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Capital IdeasTM

Investment insights from Capital Group

Categories
Trade
Supply chain shifts signal reglobalisation
Noriko Chen
Equity Portfolio Manager
Ben Lin
Investment analyst
Kent Chan
Investment Director
June 20, 2022
KEY TAKEAWAYS
  • Global supply chains are being realigned, leading to new investment opportunities.
  • This could be the start of an era of “reglobalisation,” rather than “deglobalisation.”
  • Reglobalisation could be a major growth driver for select companies that supply industrial components, automation tools, semiconductor equipment and industrial commodities.
  • Building supply chain resiliency will take time and could pressure profit margins in the short term, while companies with resilient and diversified operations may be rewarded with higher valuations in the long term

The fragility of global supply chains exposed during the COVID-19 pandemic remains one of the top economic challenges facing the world. In one respect, globalisation has long been characterised by developed market countries offshoring production to lower cost locations. But now, companies are recognising the need to build redundancies into their supply lines, which will have varied impacts on countries, companies and industries.


While some have argued this could lead to a less globalised world, this could be the start of an era of "re-globalisation," in which supply chains are reorganised and more countries are brought into global trade networks. 


“I would expect most companies with a significant percentage of their manufacturing base in Greater China to diversify to other countries,” says Capital Group portfolio manager Noriko Chen. “The reinvestment in some countries is likely to be positive. But it will also come at a cost to profitability for some companies. However, this should lead to new investing opportunities for those who can identify companies that will benefit from changes in global trade patterns.”


Global trade has slowed but is still growing

Chart Global trade has slowed but is still growing

Forecasts shown for illustrative purposes only.
As at 31 December 2021. Sources: International Monetary Fund, Refinitiv Datastream. 

Supply chains are shifting but not deglobalising


Many companies are shifting their areas of manufacturing to multiple centres across the globe to disperse risk. That does not necessarily mean this could result in less economic integration. Consider Taiwan-based TSMC, the world’s dominant manufacturer of cutting-edge semiconductors. After having concentrated the bulk of its capacity in Taiwan – a focal point for geopolitical tensions - TSMC is building its first manufacturing hub in the United States. It’s also constructing a new semiconductor plant in Japan.


Multinationals with a significant presence in China are also looking for that next big opportunity to reach consumers outside of China. Apple, which has arguably built the most impressive supply chain of any multinational in China, moved some iPhone production to India, which is forecast to have an estimated 1 billion smartphone users by 2026.


There are also Chinese companies seeking to forge closer trade links with their customers outside of China. Chinese electric vehicle (EV) battery maker CATL (Contemporary Amperex Technology Co. Limited) recently received approval to build a battery cell plant in Germany, where it works with top German automakers.


Diversification from China will take time


For companies reducing their dependence on China, the diversification from China’s supply chain will take time. China is likely to remain significant due to a lack of viable alternatives and because more goods made in China will increasingly target Chinese consumers in the future.


“A common phrase I hear from companies is ‘China Plus,’” says Ben Lin, an investment analyst at Capital Group. “This means manufacturers will retain their existing China factory, but will gradually add production capacities outside of China and slowly build up the domestic supply chain in those countries. This could take at least several years or even a decade before they can replace Chinese suppliers.”


Noriko Chen is an equity portfolio manager at Capital Group. She has 31 years of investment industry experience and has been with Capital Group for 23 years. Noriko holds a bachelor’s degree in economics from Williams College and a degree in the Japanese Language Bekka Program at Keio University, Tokyo. Noriko is based in San Francisco.

Ben Lin is an investment analyst at Capital Group, with research responsibility for the Asia machinery, construction, engineering and electrical equipment sectors, as well as Asia insurers. He has 17 years of investment industry experience and has been with Capital Group for six years. Prior to joining Capital, Ben worked as an equity analyst at Morgan Stanley. Before that, he was an equity analyst at Nomura. He holds a bachelor’s degree in commerce from Macquarie University, Sydney. Ben is based in Hong Kong.

Kent Chan is an equity investment director at Capital Group. He has 31 years of investment industry experience and has been with Capital Group for seven years. He holds a bachelor’s degree in political economics from the University of California, Berkeley. Kent is based in San Francisco.

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Trade
Global Equities
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