Cascadia Capital’s Summer 2022 Newsletter

Heading into 2022, we were focused on the boom in growth and activity creating a long-lasting supercycle thanks to five key factors aligning— stability, availability of capital, investor and buyer willingness to accept risk, technology transition and innovation, and low interest rates. What happened to that supercycle in the first
half of 2022?

In our Summer Newsletter, we explore key factors fueling the current market dynamics and share four possible outcomes for the second half of the year. We also take a closer look at how the downturn is impacting Cascadia’s clients, with perspectives provided from our industry bankers.

Download Cascadia Capital’s Summer 2022 Newsletter

NEWSLETTER HIGHLIGHTS

  • We expect rising interest rates will push the U.S. economy into a recession, leading to a healthy tightening of the market.
  • Deal activity is still robust, but buyer and investor scrutiny has intensified while astronomic prices have muted.
  • PE buyers are more likely to close than strategic buyers given the volatility of public markets.
  • Business owners contemplating selling need to go to market in the next quarter or run the risk of owning their business for another three-to-five years.

Our Cascadia team is committed to helping entrepreneur- and family-owned businesses, investors and advisors navigate these choppy waters and make the best decisions to create value. We continue to be optimistic about the prospects for quality companies and look forward to sharing another update with you this fall.

Cascadia RAAI Quarterly Newsletter – Summer 2022

We are pleased to share the Summer 2022 Robotics, Automation and AI( “RAAI”) news report from Cascadia Capital. As the market has changed over the past six months our team has been in active dialogue with investors, business owners and other industry participants, including at our May Cascadia Connect conference in Pittsburgh.

Analyzing Alternatives to China in Shoring Up Snarled Supply Chains

While “Made in China” stamps have ubiquitously appeared on goods sold in the U.S. for decades, continued waves of COVID lockdowns and recent political instability have forced companies to take a step back and re-evaluate China’s role in their supply chains.

Prior to the COVID pandemic, the pressure was already mounting in Chinese offshoring through significant wage increases, higher transport costs, quality control issues, and intellectual property theft. But the foundational issues were revealed in early 2020, as the sudden onset of COVID saw many manufacturing and supplier operations in China slow down and eventually flatline. Suddenly, American companies were left with extreme supply chain dislocation and no foreseeable return to normalized production in sight.

Just as COVID brought supply chain fragility under fire, the war in Ukraine and an increased consumer focus on sustainable materials and ethical production turned up the heat. In our ongoing dialogue with business owners, management teams, and investors, four primary reshoring or “China Plus One” alternatives have emerged, all with unique pros and cons.

Neighboring Nations: Southeast Asia

For companies deeply entrenched in China, relocating aspects of production to nearby nations in Southeast Asia may seem like a reasonable choice. Venturing into the ASEAN region—which includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam¬—means working inside a middle-class consumer base of about 135 million, an additional 30% compared to the Chinese middle-class market. The recent trade war between the U.S. and China has prompted these countries to introduce a series of new policies designed to bring foreign investment into the ASEAN region. Trade and tax incentives also make this an appealing choice depending on a company’s existing setup—ASEAN has free trade agreements with China, India, Japan, South Korea, and New Zealand. This would make it possible to set up a manufacturing presence in one of the previously mentioned countries and export products back to the U.S. (1)

Bordering Southeast Asia, India presents another alternative. For example, one of our former clients optimized costs by moving a portion of its production from China to India and shipping products to the east coast of the U.S. rather than the west coast.

Closer to Home: South America

For U.S. companies looking to bring manufacturing efforts a little closer to home, South America presents a potentially viable choice—and has even seen policy momentum in the U.S. Congress as of late. The Latin American Nearshoring Act, drafted by Congressman Mark Green of Tenn., attempts to bring economic change by pushing for a nearshoring movement in South America. Colombia, Chile, Panama, and Costa Rica have emerged as a core group of challengers for nearshoring, thanks to existing technological infrastructure and close political relationships with the U.S.

However, region-wide political turbulence is South America’s biggest challenge in the push for nearshoring. With protests, feuds, and lax COVID policies abound, it seems that political stability is a necessary hurdle to clear before companies can confidently and meaningfully invest in this region for the long term.

Trade Agreements Mean Movement in Mexico

Mexico not only maintains the status of the U.S.’ top goods trading partner, but key negotiation of the United States-Mexico-Canada Agreement replacing the North American Free Trade Agreement has driven elevated production in the country.

However, companies have been somewhat hesitant to nearshore to Mexico as border traffic in years past has resulted in significant delays in getting products out of the country. Although the Biden administration has worked to repair relations with Mexico following a tumultuous period under President Trump, tensions such as labor rights, the energy sector, climate change, and investor protections still exist. Lastly, maquiladoras—low-cost factories in Mexico owned by foreign corporations—present cheaper labor alternatives and tax advantages for those who qualify but have come under fire from consumers for labor exploitation and paying workers below the poverty line. (2)

Made in the USA

Prior to COVID, companies including H.P., Samsung, Sony, GoPro, Under Armor, and Nike quietly moved out of China, encouraged by Trump’s “America First” policy. When COVID brought global supply chains under the microscope, companies expedited the process of bringing their production as close to their end-users as possible. Brands like Stanley Black & Decker, Hasbro, and Intel have recently relocated, ending decade-long stints in China. (3)

However, it was not long before companies ran headfirst into a massive roadblock—the American workforce shortage. Local restaurants and retailers were not the only victims of COVID-induced labor issues—many prominent multinational companies have closed domestic locations heavily reliant on labor or looked outside of the U.S. to augment operations. Although the idea of bringing production home rings ideal from a logistical and public relations perspective, human resources realities present an almost insurmountable obstacle. In light of this, many businesses are making new long-term investments into automation, and the concept of robotics and a technology-augmented labor force are making reshoring to the U.S. more feasible every day.

Implications in a Transaction Environment

While supply chain dislocation and reorganization have far-reaching and immediate impacts on a company’s operations, employees, suppliers, and customers, companies considering an M&A event or capital raise must also keep the implications for those efforts in mind. Business leaders today are faced with the challenge of developing a broad, diverse supply chain with redundancies that can withstand disruption while also avoiding overly complex and widespread supply chains that can expose them to global risks.

In our recent experience, when investors and buyers evaluate a business and its potential risks, extra diligence scrutiny is placed on companies relying on one international operation or materials source. Suppose a company sources 100% of its raw materials from—or manufactures 100% of its products in—a single foreign country. In that case, investors become concerned with the binary risk that disruption in that market could freeze the company’s ability to do business. On the other hand, companies with a combination of domestic and multinational sourcing and manufacturing tend to be viewed more favorably.

Another added benefit for companies that have successfully opened operations in a new market—they may be more attractive to larger strategic acquirers who have been considering how to implement a similar strategy or have been unsuccessful in operating in that new market. These companies are viewed as more robust platforms for growth, with more reliable supply chains and the ability to optimize component manufacturing based on each region’s core competencies and cost structure.

Looking Toward an Innovative Future

COVID prompted management teams across nearly every sector to address weak points within their supply chains and reconsider how far their materials sourcing and production efforts had spread across the world. Although Southeast Asia, South America, Mexico, and the United States all present pros and cons of their own, the future seems to lie in a blend of regionalization and leveraging the workforce in neighboring countries to compensate for the labor shortage in the U.S., at least until robotics and automation solutions can advance sufficiently to alleviate that constraint.

There is no “one supply chain fits all” solution—the best fit for your company truly lies in your particular supply chain infrastructure challenges and nuances. Our team is active in ongoing discussions with business owners, management teams, and investors weighing these options regularly, and we are happy to lend our insights as you evaluate your next move—wherever it may take you.

 


(1) https://www.china-briefing.com/news/alternatives-china-manufacturing-capacity-op-ed/
(2) https://www.investopedia.com/terms/m/maquiladora.asp#toc-maquiladoras-and-labor-exploitation
(3) https://www.industryweek.com/supply-chain/article/21241083/extended-supply-chains-are-going-away-what-comes-next

Cascadia Capital Ingredients Industry Update – Summer 2022

Cascadia Connect Robotics, Automation and AI Conference 2022

Overview

With over 330 registered attendees, more than 25 speakers and panelists, and hundreds of individual meetings and connections made, the 2022 Cascadia Connect Robotics, Automation and AI (“RAAI”) conference in Pittsburgh was over the top!

The Fairmont Pittsburgh was the epicenter of the event which took place from May 2-4, 2022.  We were fortunate to have hosted this gathering in collaboration with Carnegie Mellon University, Innovation Works, and the Pittsburgh Robotics Network – all of whom have been instrumental in the region’s emergence as a hotbed of innovation to date and will continue to be key resources for the greater RAAI community.

We  named our this conference  “Connect” for a reason: to create connections among all of us in the RAAI ecosystem that would start at the Conference and endure after. Connections are what will help our ecosystem grow and evolve, and it was our goal to create an environment that would spur active dialogue and high-value networking for everyone – a goal we believe was achieved!

As can be expected from an event of this caliber, there are many takeaways. Please find below a brief conference recap, conference materials, images from our welcome reception and conference activities, and coverage of the conference by leading RAAI media outlets. Enjoy and see you next year!

Recap & Resources

Panel & Speaker Videos

Event Images

Welcome Reception at Kingfly Spirits – May 2, 2022

Click here to see all images

Cascadia Connect RAAI Conference – May 3, 2022

Click here to see all images

In the News

Read and listen to conference coverage from leading RAAI media outlets:

Listen to Geekwire’s Podcast recorded live at the Cascadia Connect Conference:

More on this episode

 

Listen to Manufacturing Happy Hour Podcast recorded live at the Cascadia Connect Conference:

Part 1 – Focusing on Robotics Clusters & Academia

Part 2 – Focusing on Robotics Investors and Growth Companies

More on these episodes

 

Listen to the Robot Report recapping the Cascadia Connect Conference:

The Robot Report Podcast · Agility Robotics gets a boost from Amazon; The US Alliance of Robotics Clusters is born

 

Read additional coverage and related articles:

‘We’ve literally run out of human beings’: Robots rise in wake of pandemic and labor shortages – Geekwire, April 28th

It’s such a good feeling, a very good feeling, for Pittsburgh to know it didn’t win Amazon HQ2 – Geekwire, April 29th

Four key challenges robots need to overcome to play a bigger role in business and industry – Geekwire, May 2nd

The robots aren’t coming for your jobs –at least according to these AI and robotics leaders – Geekwire, May 3rd

Ag-tech’s heavy lifting: Rock-picking startup among those seeing demand for automation on the farm – Geekwire, May 3rd

Pittsburgh Robotics Network, Silicon Valley Robotics, and MassRobotics Announce Alliance at Cascadia Connect – Robotics 24/7, May 4th

Even with SPACs in sharp decline, this Seattle investment bank remains bullish on finding a robotics target – Geekwire, May 5th

Backed by Amazon and newly public, Aurora accelerates self-driving tech, starting with trucks – Geekwire, May 6th

Robotics CEOs Talk Warehouse Automation at Cascadia Connect – Robotics 24/7, May 6th

Our robot partners: Inside a research lab exploring the future of human-machine collaboration – Geekwire, May 20th

Inside an Amazon robotic sortation center: How automation is changing the ‘middle mile’ – Geekwire, May 23rd

How this Amazon engineering outpost is translating its unique geographic position into growth – Geekwire, May 27th

Thank you to our partners!

 

 

 

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Building Products Market Update May 2022

Business Services Market Update Q1-2022

Food & Beverage Contract Manufacturing Industry Report – Spring 2022

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