By now it’s a familiar theme, but the switch towards the ‘reshoring’ of manufacturing continues to gather pace, even though the practical barriers and financial hurdles linked to supply chain rationalisation have probably been underestimated.
References to ‘onshoring’ and ‘reshoring’ have increased in earnings calls. But even if we assume that the ‘just in time’ mantra is assuredly giving way to “just in case’, the implications for UK businesses whose prospects are intertwined with global supply chains – ranging from distributors to original equipment manufacturers – are difficult to assess.
Ensuring supply chain resilience comes at a cost, so companies operating in particularly competitive markets, or those with thin net margins, might be more reluctant to initiate changes. Yet it seems as though manufacturers whose products are further up the value chain have found the reshoring process less financially burdensome.
As things stand, opportunities for UK investors to tap into the trend are limited, at least by comparison to their counterparts across the Atlantic, where a handful of thematic exchange traded funds (ETFs) are already on the market. So, until UCITS versions are widely available in the UK, investors might want to consider recent comments by Lynn Hutchinson, senior analyst at Charles Stanley, who believes that the industrial automation theme provides a viable proxy opportunity, having previously cited the L&G ROBO Global Robotics and Automation UCITS ETF (ROBO) in an article in ETF Stream.
Another potential option for investors centres on the projected growth in the US small-cap universe in response to the introduction of sizeable state subsidies and tax breaks to incentivise companies to relocate high-tech manufacturing to the US.
Whether this results in the creation of a US version of Germany’s Mittelstand is open to question, but there has already been some movement further up the food chain. Taiwan Semiconductor Manufacturing Company (TW:2330) has already signalled that it is shifting some manufacturing capacity stateside, while BlackRock’s 2023 Thematic Outlook estimates that the Biden administration’s $53bn (£42.4bn) CHIPS and Science Act “will lead to the geographical realignment of manufacturing capacity away from Asia”.
The widespread disruption to supply chains experienced throughout and beyond the pandemic is widely cited as the catalyst for the change in priorities. Yet it was apparent that matters were evolving on this score long before Covid-19 sent the global economy into a tailspin. And there is evidence to suggest that change has accelerated in the wake of Russia’s invasion of Ukraine.
However, it appears that reshoring will be a drawn-out process. Analysis from Goldman Sachs indicates that imports of foreign intermediate and final manufactured goods into the US economy have continued to grow faster than domestic manufacturing output.
From a more prosaic perspective, investors would do well to examine whether the changes under way could impact corporate cash flows and/or margins, especially if companies take the decision to build average inventory levels over time. It’s held that inventory-to-sales ratios increased across a range of industries in the aftermath of the pandemic, suggesting that inventory overstocking has been the preferred option for many businesses, even though it can result in increased storage and management costs. Consequently, it has become more important to monitor a company’s inventory turnover rate.
Aside from the practical benefits linked to improved quality control, lead times and the minimisation of supply chain disruption, the changes under way have also been prompted by the steady reduction of the cost advantages associated with producing or sourcing overseas. And environmental mandates are also having a major bearing on corporate policymaking. Indeed, many suppliers are now being effectively forced to comply with a growing list of legislative and regulatory guidelines covering health and safety and quality assurance, together with environmental and ethical practices.
In its latest annual results, RS Group (RS1), a distributor of industrial and electronic products, highlighted its efforts to enable its customers and suppliers to achieve a net zero value chain by 2050, another instance where external mandates provide opportunities in tandem with obligations. Kristian Olsson, vice-president within the group’s Automation and Control Category, told Investors’ Chronicle that “distributors will face a need to adapt their operations to cater to the changing landscape and potentially reconfigure their supply networks”, thereby necessitating “an agile approach to establishing and managing stronger supplier partnerships at group level as well as in local markets”.
The evolution of supply chains is certainly apparent in a study published by Make UK – formerly the Engineering Employers’ Federation – which reveals that 81 per cent of companies have diversified their supply chains to help guarantee supplies of critical components or materials.
