How Covid-19 will change supply chains

As contrarian investors, we’re always conscious of how events will upset the status quo. Recently, we’ve been trying to gauge the impact of Covid-19 – both on wider society and our portfolio. While it’s too early to quantify the long-term impact, it’s apparent that the pandemic has focused attention on fault lines in supply chains that were previously obscured.

Firstly, the risks of relying on sourcing and manufacturing goods far away from end markets have been brought back into the spotlight. China’s low wages and manufacturing scale have secured its role as “the world’s factory” and fuelled Western appetite for cheap products. Supply chains have reshaped to capitalise on this.

It’s estimated that China accounts for around 30% of the world’s manufactured goods. So when the Covid-19 pandemic hit and borders closed, many companies faced shortages of crucial manufacturing components. One area that is deeply intertwined with Asian production is the electronic goods sector. That includes Apple, which is now opting to produce AirPods in Vietnam, due to management’s concern about its overreliance on China. If more companies follow Apple’s lead, we could see a trend of companies diversifying supply chains to reduce their dependence on a single source.

The impetus behind such a trend could be political as well as practical. The US-China trade war had already frayed relations between Washington and Beijing. Recent comments from President Trump, including accusing China of manufacturing the virus in a lab, are unlikely to build bridges. The Trump administration is already “turbocharging” its plans to reduce reliance on China, with hopes that companies will revive manufacturing in the US.

For a while, pollution from manufacturing has been exported far away from where it’s a hot political topic. On the other hand, goods produced nearer to their end markets would rack up less of a carbon footprint, and companies would have to comply with more stringent standards locally, so we could see manufacturing becoming more sustainable in the long-term.

If companies are persuaded to forego low cost overseas production in favour of the security of having operations closer to home, that could push up costs. This relocation would not be a simple task – a skilled manufacturing base will have to be built from scratch, and retail businesses will either need to adjust their profit margins or their prices. In any event, it is likely to be inflationary. And that will have repercussions of its own.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.