[Editor’s note: Our editors are taking a very well-deserved Christmas break, so while they’re away, we’re featuring their most popular articles from the past year. This one is from 8 April.]
In today’s Money Morning…make no mistake, the trade war is far from over…all the eggs, one fragile basket…neighbourly boom…and more…
There is an exodus in China.
One group is fleeing the Middle Kingdom in their droves. A group that isn’t made up of individuals, but companies…
Yesterday, consulting firm Kearney released its latest ‘reshoring index’ report. A document that examines and points to trends within global supply chains.
And the big story is just how many US firms are pulling out of China.
Last year, for the first time since 2011, the US’ manufacturing import ratio fell. Meaning the US relied on less imports and higher domestic output, more than it has in the past nine years.
So, what was the reason for this turnaround?
The trade war, of course.
Imports from Asia’s low-cost countries (China + SEA) fell from US$816 billion to US$757 billion year-on-year. A 7% slump that is more consequential than it may seem. However, when you break it down by country, you get the full story.
Of the 14 low-cost Asian nations, 13 accounted for net import growth. A US$31 billion increase that was more in line with past years. The only outlier was China — the entire reason for the reversal.
What that should tell you right away is just how much the US relies on Chinese imports. A fact that probably won’t surprise you, but is important to confirm nonetheless.
More importantly though, it also shows just how impactful the trade war has been. Something that the mainstream has totally forgotten about due to this virus.
Make no mistake, the trade war is far from over. It’s simply been put on hold while both sides grapple with a new threat. And that threat could give Trump the win few expected…
All the eggs, one fragile basket
Supply chains are a fickle thing. As everyone is now learning, thanks to the TP and food shortages we’ve seen in recent weeks.
When things are going smoothly, no one gives them a second thought.
But, when things go wrong, society realises just how vital and reliant we are on them.
Last year, American companies came to this exact conclusion. As the Kearney report states:
‘Three decades ago, many US producers began manufacturing and sourcing in China for one reason: costs.
‘The US-China trade war brought a second dimension more fully into the equation-risk-as tariffs and the threat of disrupted China imports prompted companies to weigh surety of supply more fully alongside costs.’
It quickly dawned on producers that relying only on China is risky. If their supply chain is compromised — be it via a trade war or otherwise — they would be impacted.
And then the coronavirus struck. An event that could be the nail in the coffin of China’s manufacturing supremacy. As the report continues:
‘COVID-19 brings a third dimension more fully into the mix, and arguably to the fore-resilience.
‘The current crisis is exposing vulnerabilities that cannot be addressed with short-term fixes and minor tinkering. Many companies quickly ran out of any inventory they were able to stockpile ahead of the COVID-19 outbreak. Some with heavy dependence on China found they had few alternatives that could help see them through the drought.’
Simply put, relying solely on China is too risky for many companies. If the supply chain breaks down, they need back-ups or alternatives.
I’m not saying manufacturing will cease in China, just that it will thin out. We are seeing and will continue to see a shift to other low cost regions. Places like Vietnam, Malaysia, and the Philippines.
South East Asia (SEA) is about to get a whole lot busier.
Now this isn’t the first time I’ve discussed this. South East Asia’s rise is a matter that I’ve been following for a few years now. And I certainly wasn’t the first.
What’s important though, is how quickly this transition could pan out.
Shifts in global supply chains don’t happen overnight. They take years to plan, promote, and perfect.
But now companies and industries have had their hand forced by this virus. Current supply chains have failed in the face of a crisis. There is no time left.
Because of this I expect changes must (and will) be made quickly. We’ve already seen the stress placed upon local factories because of the disruption. Sites that have been forced to operate at extreme capacity to shore up supplies.
In order to avoid another shock like this in the future, diversification will be key. But, by moving operations to SEA, companies can still keep the low costs that have become the norm.
For Trump, it effectively means he has won the trade war.
Whether you agree with his methods or not, he has achieved the outcome he wanted. Or at least, part of it.
China’s stranglehold over global trade will be diminished. Giving way for more competition in the manufacturing industry. Whether it will benefit US production long term, no one knows. I certainly wouldn’t bet on it, anyway.
But for SEA, it’s about as close to a sure thing as you can get. And for us down here in Australia, that’s good news indeed.
It’s time to start paying a lot more attention to our geographical neighbours.
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.