The cost of shifting all export-related manufacturing by foreign firms out of China would cost $1 trillion over five years, said the Bank of America (BofA) in a new report.
The direct impact of this investment would reduce ROE by 70 basis points (bp) and free-cash-flow margins by 110 bp, offset by a potentially lower risk premium, according to the latest BofA Global Research report.
Their analysis excludes operating cost impacts (more expensive labour, less scale & tougher regulations), but also the potential offsets from government incentives, greater use of automation, reduced transportation costs and faster speed to market.
BofA notes that any sustained recovery in capex and manufacturing would have multiplier effects on the broader economy that includes job creation, higher wages, greater R&D spend, more tax revenues and the creation of industrial ecosystems.
The new research finds that Covid-19 has caused 80 per cent of global sectors to face supply chain disruptions, causing over 75 per cent to widen the scope of their re-shoring plans. While Covid has acted as a catalyst to accelerate this change, the underlying reasons are grounded in a shift to ‘stakeholder capitalism,’ concluding relocation favours a broader community of shareholders, consumers, employees and the state.
“Our latest survey found that companies in over 80 per cent of global sectors experienced supply chain disruptions during the pandemic, prompting three-quarters to widen the scope of their re-shoring plans,” BofA said in the report.
“While disruptions from the pandemic might have acted as a catalyst to accelerate re-shoring, we believe that the underlying structural reasons are grounded in an ongoing shift to ‘stakeholder capitalism’ where corporations focus on shareholders’ interests, as well as the broader community of consumers, employees and the state.
“While each of these stakeholders is examining the location of supply chains from very different perspectives, they are - interestingly enough - arriving at the same conclusion: namely, portions of supply chains should relocate, preferably within national borders and failing that, to countries that are deemed allies,” it added.
