Capital Ideas^TM

Many global companies are moving away from single-source supply chains as reliability and robustness are increasingly prioritised over cost and efficiency.

This has prompted many investors to ask whether multinational companies are more vulnerable to the impact of deglobalisation. The risks are clear: rising US-China tensions, the war in Ukraine, increasing trade barriers, broken supply chains, a painful bear market and a slowing global economy.

Portfolio manager Jody Jonsson invests in many large multinational companies and believes the opposite is true. She argues that multinationals are in many ways best positioned to navigate an uncertain environment and develop effective solutions to disruptions. That includes a “multi-local” approach to business that puts them closer to consumers around the world.

She outlines four reasons she believes multinationals can thrive in tough times.

1.  Multinational can adapt to US-China tensions

The US-China trade war surfaced a few years ago, since then we have seen many twists and turns.

Both countries have hit each other with onerous tariffs and other trade restrictions. China has initiated more trade with Russia, despite international sanctions imposed by the US and European Union. Beyond those immediate issues, we still have a long way to go before the US and China can resolve more entrenched disputes over intellectual property and subsidies for China’s state-owned enterprises.

In the meantime, however, companies that conduct business all over the world are doing what they do best: finding ways to adapt and succeed regardless of growing headwinds.

In the computer chip industry, Taiwan Semiconductor Manufacturing Company (TSMC) and chip equipment maker ASML are both expanding their operations around the world. TSMC is building new manufacturing plants in Arizona and Japan, while Netherlands-based ASML is investing to bolster its operations in Germany, Connecticut and California.

These are examples of the types of companies I like to call “global champions”. As a group, they can weather tough times but also reposition themselves to succeed when things begin to turn around.

2.  Experienced management teams can handle challenges

There is a reason multinational companies have come to dominate the global economy and financial markets. For the most part, they are run by managers who are smart, tough and experienced.

In my view, these battle-tested companies are favourably positioned to survive and even thrive in a hostile landscape.

Nestlé provides a good example of how a multinational can tap into high-tech solutions to streamline its supply chain operations. In recent years, the food giant has increasingly used the blockchain — best known as the foundation of bitcoin-related technology — to enable faster, transparent and more cost-effective delivery of products.

For investors, it is important to avoid focusing too much on the noise surrounding trade, protectionism and geopolitical conflict. It can be easy to get lost in the political rhetoric. There are conflicting data points released nearly every day, and many of them are inconsequential.

3.  Reshoring supply chains is likely to benefit some companies

Many global companies are establishing successful operations in local markets, rather than retreating in the face of trade barriers. That could mean bringing some manufacturing back home, or “reshoring,” and moving some to other countries, such as India, Vietnam and Mexico.

Sports apparel giant Nike has launched data-driven retail stores that stock shoes according to online buying trends in surrounding postcodes. In Europe, Nike has established a speedy supply chain initiative that allows it to tailor colours and materials based on individual customer preferences in each city it operates.

The companies that successfully navigated the COVID crisis were able to quickly expand their online offerings, localise their supply sourcing, produce closer to where they sell and tap into multiple suppliers all over the world. This unpredictable environment played to the strength of multinational companies with the expertise, resources and the money to adapt at a moment’s notice.

4.  Global champions thrive in emerging markets

A multi-local strategy is crucial for companies based in the US, Europe and Japan that are looking to stay relevant or expand into faster growing emerging markets. Countries like China, India and Brazil are nurturing their own multinational giants, as well as smaller, single-country-focused competitors.

For example, Mercado Libre — often referred to as the Amazon.com of Latin America — has done a remarkable job of defending its territory from the exact company it is so often compared to. One of Mercado Libre’s chief advantages is a more aggressive use of third-party sellers, many of which are based in Latin America, giving local customers greater access to locally sourced goods though a fast, efficient online platform.

Emerging markets consumers are looking for brands they can trust and companies that know the local marketplace. Large multinationals that can break themselves down, think locally, act nimbly and launch products quickly are more likely to succeed in the long run.

This shifting global landscape is good news for stock pickers with a penchant for fundamental research. Not every company will get it right, and it is our job to separate the ones that can from those that cannot.