
As the U.S. and the world decouple from China, we believe increased reshoring activities will give rise to a new set of investment opportunities.
U.S. and China Decoupling Accelerates Reshoring
For years U.S. corporations have discussed moving production lines closer to home, but with little momentum, as the idea was considered too costly and cumbersome to implement. But those conversations have been reignited due to several developments in recent years: the trade-war tariffs against China that began in the Trump Administration, pandemic-induced supply-chain woes exacerbated by Beijing’s zero-COVID policy before it was lifted in December 2022 and increasing geopolitical tensions between the U.S. and Beijing. That’s in addition to the shipping-port bottlenecks, inventory shortages and skyrocketing overseas shipping costs, all of which have wreaked havoc on corporate budgets. Taken together, these difficulties have thrown a spotlight on the increasing need for greater resiliency in U.S. supply chains, pushing many corporations to look for manufacturing “back-up” options closer to home. As seen below, reshoring, onshoring and nearshoring discussions among U.S. corporations soared during 2022.
Increased Reshoring Activities: Mentions of Supply-Chain Shifts During U.S. Corporate Presentations
Source: UBS Evidence Lab, Bloomberg
It’s worthwhile to note that bringing companies back to the U.S. is not a new phenomenon. Over the past decade, American companies have gradually moved their factories out of China due to rapidly rising wages there, which have eroded China’s once-overwhelming competitive advantage in labor costs. As a result of this shift in cost competitiveness, a number of manufacturers across various sectors have already begun moving their production back to the U.S. and elsewhere. The 2018 China trade tariffs further decoupled the U.S. from China and served as another catalyst for companies to relocate an increasing number of their manufacturing facilities out of China. This has been especially true for the Technology Hardware and Equipment sector, as seen below.
However, we believe these previous supply chain restructuring trends will pale in comparison with what we assess will be a tidal wave of impending relocation activity — one that we believe will especially favor countries offering less geopolitical tension, cheaper labor and a potential likelihood of fewer manufacturing disruptions. We have already seen many recent examples — and a number of them have been in the electronics-assembly space, which seems to be the least sticky industry and the most vulnerable to reshoring.
Announcements of Supply Chain Movements to the U.S. (Trailing 12-month Sum)
Source: UBS Evidence Lab
Turning Talk into Action
As mentioned, the U.S.-China trade-war tariffs in 2018 served as an early impetus for companies to move as much production as possible out of China, namely to Southeast Asian countries such as Vietnam, Indonesia, the Philippines and, to a lesser extent, Thailand and Malaysia, as well as Latin America – particularly Mexico. COVID then served as another wake-up call for companies to reassess their supply chain sources and the advantages of reshoring.
This crescendo of factors has driven a wave of companies to turn talk into meaningful action over the past couple of years. Both reshoring and foreign direct investment (FDI) job announcements began to pick up around 2018, and they skyrocketed soon after the pandemic started in 2020. To put this in perspective, the rate of reshoring and FDI job announcements in the first half of 2022 was up 31% compared with the same period in 2021, and by 6000% versus that for 2010. Interestingly, according to the Reshoring Initiative Report, the electric-equipment industry has taken the lead: The sector has seen a significant increase in announced job openings due to large investments in areas such as the electric vehicle battery space among others.
Beneficiaries of the Reshoring Movement
Beijing’s aggressive COVID policies have made China an increasingly unreliable and risky supplier for world economies, even considering some recent moves to ease restrictions there after widespread protests. Some firms have taken a harder stance than merely diversifying their supply chains away from China; they have outright prohibited China-made parts from their value chains for a variety of reasons. For example, our conversations with tech supply chain participants indicates that many tech companies — among them Amazon, Google, Oracle and other cloud-service providers — are now requesting that their Taiwanese manufacturing partners refrain from using Chinese components in their server-related supply chains, citing national security risks. With this in mind, we believe a growing number of beneficiaries will emerge as U.S. companies double down on their commitments to find a China alternative.
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Servers and broadband
Due to tariffs and national security risk related concerns, the broadband equipment and server markets have been first movers in aggressively pivoting their supply chains away from China and to new countries such as various Southeast Asian countries and Mexico. In conversations with Taiwanese Original Design Manufacturers (ODMs), there has been a nearly universal consensus that moving supply chains out of China is either now the economically most attractive option or a customer requirement going forward.
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Mexico
We believe that, in addition to the reshoring of downstream value chain production, there will be a growing trend of rearchitecting and reshoring higher-tech upstream supply chain production. Mexico is poised to play an integral part in this as an increasingly strong China alternative. Well beyond serving as a downstream supplier of lower-tech parts, companies in Mexico are starting to dabble in higher-tech production ordinarily undertaken in China, such as manufacture of commercial laptops and electric vehicle battery parts.
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Southeast Asia
Southeast Asia appears to be set to be a big winner from manufacturers looking to relocate their production capacity outside of China. Ironically, one big advantage for Southeast Asia appears to be its proximity to China, as China’s dominance will be difficult to displace in the short run for a variety of components within the electronics supply chain, necessitating that these components get exported from China rather than sent to their final assembler within the country as they do many times today. Increased investment and production within Southeast Asia should represent a tide of economic growth that can lift many boats, including companies that are geared to domestic investment and consumption.
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Automation technology
Moving supply chains from China to other low-cost labor centers, such as Vietnam and India, are not without its challenges. Among these is that the labor force in these countries is often less skilled than that of China, as well as less willing than Chinese workers to accept harsh working conditions. So in order to maintain similar levels of productivity and production levels as China, companies have increasingly turned to automation hardware and software to improve economies of scale to make up for the difference. As U.S. companies redesign their supply chains, we think automation-technology companies will play a critical role in the successful transition away from China and will become another key beneficiary.
Putting it all together, the combination of growing geopolitical tensions with China and their COVID policies have been driving an ongoing supply chain rebalancing act for companies. During this transformational period, we believe there will be ample investment opportunities to uncover, especially as capital investments find new homes outside of China.
We see especially compelling opportunities in Mexico and Southeast Asia: These are attractive destinations for reshoring endeavors, which will help drive a reinvigoration of growth across these countries’ labor and consumer markets. Additionally, we see interesting global opportunities within the industrial automation and technology industries, as companies take advantage of the “jump ball” to reimagine supply chains with the future in mind.
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