Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 499

Reshoring supply chains: What does it mean for investors?

Of all the lessons learned during the pandemic — wash your hands thoroughly, avoid crowded lifts, working from home can be productive — perhaps the most consequential lesson for companies is now obvious in hindsight: relying on single links in the global supply chain was a mistake.

Major components of the supply chain fractured during the COVID-19 crisis, resulting in shortages of everything from medical supplies and equipment to furniture and auto parts. Geopolitical events also entered the fray as US-China tensions and Russia’s invasion of Ukraine underscored the risks of relying too much on one place for critical supplies, including energy, food, and computer chips.

As my colleague Julian Abdey recently noted:

“With the rapid spread of globalisation over the past few decades, companies moved their manufacturing operations to the cheapest and most efficient countries. That was great for company profits and consumer prices. But what we found out more recently is that when supply chains get disrupted it can cause real problems. For example, Europe has realised it was too dependent on Russia for natural gas. And I think the same is true for other products like computer chips. The world is too dependent on Asia, and Taiwan in particular, for semiconductors.”

Reshoring replaces offshoring

Fast forward to 2023, and many companies — in some cases spurred by massive government subsidies — are taking big steps to diversify their supply chains, focusing on reliability and robustness over cost and efficiency. That means bringing some manufacturing back home, or “reshoring” and moving some of it to other countries.

The trend has raised questions about whether the world is moving into a period of de-globalisation. However, based on trade activity in recent years, the new path looks more like a measured adjustment to global supply chains, partially interrupted by the pandemic and the 2007–2009 financial crisis.

Globalisation marches on — at a different pace

Sources: Capital Group, Organisation for Economic Co-operation and Development (OECD), World Bank. World trade is calculated as the sum of exports and imports of goods and services and is represented above as a share of global gross domestic product. Trade data as of 2021.

Rob Lovelace, Portfolio Manager at Capital Group says:

“When we talk to companies and look at the data, we are not seeing what I would call de-globalisation. I think it would be more accurate to call it a rewiring of global supply chains. And I don’t think it’s really all that dramatic when you consider the rapid growth of digital trade, which is harder to track using traditional metrics, as opposed to physical trade.”

In fact, there is ample evidence that many companies are becoming more global as they seek to create redundant supply chains. The poster child for this development is Taiwan Semiconductor Manufacturing Company or TSMC, the world's largest semiconductor foundry. To expand its global reach, TSMC is building new manufacturing plants in Arizona and Japan. Semiconductors have become such a sensitive issue, given their use in the defense industry, that the US government has placed aggressive restrictions on where and how they can be exported.

Other examples abound in the tech sector and elsewhere. Apple announced in September that it would start producing the iPhone 14 in India, adding to its manufacturing capabilities in China, the Czech Republic and South Korea among others. In the auto sector, Tesla added to its US and China manufacturing hubs last year by opening its first European outpost in Gruenheide, Germany.

In the energy sector, Texas-based ECV Holdings has announced plans to build a power plant for industrial parks near Ho Chi Minh City, Vietnam, supplied primarily by US liquified natural gas. Meanwhile, the list of US companies establishing new manufacturing plants at home has grown dramatically in recent years to include General Motors, Intel and US Steel — fueling hopes of an American industrial renaissance.

The China+1 strategy

Amid this drive to diversify supply chains, a common misconception is that China may be displaced as the world’s largest manufacturing base. As my Capital Group Portfolio Manager colleague Winnie Kwan has observed, many companies are shifting to a “China+1 strategy” by maintaining operations in China while adding new facilities elsewhere. Incremental investments in China are likely to focus on serving mainly the domestic market, while additional investments in other locations cater to the rest of the world.

“A key question is whether the China+1 strategy will be scalable or not. Can you add a new plant in India or Mexico, for example, and scale up production as needed? Is the labour and power supply sufficient? Is logistics infrastructure in place? Can management handle the added complexity? Those are the questions I am focusing on as we research these developments and look for investment opportunities. Not every company is going to get it right” she says.

Indeed, the flow of incremental investments is an important metric for investors to track. According to a 2021 survey of foreign companies doing business in China conducted by AmCham Shanghai, the top destinations for redirected investments were Southeast Asia, Mexico, India, and the United States. However, only 63 of the 338 companies surveyed said they had such plans, which suggests the process of reshoring may be slower and more deliberate than some market participants are expecting. Winnie observed that:

“It could take a decade for companies to fully transition. But the process has certainly started, and I think it will be one of the more important investment themes of the 2020s.”

Southeast Asia is well positioned for the rewiring of global supply chains

Source: AmCham Shanghai 2021 China Business Report, published September 22, 2021.

Based on a survey of 338 foreign companies doing business in China. Of those companies, 63 said they were redirecting investments from China to other locations, including Southeast Asia, Mexico, India and the United States, among others.

Who benefits from reshoring?

With such a large undertaking, the investment implications are widespread across a number of sectors and geographies. Here are four areas expected to benefit from reshoring in the years ahead.

1. India Thanks to its proximity to China, a well-educated labour force, and a fast-growing, business-friendly economy, India may be the best-positioned country to capitalise on supply chain diversification. India’s government has taken bold steps to encourage the expansion of manufacturing operations, particularly in the smartphone space, where Apple works with contractors such as Foxconn to build the latest iPhones. The manufacturing sector is expected to accelerate over the next decade, driving growth in the Indian economy and boosting other industries such as banking, energy, and telecommunications.

2. Mexico Similar to India, Mexico’s proximity to one of the world’s largest economies makes it an attractive base for expanded manufacturing and logistics operations. Many US companies flocked there in the 1990s after the adoption of the North American Free Trade Agreement (NAFTA). That process has only accelerated under a revamped trade deal, the US/Mexico/Canada Agreement (USMCA), ratified in 2020.

Mexico’s annual exports to the US have increased sharply in recent years. Although much of that is due to the influence of American companies, China is also ramping up in Mexico. For example, Hisense Group, one of China’s largest appliance makers, is currently building a $260 million industrial park in Monterrey, aiming to produce refrigerators, washing machines and air conditioners for the US market. In the auto sector, BMW and Nissan have also recently expanded their capabilities south of the border.

3. Automation providers One of the biggest hurdles to diversifying the world’s manufacturing capabilities is a chronic labour shortage, especially in developed economies. Automation powered by artificial intelligence (AI) is likely to provide an answer to this problem, says my colleague, portfolio manager Mark Casey. He believes many Asian countries are setting the trend with high rates of industrial automation, with the US and Europe expected to follow. Both regions have room to grow, proving a bright outlook for top companies in the global robotics industry, including Japan’s Keyence, France’s Schneider Electric and Switzerland’s ABB Ltd. Amazon is also developing its own impressive AI-driven technology.

“Amazon has a new robotic picking-and-packing device called Sparrow that can grab more than 60 million different products and pack them into shipping boxes — completing each pick in a matter of seconds. Just seven years ago Amazon’s experimental robots could handle only a small number of items, and each pick would take a couple minutes. I think this sort of technology is coming along sooner than we think, and I don’t see it accounted for in the stock prices of any major American or European company” Mark recently noted.

Automation, powered by smart robots, is ready for take-off

Sources: Capital Group, International Federation of Robotics. As of 2022.

4. Multinationals Capital Group portfolio manager Jody Jonsson recently noted that:

“Although it may seem counterintuitive, the same multinational companies that benefited most from the rapid pace of globalisation in the past may be best equipped to navigate the brave new world of re-globalisation. The world’s largest and most dominant companies rose to that position for a reason — they often have the experience and resources to adapt to changing trade patterns better than smaller companies operating in single markets.”

In Jody’s view, well-managed multinational companies will remain global in their production facilities and customer bases, but they will increasingly build more local redundancy into their operations. She calls it ‘multi-localisation.’ That includes bringing some parts of the supply chain back to the US, continuing to outsource other parts and establishing new production facilities in key areas throughout the world. As Jody observed:

“If there is one lesson we’ve learned from the COVID crisis, it’s that companies must have diverse supply chains. We aren’t there yet, but the process is well underway.”

 

Matt Reynolds is an Investment Director for Capital Group Australia, a sponsor of Firstlinks. This article contains general information only and does not consider the circumstances of any investor. Please seek financial advice before acting on any investment as market circumstances can change.

For more articles and papers from Capital Group, click here.

 

RELATED ARTICLES

A struggling US dollar bodes well for markets outside America

Two companies well-positioned amid supply chain disruption

Slowing global trade not the threat investors fear

banner

Most viewed in recent weeks

Warren Buffett changes his mind at age 93

This month, Buffett made waves by revealing he’d sold almost 50% of his shares in Apple in the second quarter. The sale not only shows that Buffett has changed his mind on the stock but remains at the peak of his powers.

Wealth transfer isn't just about 'saving it up and passing it on'

We’ve seen how the transfer of wealth can work well, with inherited wealth helping families grow and thrive for generations, as well as how things can go horribly wrong. Here are tips on how to get it right.

Welcome to Firstlinks Edition 575 with weekend update

A new study has found Australians far outlive people in other English-speaking countries. We live four years longer than the average American and two years more than the average Briton, and some of the reasons why may surprise you.

  • 29 August 2024

A health scare changes my investment plans

Recently, I spent time in hospital for pneumonia. Health issues can clarify what really matters, and one thing became clear to me: 99% of what we think is important is either irrelevant or doesn’t need our immediate attention.

The tortoise wins in investing

For decades, it’s been a truism that taking greater risks with stocks should equate to higher returns. New research casts doubt on that and suggests investing in ‘boring’ stocks and industries may be a better bet.

Welcome to Firstlinks Edition 573 with weekend update

Steve Eisman, best known for his ‘Big Short’ bet against US subprime mortgages before the 2008 financial crisis, is now long and betting on what he thinks are the two biggest stories of our time: AI and infrastructure.

  • 15 August 2024

Latest Updates

Investing

The challenges of building a portfolio from scratch

It surprises me how often individual investors and even seasoned financial professionals don’t know the basics of building an investment portfolio. Here is a guide to do just that, as well as the challenges involved.

Property

What's left unsaid in Australia's housing bubble

The current difficulties confronting housing policy partially stem from an explosion of mortgage debt. We've engineered a price for housing that will cause a severe problem for future generations – if it isn't addressed.

Superannuation

A $3m super tax could make this strategy attractive again

Transition to Retirement Income Streams have waned in popularity but that could change if the proposed extra tax on super balances above $3 million goes ahead. 60-65-year-olds who are still working could benefit most.

SMSF strategies

Does a declaration of trust satisfy SMSF separation of asset regulations?

While separation of assets remains one of the most reported contraventions by SMSF auditors, the question is: does a declaration of trust satisfy the requirements of SMSF regulations? There isn't a simple answer.

Investing

Stop paying attention

Want to make better investing decisions? Do what the most skilled investors do and find a way to ignore the meaningless information you are bombarded with on a daily basis.

Shares

How to unlock the big opportunity in misunderstood small caps

Political turmoil and new regulations have left Europe-listed small caps unloved and under-covered. Taking a 'friendly activist' approach to investing in those with global growth opportunities can reap dividends.

Shares

This cornerstone of stock market valuation has been left behind

For decades, cyclically adjusted P/E ratios have been a common and widely accepted gauge of market valuation. But as the financial landscape continues to evolve, so too must our tools for understanding it.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.