Tensions with China to Push Companies to Diversify Manufacturing

Growing geopolitical tensions, particularly with China, are likely to encourage companies to diversify where they build their new factories in the coming years, says Menno Middeldorp, head of RaboResearch at Rabobank.

Speaking at The Working Capital Forum Europe in Amsterdam on 1st December, he forecast that China may lose its “lion’s share” of the total volume of new factories and foreign direct investment that it has become use to in recent years.

The lingering aftermath of the covid pandemic coupled with the heightened tensions between the US and China may push many global corporates to consider building factories in new locations or even in their home country.

The trend towards “reshoring” or “nearshoring” is being widely and increasingly discussed and is being reflected in the economic data, Middeldorp remarked.

Manufacturers are beginning to ask themselves where “can I build confidently where it won’t be part of a conflict between my country and another country”.

“As long as you think it is a risk – it makes sense to diversify their manufacturing base,” he said.

India is one country that Middeldorp sees “benefitting from the geopolitical change in direction” – given the country’s friendly relations with the US and its lack of reliance on China among other factors.

Latin America is another region that could benefit from this trend towards diversification, says Middleldorp.

The potential impact of this trend on supply chains could see companies look to have higher inventories to be “robust” in different scenarios, he added.

Middeldorp also outlined his forecasts for inflation and interest rates, painting a relatively gloomy picture of high – although stable – food prices over the next year.

While gas prices in Europe have slightly come down, he forecasts a potential hike in prices once again next year as the region approaches winter 2023.

Europe is currently using up high reserves built with Russian gas, he explained, noting how by next year these reserves would have dwindled, which will inevitably push up prices.

He forecasts that world trade growth will slow in 2023 with recessions expected.
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Reflecting on the actions of central banks to try and control inflation, he asks “the real question is how fast will inflation come down” – noting that although inflation is edging down, it is still nowhere near the 2 percent target held by most countries in Western Europe. 

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