Tectonic shifts identified in global supply chains
by Ben Poole
A survey of BofA analysts shows that supply chains for ‘global’ sectors with US$22 trillion in market cap are moving, with South East Asia, India and North America the preferred destinations. Companies in 50% of global sectors in North America intend to ‘reshore’.
Supply chains on the move
For many years it has been generally accepted that jobs that had moved from developed market (DM) economies to emerging markets (EM) would never come back, and that supply chains would continue to be increasingly global and complex. More recently there have been hints of a reversal of that trend and the BofA Global Research report shows new evidence of that reversal. In a survey of the bank’s analysts, who cover 3000 companies, BofA Global Research found that companies in more than 80% of 12 global sectors (US$22 trillion market cap) in each of North America, Europe and Asia-Pacific (excluding China) have implemented or announced plans to shift at least a portion of their supply chains from current locations. Granted, most of these relocations are small compared to their installed base, but the breadth of the shift suggests that the trend of globalisation to localisation is real.
Driving forces propelling the shift
The report notes that it is striking that there are so many reasons why companies are re-assessing their supply chains. Importantly, some reasons are financial, but not all. On the financial side, tariffs are obvious, but newer automation has also meaningfully narrowed the labour cost differential that made the original outsourcing so attractive, and, in addition the tax arbitrage has narrowed. On the non-financial side, national security is a growing factor, as are the environmental, social and governance (ESG) concerns of high carbon footprints associated with long supply chains and potentially problematic employment practices. In the view of BofA Global Research, these movements are “tectonic”: slow moving, persistent with major changes to the business environment for global companies.
Notable intended destinations
Not surprisingly, South East Asia and India were the planned destinations for half of North American and Asian supply chains. Much more surprising was that companies in about half of all global sectors in North America declared an intent to ‘reshore’. This was particularly true for high-tech sectors and industries for which energy is a key input. If borne out, this could represent the first reversal in a multi-decade trend.
Investors underexposed to beneficiaries
The BofA Global Research report suggests that investors are not fully prepared for this tectonic shift. The bank’s analysts suggest that the US could be a significant beneficiary of this process, while Chinese firms are perhaps most at risk.
Even more striking, the survey found almost universal intent to use automation. This suggests BofA Global Research’s forecast of a doubling in industrial robots to 5 million units by 2025 may prove conservative, with bullish implications for capex and manufacturing. While BofA’s Economics team expects a cyclical recovery in US manufacturing by mid-2020, valuations and fund positioning suggest investors are not positioned for a sustained recovery in manufacturing. Increased spend in automation and manufacturing would have multiplier effects on the broader economy and be beneficial for financial services that cater to them. The report recommends investors add exposure in automation, industrials and banks stocks in North America, South East Asia and India.
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