The Trump administration is pursing economic policies to strengthen U.S. manufacturing. Tariffs, regulatory reform, and easier credit can all improve the relative returns to manufacturing in the U.S. versus doing it in other countries. In prior posts, I have been evaluating the potential for Texas to reap a growing share of new U.S. manufacturing. The state will need to check the box on several essential factors that underpin a thriving manufacturing base. The last installment considered electric power generation. This post looks at the role of water. The future of manufacturing in Texas will depend on the state delivering water at a cost that industry can afford. However, there is no one-price-fits-all rate per gallon when it comes to affordable water for manufacturing.
The choice to develop a new source of water supply through drilling wells, damming rivers, or recycling it costs money. Beyond a minimum level of per capita consumption for drinking, sanitation, and cooking, water is subject to market conditions. Beyond this baseline, economics suggest the costs of producing more water should be compared to the benefits we obtain from that extra water. A gallon of water can be put to many different manufacturing uses. Different uses yield different economic returns.
Manufacturers use more water per employee than office or service firms. The amount of water needed to produce a dollar of manufactured goods varies by product. Let’s consider two industries that use a lot of water, paper, and semiconductors. The cost of acquiring this important input will influence where to build these plants. While estimates vary, we can assume a dollar’s worth of paper (about 150 notebook sheets) consumes about two gallons of water in its manufacturing. The same two gallons of water can produce five to 10 dollars’ worth of good quality CPU chips (which amounts to just a portion of a chip). Pound for pound, CPU chips sell for 750 times as much as notebook paper. A computer chip plant can produce much more economic value than a paper plant can from a gallon of water.
Both industries are important in Texas and have found water at prices that meet their needs. In terms of site selection, however, someone building a paper plant may want a location with access to cheaper water. East Texas is a natural choice with its plentiful rainfall (and lots of trees for pulp). A semiconductor manufacturer has much more flexibility in locating its plant since it can run profitably on relatively expensive water. The high value of the product also justifies expensive on-site water purification and recycling. The new generation of semiconductor plants are being built across the U.S. in widely different water climates. Some of the largest efforts range from New York in the wet East to Phoenix in the arid Southwest. Major expansions by Texas Instruments and Samsung in our state fall somewhere between in water availability. Chip plants make sense in many locations.
Texas has a diverse industrial base, including industries with a variety of water needs. Some of our most important industries use the most water, including chemicals, petroleum products, primary metals, paper products, and food manufacturing. Texas’ foundation in these will help it compete for even more investment. Other high-value sectors like electronics, machinery, and transportation equipment are also good prospects. Many regions in the state have or can develop cost-effective water supplies to support several of these industries.
If Texas continues to invest in its water infrastructure, our manufacturers will put that water to good use. The next series in this blog will consider the transportation needs of manufacturing.
Views expressed on The 338 are those of the authors and do not imply endorsement by the Texas Real Estate Research Center, Division of Research, or Texas A&M University.