U.S. multinationals have been at the forefront of the golden era of globalization, building out some of the most extensive supply chains in the world to their competitive advantage. However, the tide of globalization is in retreat, and the pendulum is swinging back toward protectionism, populism and nationalism. Escalating trade tensions not only portend weaker global growth and added market volatility near term but also a long-term rethink among multinationals on how to do business on a global scale.
What do investors need to know as the global supply chain starts to unwind? Joe Quinlan, head of CIO Market Strategy for Merrill and Bank of America Private Bank, says one of the main beneficiaries will be automation – or advanced robotics, artificial intelligence, additive manufacturing (3-D printing), digital platforms and related activities geared towards the ability to suppress costs, boost margins and nimbly reach more-demanding consumers.
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Moreover, despite higher relative U.S. labor costs, he sees the U.S. emerging as one of the most attractive places in the world for investment, particularly new greenfield investment among foreign investors.
The Golden Era for Multinationals is Over-Now What?
For decades, the world was their oyster. China’s “opening” to the West in 1979; the collapse of Communism in 1989; sweeping economic reforms in India in 1991; the creation of the European Single Market in 1992; the passage of the North America Free Trade Agreement in 1994; the European Union “enlargement” to 28 member states earlier this century—all of these seminal events helped forge a golden era for U.S. multinationals.
So did the spread of globalization—or unfettered cross-border flows of capital, goods, ideas, people and data—which knitted more and more nations into the fabric of the global economy, giving multinationals access to more resources, more workers and more consumers. One key upshot: rising earnings from abroad, with Rest of World profits of American firms rising by over 250% since the start of the century, or 6.9% annualized.
Falling transportation and communication costs also helped to grease the wheels of global commerce, allowing U.S. firms to operate virtually any place in the world. With American firms in the forefront, global foreign direct investment outflows have soared over the past few decades, rising from an annual average of just $47 billion over 1980–85 to an estimated $1.2 trillion last year. The more the investment, the more the trade, with global trade regularly outpacing the rate of global growth for decades. In turn, the combination of rising trade and investment has meant thicker and more complicated global supply chains and the rise of foreign affiliates as the main conduit for global commerce. Think of the latter as foot soldiers of globalization. They are at the core of any global supply chain—and key cogs in the financial success of any multinational. They are also the bedrock of the global economy.
According to the latest figures from the United Nations, the total assets of all foreign affiliates in the world topped a staggering $100 trillion in 2017, with total affiliate output (value added) in excess of $7.3 trillion, a figure well in excess of the aggregate output of the world’s largest economies, save China and the U.S. Affiliates employed over 73 million workers worldwide in 2017, while sales of affiliates were nearly $31 trillion. Affiliate sales were some 34% larger than global exports of goods and services in 2017, and accounted for roughly 38% of world GDP versus 29% for global exports (Exhibit 1).
Underscoring the importance of foreign affiliates to U.S. multinationals, sales of affiliates totaled an estimated $6.9 trillion in 2018, almost three times larger than U.S. exports.  With more than 37,000 foreign affiliates scattered around the world—from Albania to Zimbabwe— U.S. multinationals have been at the forefront of the golden era of globalization, building out some of the most extensive and thickest supply chains in the world to their competitive advantage. As a real world example of a global supply chain—in this case Boeing—take a look at Exhibit 2, which underscores the complexity and global scale of building/assembling an aircraft.
However, given all of the above, times are changing. The days of U.S. multinationals being largely unbound are over. The tide of globalization is in retreat. To the disadvantage of many firms operating outside their own borders, nationalism and populism are on the rise around the world. Rather than being seamless, the world is becoming balkanized or fragmented, which is another way of saying that the golden era for multinationals is history.
The past won’t be the prologue, so what now?
It’s a new world for multinationals. Forty years of declining tariffs and non-tariff barriers, and relatively open borders that allowed companies to disaggregate production around the world, is reversing. The pendulum is swinging back toward protectionism, populism and nationalism, all of which are inimical to globalization and existing global supply chains of multinationals. Escalating trade tensions between the U.S. and China—in addition to friction with Mexico, India and Europe—not only portend weaker global growth and added market volatility near term but also a long-term rethink among multinationals on how to do business on a global scale.
Complex, multinational supply chains are under review and are likely to be gradually unwound in the years ahead. Where for the past four decades global manufacturing operations of firms were geographically diffuse, with plants spread across borders and reliant on a network of international suppliers, future operations will be more local and regional in scope. Think less ‘offshoring’ of production and a movement to ‘re-shore’ or ‘near-shore’ – that is, for U.S. firms to perform more of their manufacturing closer to home—a la Tijuana, Mexico or Toledo, Ohio. Given the ongoing spat with Mexico, the latter looks more attractive.
The U.S. is hardly the cheapest place in the world to manufacture, but higher relative U.S. labor costs will be offset by increased automation, greater supply chain mobility, lower shipping costs and very competitive energy costs thanks to the American energy renaissance. Add in tax reform and other government incentives like job training credits and favorable treatment of capex spending, in addition to a large and wealthy consumer, market, and the U.S. emerges as one of the most attractive places in the world for investment. (As a footnote, and as we recently highlighted, the U.S. ranked first in terms of new greenfield investment among foreign investors in 2018).
One of the main beneficiaries around the rethink and reconfiguration of global supply chains will be automation, in our opinion—or advanced robotics, artificial intelligence, additive manufacturing (3-D printing), digital platforms and related activities geared towards the ability to suppress costs, boost margins and nimbly reach more-demanding consumers. Yes, lower-cost locales like Vietnam, Cambodia and perhaps Mexico will see a rise in foreign direct investment. But the attractiveness of these nations will be offset by the rapid adoption of robotics and related activities, the next advancements in 3-D printing, and the growing penchant among multinationals to shorten and simplify their global supply chains, and “build where they sell.”
U.S. firms bringing their supply chain closer to home will allow them to better serve the end consumer in two main ways. The first is simply by granting them more flexibility to respond to new orders and to reduce delivery times. But second, and perhaps more important, is by improving their product offering via better-integrated research & development (R&D). Housing manufacturing alongside core activities such as design, marketing and product development, the argument goes, should help to spur innovation, increasing responsiveness to shifts in consumer preferences and boosting competitiveness and profitability in the process.
Among sectors, robotic manufacturers should stand to gain as global robotic penetration accelerates not only in the U.S. and the developed nations but also in the emerging world, notably China. The mainland is already one of the largest users in the world of robots and will maintain this position as it adopts to the new world order in trade and rising wage costs at home.
Although the U.S. capex cycle has recently lost momentum (Exhibit 3), we believe that demand for robotics and AI/data-driven production processes among multinationals is a secular trend that should help boost investments in capital equipment and intellectual property products (i.e., software, R&D spending) over the long run. This shift toward more automated manufacturing provides an important buying opportunity for long-term investors considering building exposure in leading global robotics companies.
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 Source: Bureau of Economic Analysis, total sales of all foreign affiliates.
 See Capital Market Outlook, May 20, 2019, “Global Greenfield Investment: America is First.”