D-cipher video series: Deglobalization explained

“Nearshoring”, “reshoring”, “onshoring”, “supply-chain diversification” have all been terms used to frame this this notion that the era of globalization that began in the early 90’s has started to shift. Historically, companies were focused on lower costs and higher efficiency. China emerged as the dominant leader and is now at the heart of global manufacturing.

The COVID-19 pandemic exposed the risks and vulnerabilities of this approach. Companies saw extreme disruption, dislocations and bottlenecks.  As a result, low cost and efficiency are no longer the only priority. Today, we see much greater emphasis on resilience and reliability. We’re moving from “just in time” to “just in case.” 

The natural question for investors is to look at which economies and companies may benefit from this disruption to globalization. While China retains a strong cost advantage in manufacturing, but the share of US imports from China is falling and we are seeing new manufacturing facilities being set up in other countries.   

The impact is varied.  In developed markets, we believe  the opportunities may be more geared toward smart-manufacturing; while emerging and frontier markets may be more labor intensive manufacturing. National industrial policy has renewed importance with the Chips Act and Inflation Reduction Act in the US an opening shot in this changing landscape and companies are already responding.

What is clear is that as companies pay more to secure their supply chains, margins may come under pressure and elsewhere these costs will get passed on to the consumer in the form of higher prices.  As the tailwind of three decades of globalization fades a key source lower inflation may be fading with it.