Reshoring, which involves shifting of manufacturing and service bases from one location to another, is already reshaping our world. It’s a theme that is perhaps as important as AI and energy transition, mainly due to the impact on so many industries and countries.
For the last 30 years or so, the world has witnessed a huge shift in manufacturing facilities from Western countries to emerging markets, especially China. Outsourcing and globalisation meant that Western companies could take advantage of cheaper labour costs in emerging markets, particularly China.
China is now leading in most manufacturing segments, but changes in the geopolitical landscape means this might no longer be the case looking at longer horizons.
Overreliance on China, supply chain fragilities, and geopolitical tensions are causing western countries and companies to rethink their supply chains and move away from China and even Taiwan.
Reshoring is certainly having a major negative impact on China. The world’s second largest economy is experiencing a significant drop in foreign direct investments (FDI). In the third quarter of 2023, China recorded its first negative net FDI since 1998. Investments are instead flowing into other emerging markets like India, Mexico and Vietnam. Even in the US, there has been a major upswing in industrial capital investment.
For China, the overall impact of reshoring and other economic headwinds can most clearly be seen in its stock markets. $6trillion has been wiped off the value of the Chinese stock markets since 2021, while India’s stock market capitalisation recently surpassed that of Hong Kong’s, the latter representing many mainland Chinese companies.
In the long term, other emerging markets like India, Mexico and Vietnam may benefit from rising foreign investments due to reshoring. As for specific themes, robotics, automation, and semiconductors are well placed to benefit as supply chains are rebuilt in Western and other countries. Given the high cost and low availability of workers in western countries, any reshoring to the West is likely to need immense support from robotics and automation.
China’s working population is also set to shrink in the coming decades, so shifting production to countries with younger workforces may not be a bad thing for firms. Most other emerging markets also have lower cost of labour than the key coastal manufacturing hubs in China, so reshoring may make sense economically and help keep global inflation under control.
Rebalancing of supply chains can also make the global economy more robust and flexible – improving visibility and limiting risks of future shocks like we saw during the pandemic.
Reshoring also poses major challenges. China had invested heavily into infrastructure and manufacturing for decades, even subsidising multiple industries for years to gain scale and market share. China’s holistic approach and long-term focus led to a fast reduction in cost of goods produced which benefited the world economy via lower inflation and abundant availability of cheap goods. Other countries may not be as efficient as China. Thus, a shift of manufacturing away from China, especially back to western countries, could be inflationary if not managed properly.
Furthermore, a weak Chinese economy may not be great for the world economy overall. China is the world’s second largest economy, so a strong Chinese economy combined with better supply chain balance could be a win-win for all. But a weak China, trade barriers and as a result, rising geopolitical tension, will not be good for anyone.
Whether reshoring leads to a better or worse global economy ultimately boils down to how the transition is handled. Reshoring away from China is likely to continue so finding a balance is key.
Humanity and the global economy have an uncanny ability to adjust and adapt to new situations, especially to trends that play out over longer time periods. If we can get through a major pandemic, we can handle reshoring.
Ultimately, a more balanced global supply chain and rise of other emerging markets may be a force for good in the long term.
The statements and views expressed in this document are those of the author as of the date of this article and are subject to change. This article is also of a general nature and does not constitute legal, accounting, tax or investment advice. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.
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