COVID-19 Pandemic Accelerating ‘Re-Shoring’

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

COVID-19 has been detrimental to the global supply chain that fuels the consumer electronics industry. In a recent report, IDC said that there's an 80% chance for significant contraction in worldwide semiconductor revenues in 2020 instead of a previously expected minor overall growth of 2%, as factories slowly reboot and their respective suppliers recover. Knowing that a protracted period of stagnant supply chains could be equally as economically damaging as the pandemic itself, Japan has put in place a program to provide emergency loans to companies to accelerate the 're-shoring' of overseas factories.

According to the Nikkei Asian Review, the state-run Development Bank of Japan has allocated $9 billion for loans to companies to be used in supply chain restructuring due to COVID-19. In addition, Tokyo has earmarked funds for wage subsidies to offset the higher labor costs in Japan as well as to purchase labor-saving devices such as robots or other means to automate factories. According to data from the country's Ministry of Finance, imports from China dropped by nearly 50% in February as mass quarantine crippled China's industrial capacity (China's National Bureau of Statistics said that industrial output had dropped 13.5% for the first two months of the year).

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COVID-19 Accelerates Trends

Before the COVID-19 pandemic began, companies were aggressively moving factories away from China in order to escape tariffs. In this case, both Taiwan and Japan were big beneficiaries as firms that moved away to China in the 1990s chose to increase capacity in their home countries to avoid potential tariffs.

According to a mid-2019 report from Nomura, Taiwan was a "trade war winner" as the country's economic growth was poised to surge thanks to this trend. The report identified 40 companies that were in the process of expanding their capacity in Taiwan, investing billions of dollars and hiring thousands, in order to have their products labelled as "Made in Taiwan" instead of "Made in China".

In mid-2019 the IMF forecasted Taiwan’s GDP growth to hit 2.5% by year's end. In comparison, manufacturing rival Korea, which signed a much-celebrated free trade pact with China in 2014, is expected to grow at 1.8%, while financial and logistics hubs Hong Kong and Singapore are forecasted to grow at 2% and 1.5% for the year respectively.

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Vietnam is also a winner from the trade war, as firms looking for a new hub for low-end manufacturing have flocked to the country in search of a low-cost center for manufacturing that's not China. Years ago, Foxconn saw the writing on the wall and even before Trump was elected President it began preparing for a post-China manufacturing industry by moving facilities and investing in labour-saving technology as well as factory automation. Vietnam was first, then came India.

A Pandemic That Changes the World

IDC quantifies the impact of COVID-19 to the semiconductor market at $25.8 billion. The research firm predicts that even if the pandemic subsidies within a month, the impact to the market -- and the broader consumer electronics market -- will be felt for the rest of the year.

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The reality is, in an era of pandemic and trade wars supply chains that spread around the world are probably going to be a by-gone era. With automation and robotics, the need for all parts of the manufacturing process to be in countries with a low cost of labour will be a thing of a past. Indeed, as COVID-19 drags down the GDP of major world economies by the double digits there will be plenty of stimulus dollars available to ensure that manufacturing is repatriated and stays put.

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