More global companies are recognizing the importance of diversifying their supply chains to mitigate geopolitical risks. They are now emphasizing the advantages of “friend-shoring” their supply chains to better insulate themselves from challenges arising from geopolitical tensions. According to a report by Morgan Stanley, India, Mexico, and Southeast Asia are seen as the best-positioned economies for this transition, with India and Mexico standing to benefit from the localization of supply chains.
Projected Economic and Industrial Benefits
Morgan Stanley’s report highlights the potential growth and benefits associated with supply chain migration. In India, the report predicts a tripling of the manufacturing base by 2031, with its share of GDP rising from 16% to 21% over the same period. Similarly, Mexico is estimated to experience a potential net gain of approximately 30% in exports to the US within five years. This trend is already underway, as Mexico-US trade is now on par with China-US trade. The rise in investment and manufacturing could contribute to an increase in Mexico’s potential GDP from 1.9% to 2.4% over the next five years, according to the report.
Supply Chain De-risking Challenges
While supply chain de-risking is necessary, it is also a difficult and expensive process that may take a decade or longer to accomplish. The transition will involve implementing more protectionist policies. However, it is expected that most companies will maintain a significant presence in China, given its established infrastructure and market. Nonetheless, some major companies, such as Apple’s partner Foxconn, are strategically diversifying their supply chain investments. Foxconn plans to invest $700 million in a new plant in India to reduce risks associated with US-China tensions.
Adoption of ‘China+1’ Strategy
To expand their production footprints and reduce dependency on China, many companies are adopting a “China+1” or even a “China+N” strategy. This approach involves expanding production into Southeast Asia, Mexico, and India, and reshoring production in regions where it is capital-intensive or easily automated.
China’s Unique Economic Impact
The report acknowledges the exceptional role China played in the structural shift of global trade from the 1990s to the 2000s. China’s integration into the global economy was a historic event that cannot be replicated by other emerging market economies, such as India, Indonesia, or the Philippines. These economies do not have the same value or volume gap to close as China did between 1990 and 2010.
Progress of Supply Chain De-risking
The process of de-risking supply chains from China is expected to progress slowly. Tech hardware production that moves away from China is likely to flow towards Southeast Asia and India rather than North America. China currently accounts for 34% of the global manufacturing GDP ($4.9 trillion out of $14.2 trillion). As a result,an estimated $846 billion of manufacturing output, equivalent to 6.0% of the global total, could be at risk due to potential loss of international production and exports.
Projected Growth Gains for Countries
If supply chain flows were to be resettled overnight, some countries would experience significant growth gains. According to the report, the US, India (with a doubling of its share from 3.1% to 6.2%), and Southeast Asia would be the countries making “share gains.” On the other hand, regions such as EMEA and Japan are expected to maintain their existing shares of global manufacturing output. India, in particular, could witness an 11..
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