Investing in Asia’s pivot to supply chain resilience

Before Covid-19, the most prominent supply chain concerns were unpredictable tariffs and rising labor costs in major sourcing destinations. The pandemic highlighted the risk of much more direct disruption, with confidence in global supply chains now rocked further by the Russia-Ukraine war and large-scale lockdowns in China.

Because of these disruptions, companies have increasingly prioritized the security of their supply chains. But there is more than one road to resilience, with three competing approaches gaining favour: reshoring, nearshoring and diversification.

The first, reshoring, involves dismantling supply chains and bringing manufacturing back home. Companies in the U.S. had actually started reshoring before the pandemic, with a surge in 2019 as trade tensions with China increased.^[1]

With nearshoring, rather than shifting production home, companies relocate operations to neighboring countries. For example, there has been a trend for US companies to nearshore manufacturing from China to Mexico. This was driven initially by rising manufacturing wages in China – which surpassed those in Mexico in 2015^[2] – and by mounting tariffs. That process is set to accelerate following the recent supply chain disruption caused by epidemic measures in China and heightened geopolitical tensions.

Why diversification will prevail

These strategies do not necessarily solve the underlying problem, though. According to a recent study by the International Monetary Fund (IMF), more diversification, not less, is the best way to improve supply chain resilience.^[3] The IMF researchers were especially opposed to the idea of dismantling and reshoring supply chains – a concept that has become increasingly popular around the world. After all, continuing to put all of your eggs in one basket does not equate to a more resilient business, even if that basket is closer to home.

Diversification can have advantages for Chinese companies, allowing them to take advantage of cheaper labor elsewhere in Asia and be closer to their end consumers. Take BBK Electronics, which might not be a household name, but ranks ahead of Samsung and Apple as the world’s largest smartphone manufacturer through the combined unit sales of its brands Oppo, Vivo, OnePlus and Realme. Despite being headquartered in China’s Guangdong province, known as the “world’s factory,” BKK has plants around the world, with only 40% of its production taking place in China.^[4]

Some countries will benefit more than others from this increased search for diversification. A lot of labor-intensive production is being relocated from China to Vietnam in particular, with parallels being drawn between Guangdong and Vietnam given their similar population sizes and proactive policies in attracting foreign investors and building industrial parks. The crucial difference, of course, is that the minimum wage in Vietnam is about half the level of Guangdong’s.^[5]

Financing change

However, if companies in Vietnam and other Southeast Asian nations such as Thailand, Indonesia and the Philippines are to benefit fully from the growing appetite for supply chain diversification, they need to invest in their capabilities, including upskilling their workers.

Chinese firms, meanwhile, will also need to continue their efforts to move up the value chain as manufacturing becomes increasingly dispersed across the region. This will involve large investments in technology and further training for their already skilled workers. By doing this, Chinese manufacturers may be able to move to a more profitable place within supply chains instead of being displaced from them.

The global uncertainty that has increased the urgency driving supply chain diversification has also made liquidity conditions much more challenging. Under these circumstances, securities-based financing offers a compelling solution for long-term investors and entrepreneurs who are seeking to raise capital or invest in new ventures without having to sell their assets in the current market.

A sale and repurchase agreement with EquitiesFirst allows long-term shareholders to access the liquidity they need to fund supply chain diversification projects, for example, while retaining all the upside potential of the underlying shares. Like a resilient supply chain, the benefits afforded by our private ownership and long-term investment philosophy become especially clear in times of volatility.

[1] https://www.dw.com/en/why-us-companies-are-reshoring-their-business/a-60054515

[2] https://www.supplychaindive.com/news/charts-reshoring-supply-chains/581246/

[3] https://www.reuters.com/business/autos-transportation/diversify-global-supply-chains-dont-dismantle-them-imf-says-2022-04-12/

[4] https://macropolo.org/analysis/supply-chain-diversification-quitting-china-is-hard/

[5] Ibid.

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