Is the sun setting on global supply chains? A quick scan would suggest not; however, times are changing.

Supply chains are moving and shrinking. The shock from the pandemic combined with ongoing geopolitical tensions, not just between the US-China, but also the Russia-Ukraine War, and shipping disruptions as a result of ongoing conflict in the Middle East, have thrust supply chains front and center not only for corporations but also governments.

No longer is cheap labor the decisive factor for the location of production, meaning many corporations are now reconsidering their supply chain strategies. This shift marks a departure from the labor-intensive manufacturing practices that have driven rapid industrialization in Southeast Asia and lifted millions out of poverty.

Some corporations are bringing production back home, while others are opting for nearby locations to reduce the risk that shocks on the other side of the world disrupt their business. For instance, instead of outsourcing textile production to Bangladesh or plastics to China, corporations are exploring reshoring options to make their supply chains future fit.

What is reshoring?

Reshoring goes by many names, but we can divide it into three types: production could be onshored back to developed markets (DMs), nearshored to countries neighboring the US or Eurozone, or friendshored to politically aligned emerging markets (EMs), which could still be a long distance away, for example within Asia-Pacific's already deep supply chains.

Regardless of the exact form, reshoring can also simply be thought of as an evolution of offshoring, which is the already established process of manufacturing goods overseas to try to reduce the cost of labor and manufacturing.

Reshoring trend

Global supply chains have largely recovered from the pandemic shock; however, geopolitical challenges continue to pose a threat to long supply chains. Global shipping rates have more than doubled since the start of Houthi rebel attacks – and gone up by much more on China-Europe routes.

Chart 1. Events in the Red Sea have once again put pressure on supply chains

Already 67% of global retailers and manufacturers have changed where they source materials and components due to supply chain disruptions. Almost two-thirds say that further relocation remains a high priority if not the top priority. While the American Chamber of Commerce in China reports that 40% of US corporations are redirecting or planning to redirect investments originally earmarked for China.1

A new normal

Why the sudden shift? Well, the triple threat of pandemics, conflict, and geopolitical tensions might be the primary drivers, but the Francis Scott Key Bridge collapse is a stark reminder that infrastructure underpins global trade, potentially creating choke points. Climate change could also create more problems: we have already seen how low water levels in the Panama Canal and on the Rhine River can disrupt shipping. Together they have all, at one point or another, stressed how exposed global supply chains are to pockets of disruption.

Little wonder then that 96% of CEOs are thinking about reshoring, have decided to reshore, or have reshored already – up 78% in 2022.2

The global shift towards reshoring presents exciting opportunities for emerging market (EM) investors:

Benefiting locations

Countries close to major economies – like Mexico – or politically aligned countries – like India – are likely to see the most significant boost. Mexico has seen a surge in non-residential construction, while the central bank of Mexico has estimated that 16% of corporations could be benefiting from nearshoring trends. There are also tentative signs that India is benefiting from reshoring. It may be starting from a low base, but exports of electrical goods have more than doubled since 2019.

Additionally, those EMs with strong domestic markets in proximity to other fast-growing emerging economies are well-positioned to benefit. Indeed, Asia-Pacific benefits from already deep links to global manufacturing and the potential for these fast-growing economies to become major drivers of global consumption in their own right.

We are fairly skeptical about onshoring back to DMs given substantial wage differentials, so our best guess is that reshoring is really a within EM event.

Investment strategies

Investors can capitalize on reshoring through various instruments, including local currency bonds, domestic corporate bonds, and equities in corporations expanding due to the trend.

China's localization

China's focus on replacing foreign suppliers with domestic corporations (localization) creates investment possibilities for some corporations and sectors. However, the rise of national security and resilience as key policy priorities for the Communist Party and the potential for this strategy to add to tensions with the West also suggests caution may be warranted.

Presidential impact

The 2024 US presidential election outcome could significantly amplify reshoring trends. A Biden win would most likely see a continuation of current trade policies, while a Trump victory could lead to a larger range of possible outcomes.

On the one hand, higher tariffs could create disruptions and potentially start trade wars. On the other hand, talking tough could – while generating near-term uncertainty – potentially be the precursor to a deal.

Final thoughts

Ultimately, the decision to move a business to a new location depends on whether it can provide some kind of advantage over the current location. Sometimes, returning to the original location can offer tax benefits, savings on shipping costs, or simply reduce the risk of disruption. Prior to the pandemic supply chains were built for efficiency, but they now need to consider ‘just-in-case’ not only ‘just-in-time’.

However, if increased wages or costs of raw materials offset these advantages, corporations may not be able to move back on a large scale and remain competitive. This implies that corporations will seek to mitigate supply chain risk by primarily moving within emerging markets to tap into the advantages of low-cost manufacturing while also generating more flex in their manufacturing supply chains.

In conclusion, EM investors should consider reshoring as a key driver of future capital expenditures alongside investments in technology and green commodities. By strategically targeting the right markets and instruments, we believe investors can position themselves to benefit from this evolving economic landscape.

1 “AmCham Shanghai’s 2023 China Business Report: Analyzing Key Findings.” China Briefing, October 2023.
2 "Reshoring: the future of supply chains." World Finance, September 2023.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed, and actual events or results may differ materially.

Foreign securities are more volatile, harder to price, and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.