Reshoring supply chains: What does it mean for investors?

Matt Reynolds 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 […]

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