Supply Chains May Move Closer to Home – And Allies – Says Morgan Stanley

If given the choice, many people would opt to do business with neighbors and friends rather than distant strangers. The world economy may be following such personal preference, if Morgan Stanley analysts are correct.

According to an analysis published by the investment bank in July, trade among regional partners in multiple political and economic centers may replace the current model, which centers around just a few economic powers and deep global interconnectedness. Since the late 20th century, ideas, goods, services, and capital have been crossing borders and connecting world economies. With technological advances, this trend had been expected to continue, the analysis claims.

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But new factors, including the COVID-19 pandemic, changes in consumer preferences, increased purchasing power in emerging markets, and geopolitical shifts such as tariffs, have inspired thoughts of “slowbalization” rather than perpetual globalization.

“We expect these forces to drive governments and corporations to invest substantially in on-shoring, near-shoring, and friend-shoring for value chains,” Michael Zezas, Head of U.S. Public Policy Research and Municipal Strategy at Morgan Stanley Research, said in the report.

Whether, or to what extent, companies make the transition is unknown. Just 4% of North American management teams surveyed said they were “highly receptive” to making adjustments to their supply chains. In Europe, the figure was 7% and in the Asia Pacific, 21%. Risks for companies include potential lack of labor and logistics in new locations, maintenance of supply from old locations while transitioning, and competitive disadvantages if competitors don’t change their strategies, too.

Morgan Stanley noted that different industries would need different amounts of time to revamp their processes but cited a three to five year period, on average. And, certain sectors may find a conversion more strategic than others.

“The sectors we’re watching that may benefit from spending on supply chain realignment include semiconductor capital equipment, automation, clean tech, defense and cybersecurity, industrial gases, capital goods, and metals and mining,” Zezas said.