Before the world had even heard of the coronavirus, the intricate transnational trade networks that feed the modern factory already appeared vulnerable. A wide range of forces are responsible: From trade disputes to national security concerns to climate change and the rise of automation and robots. “It’s not just one factor but many,” says Candace Browning, head of BofA Global Research. “And what’s remarkable is that they’re all happening at the same time.” The result? A fundamental—and accelerating—shift toward de-globalization, as more and more companies are bringing supply chains, manufacturing and jobs closer to home, according to a report from BofA Global Research, titled Tectonic Shifts in Global Supply Chains.
What does this mean for the U.S. and global economies? How might companies best adapt to the changing environment, and could this present new opportunities for investors? Co-authors Browning and Ethan Harris, head of Global Economics for BofA Global Research, share their thoughts on this evolving trend and the seismic changes it represents.
What ignited your sense of urgency around the changes that may be underway in the global economy?
Candace Browning: We’re always looking beyond daily events at bigger economic trends affecting the United States and the world. We’d heard that companies were thinking more locally but wanted to gauge whether it was myth or reality. So, we surveyed our international team of equity analysts—who together cover some 3,000 global companies—and were struck by what we found. Across 12 industries ranging from semiconductors to capital goods, companies in more than 80% of those industries are rethinking, or plan to rethink, at least some of their supply chains. We weren’t surprised that companies are shifting from China towards lower labor costs in Southeast Asia and India. What really did surprise us was the number of companies, particularly in North America and Asia, that intend to “reshore” supply chains to their own country or region. Firms in almost all industries plan to make the transition work using robots and automation. Our forecast that industrial robots will double to 5 million units by 2025 may be conservative—and the cost of automation and robots keeps going down.
“What really did surprise us was the number of companies, particularly in North America and Asia, that intend to ‘reshore’ supply chains to their own country or region.”
- Candace Browning
Head of BofA Global Research
What exactly are supply chains, and why is this shift so significant?
Ethan Harris: For 60 years after World War II we witnessed a steady rise in international trade and revolutionary changes in how products are made and sold. Today, through complex networks of suppliers, a single smart phone or appliance contains parts sourced from many countries. In the last decade, though, international trade has leveled off, and our new findings suggest that what had seemed a relentless march toward globalization may now be reversing. Of course, that doesn’t mean that international trade will end. But when you consider that the companies in the 12 global industries we cover represent $22 trillion in combined market value, even incremental shifts toward “de-globalization” could have major implications for economies, jobs and consumers.
Why now? What’s driving this trend?
Browning: Higher wages in the developing world and advances in automation are reducing some of the cost benefits that have long made overseas suppliers so attractive. Another factor is ongoing trade tensions, even taking into account the new Phase-1 trade deal between the United States and China. National security is a growing concern as countries seek to protect their technologies. From an environmental, social and governance perspective, sourcing parts locally may leave a smaller carbon footprint and help companies ensure that suppliers treat employees well. It’s too early to know which of these forces will play the most important roles in de-globalization, but we’ll be watching developments closely.
Who might the beneficiaries be, and where are the challenges?
Harris: U.S. companies seem most ready to embrace automation and its cost savings. Technology companies and their suppliers could benefit as demand for robots rises. Generally, larger companies tend to have multiple suppliers and their scale may give them greater flexibility to adjust supply chains. China faces perhaps the greatest challenges. The underlying story is positive, with a rising middle class earning more money. But that means China needs to speed up its effort to depend less on exports and more on domestic consumers and services. The coronavirus, which has forced a number of Chinese factories to slow down or stop production altogether, contributes to these pressures.
Browning: Small U.S. businesses may also benefit as part of industrial “clusters” that develop when large manufacturers move into an area. Manufacturers spend 5.5% of domestic net sales on research and development, compared with 3.6% for non-manufacturers, so that, too, creates opportunities for companies that support them.1 In some cases, reshoring will mean moving supply chains to nearby developing countries. So Mexico is likely to benefit from reshoring of U.S. companies, for example.
What does all this mean for workers and consumers now?
Browning: Some 400,000 U.S. factory jobs are currently unfilled, and companies are going out of their way to lure job seekers with higher wages, signing bonuses and other benefits. Moving supply chains closer to home will increase the demand for skilled workers such as welders, engineers and machine programmers—and manufacturing jobs already pay 15% more in total compensation than nonmanufacturing jobs.2 So, wages are likely to grow. But jobs, too. Ten years ago, conventional wisdom held that workers were all going to be replaced by robots. Yet while automated factories do require fewer employees, every new manufacturing job generates an estimated six additional jobs indirectly.
The benefits may be less pronounced among service companies, and unskilled workers will face steeper challenges. So companies and policymakers alike will have to emphasize retraining and other programs to help give workers the skills they need for the new manufacturing landscape.
Harris: For consumers, a lot depends on what the major forces behind de-globalization turn out to be. If it’s mostly about trade barriers, consumers will pay higher prices, which is obviously not good for them. But if it’s because companies find greater efficiency through automation and lower shipping costs, that’s good news for everyone. That story is still unfolding.
What risks does de-globalization present?
Harris: Protectionism or national security could prompt government anti-trade policies that make this process happen much too quickly. In the technology sector, for example, different countries have developed very different capabilities. Forcing everyone to suddenly shift to local supply chains would be incredibly expensive and quite disruptive. One of the toughest challenges for governments will be finding ways to address national security concerns while minimizing those disruptions.
“We’re calling this a ‘tectonic’ shift because we expect things to move slowly but persistently over the next five or 10 years. It won’t happen overnight, but some of the forces seem unstoppable.”
- Ethan Harris
Head of Global Economics
BofA Global Research
How quickly do you expect these changes to take place—and what should investors watch for?
Harris: We’re calling this a “tectonic” shift because we expect things to move slowly but persistently over the next five or 10 years. It won’t happen overnight, but some of the forces seem unstoppable. National security and protectionist concerns aren't going away. Automation’s not going away. Labor costs in China aren’t going to suddenly drop.
Browning: While de-globalization is likely to play out over a number of years, a look at market values and fund investments tells us that investors may not be fully prepared for a sustained recovery in manufacturing that could begin by mid-2020. We see opportunities ahead for industries ranging from automation to industrials to the banks that will help finance changes in supply chains. For these reasons, we believe investors should start thinking now about the implications for their portfolios, and how they can prepare for the global shift.
Read the Report
For a deeper look at de-globalization and its implications for the U.S. and global economies, read the report:
1National Science Foundation, National Center for Science and Engineering Statistics, 2016
2Economic Policy Institute (Adapted from Langdon and Lehrman, 2012)
1For more information about any awards cited, visit http://go.bofa.com/awards
READ THE REPORT