The cost to U.S. and European companies to relocate production from 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 more than 80% of the global sectors experienced supply chain disruptions during the pandemic, prompting three-quarters to expand the scope of their plans for redevelopment.
The inquiry by BofA’s head of global research Candace Browning and her team comes as President Donald Trump on Tuesday promised companies to offer tax credits to relocate their factories back to the US from China, to reduce the country’s confidence in 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 was lifting another round of restrictions on China’s Huawei as Trump renewed allegations that the company’s telecommunications equipment was being used for spies. Huawei has repeatedly denied allegations that it could facilitate Chinese espionage.
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BofA said that even before the pandemic’s January survey of global analysts confirmed that the trend from globalization to localization was “real and structural”. Six months later, COVID-19 “turned tectonic shifts toward visible fault lines,” bank analysts said.
They projected that the £ 1 trillion investment would reduce the 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 prohibited. “
Industries with structurally higher revenues – such as healthcare and technology – will be able to absorb this incremental cap, while others, with more subdued cash flows, may need to provide financing for external debt rather than equity.
Investors need to buy construction technology and machinery, automation and manufacturing supplies for electrical and electronic equipment to take advantage of this theme, said BofA analysts.
“We expect business management and policymakers to aggressively explore ways to offset the higher operating costs associated with re-shoring,” the analysts wrote, adding that although they did not expect a “silver bullet”, they were struck by the intention to use automation at future locations.
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Policymakers are also expected to help through taxes, low-cost loans and other subsidies, with recent announcements about that effect from the US, Japan, the European Union, India and Taiwan, among others.
Banks in North America, Europe and South Asia could also benefit from greater economic activity that would come with these changes.
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