Bull in China shop considers other options

Which economies could benefit from global trends to reshoring and de-globalisation…

Will you be getting Matt Hancock’s diaries for someone this Christmas? Perhaps for your proctologist? It seems like the sort of thing he might appreciate.

The publication of the former health secretary’s apologia pro vita sua takes the mind back to a time when the desperate scramble for scrubs, face masks and ventilators led to a consensus forming that supply chains had become too long and too complicated, and too dependent on the whims of potentially unfriendly governments.

Our politicians have largely forgotten all this of, course, and moved on to the next headline. Businesses seem to be a little more strategic in their planning, with a cooling of relations with China contributing to a willingness to seek more local manufacturing bases, or at least those in companies that are less likely to cut off access in a crisis.

To us it seems likely that in another twenty years there will be a very different series of global interconnections, and manufacturing supply chains are likely to look very different. This presents challenges for businesses, not least in rising wage costs and potentially skilled labour shortages, but could it also create opportunities?

India is often considered to be a major potential beneficiary of the cooling of relations with China. It has a young and highly educated workforce. This workforce is growing rather than shrinking, unlike China’s. Being the world’s largest democracy, with a high degree of political stability, it is fast becoming a viable alternative investment destination to China. In a recent meeting with Ashoka India Equity (AIE), the managers noted that India’s burst of rapid development potentially provides great long-term investment opportunities.

Coming from another angle, the manager of abrdn Japan (AJIT) notes that Japan is a world-leader in automation and robotics. India may be able to provide the young and skilled workforce to take on China, but perhaps we are looking at an era of greater diversification in the supply chain. ‘Re-shoring’ elements of manufacturing to developed economies may require greater focus on automation and efficiency to offset labour shortages and higher wages.

This is nothing new. Japanese car manufacturing, for example, has found a way to manufacture right on the doorstep of its European and North American customer bases and to compete with car companies relying on lower-wage economies for manufacturing. As AJIT’s manager notes, many of Japan’s largest manufacturers are already globally diversified, perhaps providing a blueprint for competitors over the next few decades.

India’s success as a near-shoring location, and Japan’s skills in automation are not new, and none of this says to us that China won’t remain an incredibly important part of the global economy as the rest of the world just has so much invested in its success. But we think there are powerful global trends emerging that are likely to play to the established skills and resources of other economies such as India and Japan that we shouldn’t ignore.

Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.