David Kimberley
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Updated 18 Nov 2022
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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.

A couple of weeks ago we wrote about how companies are purportedly looking to onshore their businesses operations. A key point there was that the term described companies moving production out of China to third-party countries, not just back to their own shores. In that sense, the term is something of a misnomer as moving a factory from China to Vietnam probably isn’t what you’d expect when you first hear the term ‘onshoring’.

Much of the talk about onshoring also tends to build upon the narrative that globalisation is coming to an end and, much like at the start of the 20th century, we will see a contraction in cross border flows and a desire among countries to turn inward. At least thus far, this doesn’t seem to be happening. Cross border flows and the level of direct foreign investment all bounced back to pre-pandemic levels in 2021 according to the UN. It’s entirely plausible they’ll fall this year but that seems less to do with deglobalisation and more to do with Russia invading Ukraine.

It's also very easy to listen to people like BlackRock CEO Larry Fink saying “globalisation is dead” and then nod your head and think, “that Larry Fink makes lots of money, he must know what he’s talking about”. But governments, even if they’d like to onshore industry, are not in control of private companies. And even if they were, you cannot move large-scale industry by diktat. Trying to do so usually results in that uniquely dictatorial-communist style of business, where you have large hydroelectric dams in the middle of a desert or factories churning out poor quality plimsolls that no one wants to buy.

What may be happening instead is something of a reshaping of global trade, particularly when it comes to China. Managers from Vietnam Enterprise Investments (VEIL) and Ashoka India Equity (AIE) have seen signs that companies are moving their operations to the countries they specialise in. Partly that’s to do with costs, China’s economic growth means manufacturing is not as cheap as it once was. The ‘fear factor’ of dictatorial whims and more confrontations with the west is likely another driving force as well.

This is not to say that onshoring is a total myth as there does appear to be a genuine drive to move critical technology closer to home. In August, for example, the US put the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act into play, with huge incentives for companies to start producing semiconductors on US soil. Renewable energy is arguably another example of this. Although it’s sold as a solution to environmental problems, it also tends to mean that countries using it become more energy independent.

As noted, it’s easy to incentivise or push someone to do something, but it cannot be done on some sort of whim. The result is that the movement to onshore is likely to be driven by a mix of practicality and legislation. In some instances there may be a genuine relocation of manufacturing to within a country’s borders. But another strong likelihood is simply the movement of facilities to other countries that pose less of a risk to companies. So less the end of globalisation and more a change in what globalisation has looked like over the past three decades.

Past performance is not a reliable indicator of future results

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