By Diego Franzin, Head of Portfolio Strategy at Plenisfer Investments SGR S.p.A.
Reshoring, the relocation of production to home markets or neighboring countries (aka, “nearshoring”) is coming sharply into focus among Western companies.
This structural phenomenon was already underway prior to the current economic phase, triggered by rising labor costs in emergent manufacturing hubs and the progressive slowdown of globalization over the past decade. In fact, looking back over recent decades, we saw globalization taking hold in long-term cycles, reflecting the world's geo-economic and geopolitical developments.
The full expansion of global supply chains took nearly three decades, and we can hardly expect the phase of their "shortening" to play out in a few quarters.
The shrinking supply-chain trend has been, in the last two years, accelerated by a pandemic that interrupted manufacturing and dramatically thinned stocks. This was also due to decades of "just in time" policy for non-essential goods, which derailed with the sudden return of demand. The fragility of global supply systems has been amplified recently, first with the start of the war in Ukraine and then with the paralysis of the Shanghai port due to unforeseen Chinese lockdowns.
In short, pandemic and war have catalyzed a structural phenomenon already underway, highlighting the need to diversify suppy chains across several countries in order to avoid the concentration of production in too few geographical areas. As for energy inputs, rethinking supply chains is no longer just about maximizing efficiency, but guaranteeing security and control.
For the reasons set out above, we believe that the reshoring trend is destined to accelerate. Significant initiatives have been planned or are already underway. For example, semiconductor giant Intel recently announced €80 billion in investment in Europe over the next ten years, with three new factories (two in Germany and one in Italy) to be built from scratch.
The McKinsey Global Institute estimates that up to 26% of global production will be subject to reshoring and/or nearshoring, and that companies will need to implement strategies to limit the potential downside of supply chain disruptions, quantified at an average 42% decline in EBITDA over the next decade.
According to a report by Allianz, of about 1,200 multinationals based in the USA, UK, France, Germany and Italy, “15% are considering the possibility of bringing production back to the country of origin, and about 30% could relocate some plants to neighboring and/or friendly countries”. Looking just at Europe, 2021 already witnessed 565 cases of reshoring involving Italian, French, English and German companies (Source: Centro Studi Srm).
Reshoring generally entails an initial bump in production costs due mainly to higher labour costs, which have risen across global economies.
In light of the structural inflationary pressures underway, in Plenisfer we believe manufacturing firms will increasingly supplement automation processes capable of optimizing productivity in the medium term while reducing the overall costs associated with factory relocations.
We believe that reshoring will lead to a profound reorganization of industrial processes, a trend that will generate several possible investment opportunities in the Digital Industry sector and associated technological applications.
We believe that the spread of automation goes hand in hand with a growing digitalization of manufacturing ("Digital Industry”). Collecting and analyzing data is essential to optimizing machine efficiency with increasingly sustainable processes.
At Plenisfer we think advances in the Digital Industry combined with persistent inflationary pressures and ongoing reshoring, will be the factors driving the spread of industrial automation systems, a sector valued at about $175 billion in 2020 and estimated to grow to $265 billion by 2025 (source: The Statesman).
In particular, in recent years technological advances have promoted investments in automated systems based on artificial intelligence and machine learning as well as cobots, or "collaborative robots”, designed to share the workspace with people. These newcomers to the manufacturing scene are easier to program, smaller and cheaper than industry’s traditional robots. The small-scale deployment of the latter — apart from the automotive sector — will make way for, in our opinion, an enormous potential in the large-scale adoption of the newest cobotic systems.
We expect the adoption of automation systems to be driven in particular by energy-efficient cobots of increasing complexity and miniaturization, readily applicable in the fields of microchip or car-battery production, for example.
The lower cost of these automation systems compared to traditional robotics, also makes them accessible to small- and medium-sized enterprises that will benefit from the recent spread of a new business model called Raas ("Robot as a service"). According to this model, the cobot is "rented" by the manufacturing company that pays only for the hours utilized, while the capital investment and maintenance costs are covered by the company offering the “service,” with obvious economies of scale. This solution is based on the increasingly popular "pay per use" technology that we believe is destined for rapid deployment, as seen with the adoption of cloud computing.
In short, with industrial automation we expect to see the same "democratization" of technology that has already benefited consumer electronics: industry 5.0 will be "digitalized" and driven by easily programmable software, increased flexibility and small-scale hardware.
At Plenisfer, we believe that the Digital Industry will also transform logistics and warehouse-storage systems.
We are already witnessing the spread of "proximity" logistics centers developed in parallel with the bigger hubs, leveraging on technological solutions that in the sector are, as mentioned, still not widespread.
The pressure dictated by the constant growth of e-commerce is destined to further transform a logistics sector in search of ever-increasing efficiency. Considering that about 2/3 of the costs incurred by the sector are still attributable to personnel, it is easy to understand how automation is destined to grow in this area as well.
The industrial technology sector has not experienced the explosive growth phase that affected the FANG-led technology sector (Facebook, Amazon, Netflix and Google), at least until last year, characterized by high leverage and Price/Earnings (P/E) multiples topping 30 (compared to average P/E ratios of 8 in the industrial technology sector).
For this reason and for the structural and economic dynamics described, equities in Europe and the USA that represent the industrial technology sector will, in our opinion, have to be carefully evaluated.
At Plenisfer we believe that those players able to offer cutting-edge solutions like cobotics in the digital industry — or advanced software for industrial applications like virtual prototyping — will hold the markets’ attention well into the long term.
This analysis has been prepared for informational purposes only. This document does not constitute an offer or invitation to sell or buy any securities or any business or business described herein and does not form the basis of any contract. The above information should not be used for any purpose. Plenisfer Investments SGR S.p.A. has not independently verified any of the information and does not release.
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