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.

Disclaimer

Past performance does not guarantee future returns, and individual returns are not guaranteed or warranted.

This Document is intended solely for accredited investors, sophisticated investors, professional investors, or otherwise qualified investors, as may be required by law or otherwise, and it is not intended for, and should not be used by, persons who do not meet the relevant requirements. The content provided herein is for informational purposes only and is general in nature and not targeted to any specific objective or financial need. The views and opinions expressed in this Document have been prepared by third parties and do not necessarily reflect the views and opinions of EquitiesFirst.  EquitiesFirst has not independently examined or verified the information provided herein, and no representation is made that it is accurate or complete.  Opinions and information herein are subject to change without notice.  The content provided does not constitute an offer to sell (or solicitation of an offer to purchase) any securities, investments, or any financial products (“Offer”). Any such Offer shall only be made through a relevant offering or other documentation which sets forth its material terms and conditions. Nothing contained in this Document shall constitute a recommendation, solicitation, invitation, inducement, promotion, or offer for the purchase or sale of any investment product by First Holdings, LLC or its subsidiaries (collectively, “EquitiesFirst”), nor shall this Document be construed in any way as investment, legal, or tax advice, or as a recommendation, reference, or endorsement by EquitiesFirst. You should seek independent financial advice prior to making an investment decision about a financial product.

This Document contains the intellectual property of EquitiesFirst in the United States and other countries, including, without limitation, their respective logos and other registered and unregistered trademarks and service marks. EquitiesFirst reserves all rights in and to their intellectual property contained in this Document.  The Document should not be distributed, published, reproduced or otherwise made available in whole or in part by recipients to any other person and, in particular, should not be distributed to persons in any country where such distribution may lead to a breach of any legal or regulatory requirement.

EquitiesFirst make no representation or warranty with respect to this Document and expressly disclaim any implied warranty under law. You acknowledge that EquitiesFirst is not liable under any circumstances for any direct, indirect, special, consequential, incidental, or punitive damages whatsoever, including, without limitation, any lost profits or lost opportunity, even if EquitiesFirst has been advised of the possibility of such damages.

EquitiesFirst makes the following further statements that may be applicable in the stated jurisdiction:

Australia: Equities First Holdings (Australia) Pty Ltd (ACN: 142 644 399) holds an Australian Financial Services Licence (AFSL Number: 387079). All rights reserved.

The information contained on this Document is intended for persons located in Australia only and classified as a Wholesale Client only as defined in Section 761G of the Corporations Act 2001. The distribution of information to persons outside this criteria may be restricted by law and persons who come into possession of it should seek advice and observe any such restriction.

The material contained in this Document is for information purposes only and should not be construed as an offer or solicitation or recommendation to buy or sell financial products.

The information contained in this Document is intended to be general in nature and is not personal financial product advice. Any advice contained in the Document is general advice only and has been prepared without considering your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. You should seek independent financial advice and read the relevant disclosure statements or other offer documents prior to making an investment decision about a financial product.

Hong Kong: Equities First Holdings Hong Kong Limited is licensed under the Money Lenders Ordinance (Money Lender’s Licence No. 1681/2023) and to carry on the business of dealing in securities (Type 1 licence) under the Securities and Futures Ordinance (“SFO”) (CE No. BFJ407).  This Document has not been reviewed by the Hong Kong Securities and Futures Commission. It is not intended as an offer to sell securities or a solicitation to buy any product managed or provided by Equities First Holdings Hong Kong Limited and is only intended for persons who qualify as Professional Investors under the SFO. This document is not directed to individuals or organizations for whom such offers or invitations would be unlawful or prohibited.

Korea: The foregoing is intended solely for sophisticated investors, professional investors or otherwise qualified investors who have sufficient knowledge and experience in entering into securities financing transactions.  It is not intended for, and should not be used by, persons who do not meet those criteria.  

United Kingdom: Equities First (London) Limited is authorised and regulated in the UK by the Financial Conduct Authority (“FCA”).  In the UK, this Document is only being distributed and made available to persons of the kind described in Article 19(5) (investment professionals) and Article 49(2) (high net worth companies, unincorporated associations etc.) of Part IV of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (‘’FPO’’) and any investment activity to which this presentation relates is only available to, and will only be engaged in with, such persons. Persons who do not have professional experience in matters relating to investment or who are not persons to whom Article 49 of the FPO applies should not rely on this document. This Document is only prepared for and available to persons who qualify as Professional Investors under the Markets in Financial Instruments Directive.