One of the things that COVID-19 is likely going to accelerate is the de-centralization of manufacturing in China.
This de-centralization was already a big theme in the last two years. Suddenly, a pandemic is likely going to accelerate it.
The worst-case scenario planning in the past was for a risk manager to ask the question: “What would happen if we were to hit by a global pandemic?”
Now we are finding that out.
Companies Suffered Due to China Disruption
During this period, Hubei was shut down for a time. Because China is a major supplier to the world, companies in other countries faced a problem.
Apple came out to warned us they are not going to hit their sales guidance. Car manufacturers started to realize when they do not have parts, they cannot make vehicles, and they cannot have sales.
China Suffers Now that Global Consumers are Disrupted
Now that the pandemic has become global, this affected China as well. Their manufacturing companies are getting online, but there are less people to sell to!
Crucially, this pandemic caused a scramble for something that we didn’t think is so essential: ventilators, masks, and equipments for testing & keeping our healthcare workers protected.
The after effects of this pandemic is likely going to accelerate some shift.
Acceleration of a more Diversified Supply Chain
Donald Trump has been trying to force companies using China as a manufacturing base to come back home. Now, the companies themselves may be psychologically scarred by the event to do something by themselves.
I am not sure whether they are thinking about shifting back to the United States. Perhaps, it is more of a decentralization to Mexico and Vietnam than solely China.
The areas that are likely to benefit from this are Latin America and Southeast Asia.
Japan has Kick Started the Incentive in the Middle of this Turmoil
Two days ago, South China Morning Post put out an article talking about Japan paying their firms to leave China.
Japan has earmarked US$2.2 billion of its record economic stimulus package to help its manufacturers shift production out of China, as the coronavirus disrupts supply chains between the major trading partners.
The extra budget, compiled to try to offset the devastating effects of the pandemic, includes 220 billion yen (US$2 billion) for companies shifting production back to Japan and 23.5 billion yen for those seeking to move production to other countries, according to details of the plan posted online.
The move coincides with what should have been a celebration of friendlier ties between the two countries.
That has renewed talk of Japanese firms reducing their reliance on China as a manufacturing base. The government’s panel on future investment last month discussed the need for manufacturing of high-added value products to be shifted back to Japan, and for the production of other goods to be diversified across Southeast Asia.SCMP
Considering how dependent the Chinese consumer have been to Japan in recent years, this is a very big shift. Basically, Japan is saying despite the tremendous advantages, we are going to hedge our bets and not be so dependent this way.
The Opportunity for Singapore
Singapore is not a country that will be on many people’s minds when it comes to manufacturing, but there might be an opportunity there. We have a very educated workforce.
The meeting between President Trump and Kim Jong-un, the turmoil in our neighboring countries, in Hong Kong and our handling of COVID-19 (the perception, not the actual situation) have given company leaders the impression that this is a place that might be worth considering.
Despite our high cost, this is an opportunity to see if Singapore can be turned into an advanced automation manafacturing base for them.
The impact to investing is going to be less clear.
First-level thinking will tell us that China is going to be going to lose out on this. However, I think for some time, people are starting to realize that manufacturing in China is not as cheap anymore.
I have a feeling that some Chinese firms will also see the need to diversify their supply chain!
Ramifications to Individual Companies
From an individual company perspective, it will be a bit tough to shift immediately. Most companies are going to suffer on their upcoming financial statements this year.
Relocating manufacturing facilities has cost to it. After the shift, we would not know whether the aggregate cost goes up or remains the same. The result for individual companies will vary in reality.
Long term this would mean it affects profit margin.
If a company chooses to pass on this cost to the consumers (their customers are more price inelastic. If you up the price they will still buy from you), there might be some cost-push inflation coming on a very wide basis.
Be Globally Diversified in Investing.
We are not sure how this is going to turned out.
However, if you invest in a basket of global companies through a low-cost globally diversified fund, you should be able to capture the returns.
Some of your companies will suffer.
Some small companies will benefit by becoming significant enough for a global fund to invest in.
Either way, things will be OK.
I invested in a diversified portfolio of exchange-traded funds (ETF) and stocks listed in the US, Hong Kong and London.
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