The cost for U.S. and European companies to move manufacturing out of China could reach $1 trillion over five years, according to new research from Bank of America.
The survey of the bank’s global analysts found that companies in over 80% of global sectors experienced supply chain disruptions during the pandemic, prompting three-quarters to widen the scope of their re-shoring plans.
The research from BofA’s head of global research Candace Browning and her team comes as President Donald Trump on Tuesday pledged to offer companies tax credits to relocate their factories back to the U.S. from China, to reduce the country’s reliance on Beijing.
“We will create tax credits for companies that bring jobs from China back to America,” Trump said in a speech to supporters in Mankato, Minnesota, according to Reuters.
On Monday, the U.S. said it is imposing another round of restrictions on China’s Huawei, as Trump renewed accusations that the company’s telecommunications equipment is used for spying. Huawei has repeatedly denied accusations it might facilitate Chinese spying.
BofA said that even before the pandemic, its survey in January of global analysts confirmed that the trend of globalization to localization was “real and structural.” Six months later, COVID-19 has “turned tectonic shifts to visible fault lines,” the bank’s analysts said.
They projected that the £1 trillion investment would reduce return on equity by 70 basis points (bp) and free-cash-flow margins by 110bp, offset by a potentially lower risk premium. “This would be significant, but “not prohibitive.”
Industries with structurally higher returns — like health care and technology — will be able to absorb this incremental capex, while others, with more muted cash flows, may have to resort to external debt or equity financing.
Investors should buy construction engineering and machinery, automation and electrical and electronic equipment manufacturing stocks to benefit from this theme, the BofA analysts said.
“We expect corporate management and policy makers to aggressively explore ways with which to offset the higher operating costs associated with re-shoring,” the analysts wrote, adding that they while they don’t expect a “silver bullet,” they were struck by the intent to use automation in future locations.
Policy makers are also expected to help through tax breaks, low cost loans and other subsidies, with recent announcements to that effect from the U.S., Japan, the European Union, India and Taiwan, among others.
Banks in North America, Europe and South Asia may also benefit from greater economic activity that would come with these changes.