As global-supply-chain strategies evolve and geopolitical dynamics shift, nearshoring, friendshoring and reshoring have emerged as key corporate strategies that prioritize supply-chain resilience over immediate cost-cutting concerns. Mentions of these supply-chain strategies in multinational corporations’ earnings calls have risen sharply since 2020.[1] Climbing costs associated with port bottlenecks, parts shortages and shipping costs have contributed to the growing reassessment of supply chains.[2]
The global nearshoring trend may not displace China as the world’s largest manufacturing base. Many companies, however, may shift to a “China plus one” or “China plus many” strategy, maintaining some operations in China, for example, to serve the local market, while adding facilities elsewhere. Moreover, diversifying supply chains away from China could be challenging for some companies, especially in certain industries, and may take considerable time to unfold.[3]
Supply-chain changes link to seven key portfolio areas
Either China-plus strategy could offer both opportunities and challenges to institutional investors, potentially influencing some of the most important decision areas in portfolio construction.
Country beneficiaries. As manufacturers seek to diversify their supply chains, some emerging- and frontier-market countries with untapped manufacturing capacity, particularly in Asia (Malaysia, Thailand, Vietnam and India[4]) and Latin America, stand to be the potential front-runners of a China-plus strategy. For example, at the beginning of 2023, Mexico replaced China as the U.S.’s top trading partner, benefiting from geographic proximity, a strong manufacturing-based economy, skilled workers and free-trade pacts.[5] The primary candidates to be China-plus beneficiaries offer competitive labor costs, geopolitical friendliness to key developed-market nations and a strategic geographical location.
In a twist on the nearshoring trend, some Chinese manufacturers are themselves moving their late production stages to neighboring nations, as geopolitical tensions and tariffs rise.[6]
Global investment themes. Many of the likely China-plus beneficiary countries are grappling with labor and skill shortages. Robotics and industrial automation may help bridge the gap, presenting investment opportunities in companies with these thematic exposures. Year to date through Sept. 12, 2023, robotics and artificial intelligence has been one of the best-performing thematic segments based on the MSCI ACWI Investable Market Index (IMI), posting a return of 42.4%. The nearshoring trend may fuel ongoing interest in the theme.
Commercial real estate. The nearshoring trend entails a shift from “just in time” logistics and lean inventory to a “just in case” model, in which firms scale up the amount of warehoused goods. This may lead to greater demand for warehousing and manufacturing facilities in the China-plus beneficiary countries, possibly leading to a commercial-real-estate boom in some markets.
The higher demand surfaced, for example, in central and eastern Europe as the logistics segment of the real estate market expanded sharply from 2018 to 2022 with multinational companies strengthening their supply chains by nearshoring.[7] And beginning in 2020, demand for logistics infrastructure in southeast Asia’s emerging markets climbed swiftly, due in part to domestic economic growth and relocation of production facilities from China.[8]
ESG and climate. While nearshoring reduces the carbon footprint associated with long-distance transportation, constructing new facilities has an impact on the environment. As companies relocate supply chains to withstand disruptions, they may choose to maximize their investment in climate-related innovation, scale sustainable finance and attempt to turn the risks of the net-zero transition into opportunities. Investors attuned to this possibility may identify related investment opportunities.
Industry implications. The industries with complex, global supply chains, such as semiconductors and pharmaceuticals,[9] may be most affected by the nearshoring trend. On the one hand, some developed-market companies in these sectors could face significant costs associated with reconfiguring their supply chains, thus reducing their profitability. On the other hand, emerging-market companies in candidate China-plus countries that supply these industries may benefit.
Another way to assess the industry implications of nearshoring is to examine which industries in China have the highest economic exposures to developed-market countries. High exposure may be a harbinger of upcoming change in these industries.
Geopolitical risk. As the nearshoring trend has gained traction, geopolitical risk has become a more explicit input in investment strategy. Even companies engaging in friendshoring, which encourages sourcing from geopolitically allied countries, may be vulnerable to shifting geopolitical tensions. Alliances can be fluid and unpredictable, and companies may choose to hedge their associated risks by spreading production facilities across several friendly countries or bringing them onshore. Monitoring the stability of a company’s geopolitical ecosystem may become more important for investors.
Macroeconomic trends. Nearshoring could stimulate economic growth in the beneficiary countries through job creation and infrastructure development, leading to increased capital expenditures in the global economy. At the same time, global inflationary pressures could build from increased demand for resources and labor. Greater trade fragmentation could also entail costs to economic growth. The IMF estimates that the move toward economic blocks with higher foreign-direct-investment barriers could cause a 2% drop in long-term global economic output.[10]
The trend toward China-plus strategies likely has consequences for equity allocators
If nearshoring, friendshoring and reshoring strategies are widely adopted around the world, the deglobalization trend could cause significant shifts in the global economy. The repercussions could influence investment strategies and equity allocations, particularly for the emerging markets. In future blog posts, MSCI Research will examine in more detail the strength of the deglobalization trend as well as the investment opportunities and risks associated with it.