wave of divestment, and what the public and private sectors can do to dampen the blow.
Q: What are the macro drivers behind divestment?
A: Divestment is a hot topic and of major concern for all countries. I think this concern will be growing, because the phenomenon is growing, and there will be a transformation of global value chains (GVCs) in the coming decades.
Several forces are driving this: the sustainability imperative; the new industrial revolution and technology; the global governance realignment, with systemic competition and geopolitical rivalries; and the resilience-driven restructuring of GVCs. The latter involves all kinds of business restructuring, such as reshoring, nearshoring and regionalisation.
Q: How can governments deal with different types of divestment?
A: If it is divestment due to rising costs or regulatory changes at the local level, then governments can try to fix that. Investors may have specific problems with production on the spot, and governments can try to resolve them — what we’d call traditional investment retention.
But if the divestment is a result of structural transformation due to technology fundamentally changing an industry, such as the automobile industry, then the challenge for governments is different. It’s not a question of investment retention, it is a question of divestment facilitation.
That means encouraging firms to ensure they divest in a responsible manner, such as taking care of the environment and the social dimension — namely the labour, community and supply network — around the plant. The firm that is divesting has a social obligation, but also the capacity to a certain extent to help with the downstream. The host government can also do matchmaking with potential domestic and foreign investors to help the firms identify new acquirers.
Q: Why is divestment taking place in the automobile industry?
A: Electric vehicles [EVs] require a battery, which accounts for over 40% of the costs of the vehicle and requires around 20 parts. But the traditional combustion engine requires 2000 moving parts — the number of parts is shrinking from 2000 to 20, meaning value chains are becoming smaller and more consolidated.
Q: What can countries do to manage the divestment process?
A: Host countries need to shift their strategies. The UK and many other countries in central and eastern Europe position themselves as big suppliers or assembly lines for the German auto industry. The shift to EVs is quite challenging, but the technology and skills are already there in these locations.
One of the future industries that might be able to replace automotive is industrial robots. Looking to this industry for new investment to replace the old industry is taking into account sustainability and technological development.
Q: What about the replacement of high-skilled manufacturing jobs with lower paid jobs in industries such as logistics?
A: The future transformation of GVCs is that the manufacturing value chain will be shorter, while the service value chain will be longer. Service channels are going in the opposite direction to manufacturing, where it becomes more fragmented and there is more offshoring.
In the case of the site Honda has left in Swindon, it will unlikely be totally filled by a large online retailer. The UK government can still use this to promote investment opportunities for high-tech industries, such as industrial robots.
Q: How best can firms divest from their operations?
A: Good corporate citizenship calls for responsible divestment at the national, community and individual level. For the time being, there are no international rules and norms on responsible divestment. But it is incorporated in general corporate social responsibility that people expect, along with human rights. I think at this stage, we need to really identify best practices, so we can have a process of peer learning and peer pressure, to then gradually introduce this into the regulatory framework of host countries.
James Zhan is the director of investment and enterprise at the UN’s Conference on Trade and Development.
This article first appeared in the June/July print edition of fDi Intelligence. View a digital edition of the magazine here.