A THREE-decade-long process of globalisation now faces a number of challenges:
- Geopolitical tensions between the US and China have been growing for some time
- Supply chain disruptions stemming from the Covid-19 pandemic have forced companies to consider whether resilience is more important than cost
- Russia’s invasion of Ukraine highlighted the risks of relying on a small handful of suppliers for key commodities such as natural gas.
Security is becoming a paramount concern in terms of defence, energy supplies, or security of information or technological know-how. As a result, headwinds against globalisation have strengthened and there is an unpicking of some trends of recent decades. We believe this will have a knock-on effect on many aspects of corporate behaviour.
Certain investment themes will come under the spotlight as a result. Here, we look at the impact of the process of deglobalisation on some of our favoured themes: smart manufacturing; energy transition and climate change; and the circular economy.
Smart manufacturers enable industrial independence
Manufacturing reshoring or “near shoring” – bringing production closer to a company’s home market – is already underway. Smart manufacturers stand to gain the most from this shift. They are the suppliers of sustainable innovations in hardware, software and new materials, and help to facilitate manufacturing independence.
The semiconductor sector is leading the reshoring charge. US concerns about overreliance on China for the manufacture of high-end semiconductors led to the passing of the Chips Act in 2022. This includes US$52.7 billion of incentives for semiconductor research and development and manufacturing.
It goes beyond chips. The US has also passed the Inflation Reduction Act (IRA) which envisages the mobilisation of US$1.5 trillion of capital into clean energy, including advanced manufacturing production credits. Europe has followed suit with its Green Deal Industrial Plan (GDIP) which offers 390 billion euros (S$572.5 billion) of funding to enhance the EU’s manufacturing strength in strategic technologies such as solar and wind energy, heat pumps, and batteries.
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These plans aim to ensure secure supply of the critical technologies needed for major shifts in digitalisation and the transition to green energy. They also aim to create skilled jobs and “future-proof” the competitiveness of the US and European economies.
Smart manufacturers are also at the leading edge of the wave of innovation in artificial intelligence (AI) and robotics. Robotics can bring down the cost of switching from a low-cost manufacturing site to a higher cost one. This may be especially important in regions where there are already labour shortages.
Like many Western nations, China faces a demographic challenge as the working age population shrinks. Labour shortages tend to push up wages, potentially encouraging companies to invest in automation.
Innovations such as embedded AI and better vision systems, as well as price deflation, are making automation investments the most economically attractive they have ever been. Smart manufacturers producing equipment such as robotics or sensors will be the winners here.
War and energy security
The imperative to switch from fossil fuels to green energy to limit global warming is well understood. But part of the reason why governments are keen to invest in energy transition technologies is to ensure the security of supply. The danger of relying on others for energy has been demonstrated by the impact of Russia’s invasion of Ukraine on natural gas prices.
Countries can become self-sufficient in energy if they rely on wind, solar, wave or biomass power. Hence in the US, the desire for energy self-sufficiency has helped to drive the wave of government stimulus directed at renewable energy – such as IRA in the US, and GDIP in the EU.
Of course, just because governments are seeking to expand renewable energy capacity and attract businesses dealing with renewables to their countries does not mean that only companies domiciled in those countries will benefit. Many of those who would benefit from the push for energy security and investment are global operators.
The supply chain disruptions caused by the pandemic have been detrimental for many companies operating in the energy transition space. Their earnings and valuations have suffered amid higher raw materials costs and logistical challenges. But those are short-term impacts compared to the long-term structural shift towards renewable energy.
Circular economy keeps goods in use
The move towards a more local supply chain also plays into the circular economy theme.
A circular economy delivers what consumers need. It challenges the existing “take-make-waste” approach, which consumes finite resources that are used briefly and then discarded, often directly to the landfill. A circular economy designs products and services with efficiency, reusability and recyclability in mind.
Keeping products and materials in use locally reduces reliance on distant suppliers, enabling simpler logistics and reducing energy consumption.
The writer is investment director, thematics, Schroders
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