Whilst plenty of journalists, executives & politicians talk about China+1, very few people have data to hand which gives them a sense of the sheer scale of the transformation that is taking place in global supply chains today. This article by three investors from Capital Group, the Los Angeles headquartered giant of active asset management, is one of the most data-oriented articles we have read regarding China+1. If you want to squeeze maximum value out of this, we suggest that you click on the hyperlink above and read the full article, especially the charts embedded in the article.

As we all know, Covid-19 underscored the fragility of global supply chains – many companies found that most of their critical inputs were coming from China, often from a single plant in China. “Fast forward to 2023, and many companies — in some cases spurred by massive government subsidies — are taking big steps to diversify their supply chains, focusing on reliability and robustness over cost and efficiency. That means bringing some manufacturing back home, or “reshoring” and moving some of it to other countries.”

Ironically, as Western companies re-design their supply chains to mitigate their dependence on China, these supply chains are becoming more global i.e. they are now being spread across more countries:

“The poster child for this development is Taiwan Semiconductor Manufacturing Company or TSMC, the world’s largest semiconductor foundry. To expand its global reach, TSMC is building new manufacturing plants in Arizona and Japan. Semiconductors have become such a sensitive issue, given their use in the defense industry, that the US government has placed aggressive restrictions on where and how they can be exported.

Other examples abound in the tech sector and elsewhere. Apple announced in September that it would start producing the iPhone 14 in India, adding to its manufacturing capabilities in China, the Czech Republic and South Korea among others. In the auto sector, Tesla added to its US and China manufacturing hubs last year by opening its first European outpost in Gruenheide, Germany.”

The fund managers at Capital then ask a bunch of question that the research team at Marcellus often ponders about: ““A key question is whether the China+1 strategy will be scalable or not,”…“Can you add a new plant in India or Mexico, for example, and scale up production as needed? Is the labour and power supply sufficient? Is logistics infrastructure in place? Can management handle the added complexity?””

Here is their answer to these questions: “According to a 2021 survey of foreign companies doing business in China conducted by AmCham Shanghai, the top destinations for redirected investments were Southeast Asia, Mexico, India and the United States. However, only 63 of the 338 companies surveyed said they had such plans, which suggests the process of reshoring may be slower and more deliberate than some market participants are expecting.

“It could take a decade for companies to fully transition,” she adds. “But the process has certainly started, and I think it will be one of the more important investment themes of the 2020s.””

There is a chart in the article which shows around a third of the China+1 investment flowing into India. Why is India well placed to get these FDI inflows? Here is what the fund managers at Capital have to say, “Thanks to its proximity to China, a well-educated labour force, and a fast-growing, business-friendly economy, India may be the best-positioned country to capitalise on supply chain diversification. India’s government has taken bold steps to encourage the expansion of manufacturing operations, particularly in the smartphone space, where Apple works with contractors such as Foxconn to build the latest iPhones. The manufacturing sector is expected to accelerate over the next decade, driving growth in the Indian economy and boosting other industries such as banking, energy and telecommunications.

“India is arguably better positioned today than China was 20 years ago,” says Capital Group equity analyst Johnny Chan.”

Interestingly, a linked development say the Capital fund managers, is the faster than expected rise of robotisation in manufacturing: “One of the biggest hurdles to diversifying the world’s manufacturing capabilities is a chronic labour shortage, especially in developed economies. Automation powered by artificial intelligence (AI) is likely to provide an answer to this problem, says portfolio manager Mark Casey. Many Asian countries are setting the trend with high rates of industrial automation, with the US and Europe expected to follow. Both regions have room to grow, proving a bright outlook for top companies in the global robotics industry, including Japan’s Keyence, France’s Schneider Electric and Switzerland’s ABB Ltd. Amazon is also developing its own impressive AI-driven technology, Casey notes.”

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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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