There is an entire global chain behind the most common investments

Following the global supply chain

October 5, 2018 • GLOBAL SUPPLY CHAIN

It often starts somewhere deep below the earth’s surface, where miners chip away at geological deposits millions of years old, extracting resources like europium for our plasma screens and copper that will eventually be moulded into the chips that enable our computer circuit boards. Further along the supply chain, a robotics team will then assemble the laptop before it’s off to logistics, destined for consumers in all corners of the world – from Shanghai, to Vienna and Chicago, and more.

Never before have the world’s supply chains become so intricate and fluid, shifting as new markets and suppliers emerge to provide the bits and pieces that go into our consumer goods, while others move up the value chain to tackle more complex tasks. From an investment perspective, this means going beyond the data points related to an end product and looking at the individual contributors in the network as potential opportunities.

A new network is on the rise

It’s hard to believe that the notion that developed countries would work with supplier companies in emerging economies to cut costs is only a few decades old. The trend really gained momentum following the former North American Free Trade Agreement (now USMCA), when U.S. car manufacturers outsourced much of their labour to Mexico.

The next iteration of global outsourcing has evolved from seeking cost-effective labour to sophistication of technology. With companies focused on their sweet spot – product design and brand – they’ve turned to global suppliers to take advantage of their specialized strengths and expertise for further economies of scale.

China, as an example, has undergone an astonishing transformation – from serving as an imitator and the world’s factory floor for cheap goods, to a country on the cusp of leading the world in technological innovation.

While China is moving up the value chain, other Asian countries such as Vietnam, Malaysia and India are stepping up the chain as well. In Vietnam, the combination of cheap, highly-skilled labour and a push from government have attracted investment with new suppliers setting up shop.

 

The technology transformation

Three decades of hyper-globalization, fuelled by the advent of AI and worldwide connectivity, is also giving way to a change in the supply chain that should not be overlooked.

Take Adidas, the global athletic brand giant. The company has built an advanced automated facility in Germany using 3D printing that promises to develop, manufacture and restock footwear in a matter of days, as opposed to international orders taking many months, all with a fraction of the standard workforce.

By improving efficiencies, a change in production processes also has the potential to strengthen company balance sheets with reduced inventory costs, lower capital spending, shortened transition lag and overall improved return on invested capital. The downside is that easy access to technology such as 3D printing also lowers barriers to entry, potentially increasing competition for reigning brands too.

All told, these combined forces are revolutionizing the supply chain as we know it. At AGF, our global mindset allows us to dissect and better understand the evolution of this next generation network in order to deliver stability for investors during a period of rapid change.

Commentaries contained herein are provided as a general source of information based on information available as of October 5, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.

References to specific securities are presented to illustrate the application of our investment philosophy only and are not to be considered recommendations by AGF Investments. The specific securities identified and described herein do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.