Globalization is a corporate strategy born centuries ago. It has had its “ups and downs” over time, falling in and out of favor with strategists. We believe we are starting a new phase of international commerce, which will strive to diversify supply lines and reduce dependencies on one nation state. The country to lose supply chain status will be China. Likely countries to benefit from China’s loss are India, Vietnam and Malaysia – even the United States, France or Japan if the work can be done with robots using artificial intelligence. There are numerous reasons why this shift is happening – politics, nationalism, COVID-19 – and it is not unusual to have the trade “pendulum” swing in another direction after so many years swinging “China’s way”. For instance, in 2018 China supplied about 42% of the world’s exports of personal protective equipment. Three-quarters of Italy’s imported blood thinners come from China, as do 60% of the ingredients for antibiotics imported by Japan. Such dependence would seem idiotic, even if the trading partners were “the best of friends” – which unfortunately is not the case.
Now we are not suggesting that there will be a “wholesale” emigration of business out of the Middle Kingdom. For certain industries like furniture, toys, clothes, etc. it probably would not make sense to re-fashion supply lines which took decades to form. First, such businesses are not essential to America’s well-being. Second, it is no mean feat to establish an efficient well-functioning network of suppliers. Lastly, the Chinese market is a big and attractive market, and few would want to abandon it entirely. But for industries which are considered “key” to the future for the U.S. economy (think semiconductors and their manufacturing equipment, ingredients for medicines, sophisticated health care clothing) American companies need to and will diversify their supply chain, which will mean new manufacturing hubs outside of China and perhaps even in the U.S. The same rationale will apply to any European or Japanese company.
In a recent survey of American multinationals, 40% were either considering or in the process of relocating manufacturing capacity. In another survey, 24% were planning to adjust their sourcing outside of China due to COVID-19. Google and Microsoft have set up “shop” in Vietnam. Others will do the same in India or Malaysia or bring it home to America, France or Japan. The “train is leaving the station”, as the strategic focus is on more secure supply lines, not just simply the least costly supply lines. Diversity of supply lends to security because it decreases dependency.
China is still a great country with a huge and fast-growing market. It will not be economically shunned because the world needs China too much as an engine of world economic growth. But because of a rise in nationalism under President Xi, a more aggressive foreign policy, trade policies over the years which have taken advantage, and finally, the COVID-19 pandemic – China has already lost and will lose manufacturing opportunities and supply chain status. Others will reap those rewards and we will be looking there for new investment ideas.