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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