Investing in an Emerging World Order. Part 2

Over the course of the last couple of years, we have seen high-profile changes to supply chains, such as in Mexico and Vietnam, where offshoring and nearshoring trends have occurred. But there are simultaneously deeper, longer-term shifts underway.

First, it’s worth laying a bit of groundwork. In our view, there’s an important distinction between high value-added and lower value-added industries in terms of how, why and where supply chains shift. For example, in higher-end, sophisticated industries like electric vehicles (EVs), artificial intelligence (AI), semiconductors and solar panels, the required level of technical ability and in-depth knowledge is substantial. That makes it harder to effect wholesale supply-chain shifts to new economies where available workforces may be less skilled and therefore ill-equipped to step quickly and efficiently into production roles.

Safeguarding value 

Rather than shift entire supply chains, companies in high value-added industries are choosing to locate new production facilities outside of their territories, minimizing the disruption to their core operations. Good examples are the technology hardware and semi-conductor industries. Here, firms have been allocating units away from locations that are simply the most cost-efficient and instead settling on destinations that have some financial benefit and also help insulate them from geopolitical tensions or other issues (like another pandemic) which could interfere with future production.

Some companies within the Asian semi-conductor industry, for example, are at the early stage of building facilities in the U.S. and Western Europe, while some companies in the electronics sector are setting up units in Southeast Asia, including Singapore. Some of these shifts are tied to overseas government incentives, for example, the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act and the Inflation Reduction Act in the U.S. In many cases, the structure and domicile of the companies won’t change—they will just diversify their revenue sources geographically by locating production facilities in other countries.

“Some technology hardware and semi-conductor firms have been allocating units away from locations that are simply the most cost-efficient and instead settling on destinations that have some financial benefit and also help insulate them from geopolitical tensions.” Inbok Song, Portfolio Manager

Seeking efficiencies

Further down the value chain, production of intermediate goods like steel, glass and auto parts, as well as final assembly and testing of goods, has been migrating from China to other economies capable of moderately sophisticated production processes but not yet equal to China’s full capabilities. Malaysia, Vietnam, the Philippines and India have benefited in this regard as they have the labor forces capable of such manufacturing processes and the economic capacity to support expanded local production facilities. As a result, these economies are seeing new demand from overseas companies eager to capitalize on this attractive combination of features—which should not only boost their economies but should also contribute to improving living standards over time.

Similarly, industries such as garment production—for which one of the major cost considerations is labor—could also see some shifts from China to cheaper economies like Vietnam and Indonesia.

In the final part of our series, we will look at some of the companies that are reconfiguring their networks and assess the opportunities that supply chain-changes present for investors.

¹ Sources: Bloomberg, Wall Street Journal, Mint, Financial Times, Fortune, New York Times.

Peeyush Mittal
Portfolio Manager
Matthews Asia

Inbok Song
Portfolio Manager
Matthews Asia