Investment Adventures in Emerging Markets


Technology: One World, Two Systems

In this excerpt of our latest “Trends Reinforced,” Chetan Sehgal explains why the global pandemic and US-China rivalry has driven demand for greater resilience and security of supply chains.

Supply Chains Under Stress

In recent years, international supply chains have come under mounting pressure. Even before COVID-19, a growing number of companies and countries were already looking to diversify away from a perceived excess dependence on China, borne from rising Chinese labor costs paired with escalating trade tensions with the United States.

As Sino-US rivalry has extended from trade to technology, we’re seeing the development of “one world, two systems” in which geopolitical considerations play an increasingly dominant role in driving technology and trade patterns. This is already evident when it comes to the online giants—US companies regarded as household names such as Google, Amazon and Facebook do not have much, if any, presence in China’s online ecosystem.

The global pandemic has driven demand for greater resilience and security of supply chains, further reinforcing this structural shift. Global supply chains are starting to fracture, which poses challenges but also opportunities for those companies able to effectively navigate this changing environment.

Adapting to Structural Change

In our view, the sheer size and efficiency of China’s manufacturing sector will ensure it remains a crucial part of global supply chains for years to come. It is those companies integral to global technology hardware production—supplying key products to both China and the United States—that may have to be most adaptive. As active, engaged investors, we identify three characteristics that may facilitate success:

  • Intellectual Property: Semiconductor foundries benefit from the structural themes driving global demand for computing power, rather than being dependent on the fortunes of specific companies—whether Chinese or American. Technological leadership enables a virtuous cycle of growing market share that funds research and development and increased capital expenditures.
  • Improving Competitive Dynamics: US tariffs and sanctions have negatively impacted the competitiveness of certain Chinese technology companies, entailing opportunities for others to grow international market share in smartphones and fifth-generation (5G) network equipment.
  • Global Diversification: As supply chains fragment, those companies with pre-existing worldwide production capabilities will likely demonstrate greater resilience and adaptability.


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What Are the Risks?

All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. The technology industry can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants as well as general economic conditions. Smaller and newer companies can be particularly sensitive to changing economic conditions. Their growth prospects are less certain than those of larger, more established companies, and they can be volatile.

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