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Global Supply Chains Shift will be Accelerated Due to this Psychological Scar

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.


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.

My preferred broker to trade and custodize my investments is Interactive Brokers. Interactive Brokers allow you to trade in the US, UK, Europe, Singapore, Hong Kong and many other markets. Options as well. There are no minimum monthly charges, very low forex fees for currency exchange, very low commissions for various markets.

To find out more visit Interactive Brokers today.

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Sunday 12th of April 2020

Hi Kyith,

Too many competitors fighting for investments now, 40/50 years ago, many countries like China, Indo-China, Mexico, Indonesia, Malaysia, Africa, Sri Lanka, India etc., due to many reasons, like wars, communism, self-imposed lockdown, low education systems, poor infrastructure, their manufacturing were not competitive, but now they offer cheaper labour cost, abundance workers, and educated workforce and big internal markets to test run the products. Singapore is neither here nor there, our cost is higher than China, Mexico and Vietnam and our technology is behind USA, Japan and South Korea. Singapore does not have its own manufacturers, Apple and Huawei can manufacture their products in Vietnam and the home countries still earn the profits and HQ got salary paid, but Singapore is just a subcontractor for MNC, like Seagate, Seagate left Singapore and never come back again. Singapore can’t just sit there and wait for the trend to change and favour us, Singapore has to be proactive and seek out opportunities. The world keep changing every minutes, Singapore has to adjust to the constant changes and grad the new opportunities. If Singapore do nothing while the whole world keep changing, Singapore will never improve. What is Our LKY greatest fear for Singapore? If they lost their bearings and do not understand the constraints that we face. You lose those, and you’re down. And you can go down very rapidly…


Saturday 11th of April 2020

Hi Kyith, nice write-up as always. Just some points of concern:

1. Before this pandemic hit, there was always the impression that supply and demand will always balance themselves out. Now, we see that in fact there is an urgent shortage of essential healthcare equipment, and previously unnoticed fissures of inequality being revealed. I wonder if this disaster can encourage national leaders to adopt new ways of thinking how Singapore would fit in the global manufacturing space and develop new metrics of success as opposed to serving as a tax haven and luxury home attraction.

2. Companies have started diversification of their supply chain to Southeast Asia and Latin America. Yet, Singapore has never been considered as one of the places for these companies to diversify their production. For many decades, the manufacturers of wood planks, plastic moulds and other “boring” goods have been relegated to the dustbin of history. People in manufacturing in Singapore have lost jobs to cost competition. How would Singapore suddenly become relevant now? I don’t know. Is there currently an oversupply of lawyers and doctors for a population whose growth has become stagnant?

3. The disruption in China is across the board because many companies require China to complete basic manufacturing before the proprietary and skill-intensive processes are completed in the manufacture’s home country. As long as China maintains its ease of access to basic supplies, invests in good infrastructure, and upskills its workforce, I don’t see China’s position being easily overtaken by other regions.

4. What I really don’t feel right is that companies should be awarded for their financial prudence, just like an individual should. Yet, we are seeing bailouts and forgiveness for corporations that had squandered past years’ of gains in varying degrees on stock buybacks and unproductive investments. Hopefully, this will cause a renewed interest in Graham’s emphasis on finding out the real earnings of a company, as opposed to satisfying certain checkboxes like sufficient interest coverage, consistent dividend growth, etc.


Sunday 12th of April 2020

Hi Rex! Thanks for the comments let me see if I can address them.

1: We hope they do. If they are not thinking about it and trying to survive in this tougher environment then we are doomed 2: Your question is as good as mine. They believe we are highly educated and have a competitive edge. But in truth automation may be able to be carried out by other countries as well. It is not exclusive to us. There is an opportunity but that opportunity can be lost 3: Thanks for opening up my thoughts on this. 4: This is something that I am not comfortable with as well. You conducted buyback to boost ROE but now that you need money you asked for bailouts. In truth, in all risk management, we seldom think that things will get THIS bad. So in a way we could forgiven them. I do hope that this money is not come for free. I do hope that there are some checkboxes like you say before all those shareholder payouts can happen.

Teo See Hwa

Saturday 11th of April 2020

Will, you made something more expensive to sell in the World and will the government pay more to buy from you.

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