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Written by: John Lin
Geopolitical tensions in recent years have prompted companies to reconfigure their supply chains, with US firms increasingly moving production outside of China. Yet even as countries such as Mexico and Vietnam become more prominent in global manufacturing, Chinese companies remain deeply involved.
Deglobalization is changing the way companies in diverse industries manufacture products. Many are moving manufacturing closer to home or to regions that are less likely to become entangled in disruptive geopolitical conflicts.
Trade Winds Flow to Mexico and Vietnam…
As a result, US imports from China have declined since 2018 to about 15% of the total (Display). However, over the same period, China’s exports to the rest of the world have increased.
Mexico and Vietnam have been big beneficiaries of changes to supply chains. But that doesn’t mean China has been removed from the picture. In fact, Chinese exports to Vietnam have jumped by 72% since 2018, while US imports from Vietnam have risen by a similar proportion. Chinese exports to Mexico have surged by 155% over the same five-year period. Even as Mexico and Vietnam enjoy GDP benefits from new sources of trade, Chinese companies are still embedded in the relocated supply chains.
…but Chinese Companies Remain in the Game
The trade data suggest that Chinese manufacturers have quickly adapted to a new reality by setting up shop in favored manufacturing destinations. Many are rerouting a large portion of their shipments and/or moving production sites to other countries. Indeed, our research indicates that Chinese companies comprise about half of Apple’s suppliers in Vietnam.
These complex trade patterns matter for Chinese companies—and investors. While deglobalization and trade risks may have deterred some equity investors from China, the actual impact on individual companies is far more nuanced.
Diversifying supply chains away from China is not always easy to do. Global manufacturers have often found that Chinese companies with essential products for complex production processes are not easily replaced. As US elections draw near, concerns about trade could raise new questions for Chinese companies. Despite the pressures, we believe selective equity investors can find resilient companies in China, with business models that remain integral to global trade and create solid cash flows to support long-term return potential.
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