An Investor’s Guide to Evolving Supply Chains

Many companies are rethinking supply chains amid disruptions from the war in Ukraine and the pandemic. Equity investors must decipher which companies can adapt their processes to compete in a less globalized world.

Solving the supply chain problem is one of the biggest operational challenges facing companies after decades of globalization. Beyond the geopolitical risks, the business benefits of offshoring are coming into question. Offshore wages are rising (Display, left), while increasing automation is reducing the higher cost of domestic labor needed to manufacture closer to home. Shipping costs have skyrocketed (Display, right). And for US companies, domestic energy costs are much cheaper than abroad, while tariffs stemming from US-China trade disputes have added another layer of costs.

These trends are eroding the economic rationale for offshoring. Offshoring generally makes sense if a company can produce a good for at least 20% less than in its home country. As companies and investors reassess the trade-offs, they may also demand a greater offshore discount to compensate for escalating supply chain risks. Here are some of the key issues equity investors should watch to find companies that are ahead of the reshoring curve.

Capex clues: How a company invests for the future can indicate whether it’s shifting production toward new regions to avert future disruption. In some industries, we’re seeing huge capital expenditures in manufacturing facilities to improve regional alignment with customers and revenue.