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Investing in an Emerging World Order. Part 2

In the second part of our series on global supply chains, portfolio managers Inbok Song and Peeyush Mittal examine the regions and countries that may benefit from industries and companies shifting operations.

  • 08/31/2023
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Key Takeaways

  • One of the key determinants of supply-chain shifts is whether an industry produces high value-added or low value-added products. In both cases, we believe there are countries and companies well-positioned to benefit.
  • Rather than shift entire supply chains, companies in high value-added industries, like semi-conductors, are choosing to locate new production facilities outside of their territories, minimizing the disruption to their core operations.
  • At the lower value end, industries like garment manufacturing are seeking to relocate production facilities to cheaper economies which have industrial capacity combined with relatively skilled labor forces.

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.

Markets On the Move

-Setting up shop in India
One of the biggest beneficiaries of offshoring and de-risking has been India. Its relatively stable democracy and clear regulatory environment, which stand in contrast to China’s, are understandably attractive to investors. Further, India’s large economy means it can offer the scale necessary to support major supply chains and generate meaningful local demand. As a result, we are seeing new production facilities in a variety of industries in India, including in chemicals, pharmaceuticals, medical technology and EV batteries. Foxconn Technology Group, the Taiwanese iPhone maker, for example, is adding factories and expanding operations in India. Also in India, conglomerate Tata Group plans to assemble iPhones as Apple seeks international partners to help dilute its reliance on China.1

-Taiwan and South Korea go global
Many technology companies in these markets are navigating trade sanctions and geopolitical tensions between the U.S. and China and reviewing their supply chains. In some cases, they are establishing units in overseas developed markets encouraged by government incentives in those countries. Some Asian chipmakers and technology companies are setting up partnerships with multinationals to make their networks more robust and better able to withstand changes in government trade policies. In many instances, companies from Taiwan and South Korea are reaching deals to invest or build plants in developed market economies. Ford and South Korea’s SK Innovation, for example, plan to build a battery plant in Kentucky. Samsung is building an advanced chip plant in Texas. TSMC, on the other hand, is constructing plants in the U.S., Japan and Germany as it works to meet clients’ diversification needs.1

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

 

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