The term “+1” is most commonly used in reference to RSVPs to a wedding or social gathering. It grants the invited guest permission to bring someone with them to the event. Economically, one of the hard lessons we learned during the coronavirus pandemic was that many companies and industries need to invite a “+1” into their supply chains.
Major components of the supply chain broke down during the COVID-19 crisis. This resulted in shortages of microchips, medical supplies, manufactured goods, and automobiles. Prior to the pandemic, companies had spent the last 20 to 30 years consolidating their manufacturing operations in the cheapest and most efficient countries. This often led them to Southeast Asia, and in particular China.
As with many things in life, this worked great until it didn’t. It enhanced corporate profits and lowered consumer prices. During the pandemic, we learned firsthand how difficult and dangerous this can be when these supply chains get disrupted and cause real problems.
Many US companies are now considering diversifying their supply chains with a focus on redundancy and reliability over just minimizing costs or maximizing profits. Some companies are bringing manufacturing back to the United States, or at least moving it closer to more friendly partner countries.
Contrary to popular belief, this does not mean that China will no longer be a major manufacturing hub in the global economy. However, many companies are creating a “China +1 strategy”. They are maintaining their current operations in China but adding new or additional facilities at home, or in places such as Mexico.
This also does not mean that globalization is going away. As you can see in the chart below provided by our friends at Capital Group, and the American Funds, world trade, as a percentage of global GDP, grew in a slow but steady ascent for nearly forty years. However, this has moved in a sideways direction since the 2007-2009 Global Financial Crisis and was exacerbated further by the 2020-2023 COVID-19 pandemic.
Globalization marches on — at a different pace
Sources: Capital Group, Organisation for Economic Co-operation and Development (OECD), World Bank. World trade is calculated as the sum of exports and imports of goods and services, and is represented above as a share of global gross domestic product. Trade data as of 2021
While this process of re-shoring or near-shoring our manufacturing has definitely started, it could take many years for companies to make significant progress. As always, there will be winners and losers over the next decade as this plays out. The CFPs of Impel Wealth Management will seek to identify trends that could help our clients make smart financial decisions and to build their family’s wealth. We wanted to share this important idea and trend with you as we continue “Moving Life Forward”.
© 2023 Jesse Hurst
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.