Key takeaways:
- Supply-chain disruptions, geopolitical tensions and export restrictions on cutting-edge semiconductors have led companies to reconsider their reliance on China as their manufacturing base for the world.
- China’s importance in global trade is not expected to disappear. Companies we speak to are not seeking to disengage from China. Rather they are looking to diversify their production to reduce these risks.
- This has led to the emergence of a two-, three- or four-pronged approach: a China plus many strategy. This could result in the creation of many new global manufacturing hubs.
Rising geopolitical tensions and increased sensitivity surrounding production of cutting-edge semiconductors and artificial intelligence technology are contributing to the re-shaping of the global trade landscape. Taken together, this changing environment is leading countries to accelerate efforts to diversify their trade relations and protect their supply chains.
As a result, we have seen the United States, EU and Japan adopt a “de-risking” strategy by realigning their supply chains and strengthening bilateral relations with their European, Latin American or Asian allies. This has been more evident in strategic and sensitive sectors such as technology, defense, health care and green energy.
Diversifying and protecting supply chains has led to the emergence of the “shoring” concept.
- Onshoring—bringing manufacturing back home.
- Nearshoring—shifting production to countries closer to home.
- Friendshoring—building capacity in markets that are considered to be allies.
This report explores these topics and includes case studies covering four key markets: Vietnam, India, Mexico and Turkey. We believe that these markets offer opportunities for manufacturers and investors to diversify their risk.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.