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After years of relying on China-based supply chains, businesses from the U.S. and Europe are starting to turn locally due to thof COVID 19 pandemic effect. The said pandemic has caused a problematic disruption on the supply chain, which affected around 80% of global firms in different sectors. This movement is expected to be done in five years and can amass at least a $1 trillion loss for these companies, as shown in the prediction of Bank of America(BofA).
Although the decision was profoundly affected by the onset of the pandemic, the trend of shifting away from China was ignited as some companies started to go towards a localized approach for the supply chain.
Global analysts surveyed by BofA have also reiterated some provisions that can further push companies to turn their heads from globalization. Some of these are trade disputes, climate change, the advent of automation, and increasing tariffs.
In this giant leap, BofA also counters that it might not be a wrong choice, and the shift could be potentially beneficial for the companies in the long run. The head of BofA’s Global Research Candace Browning further explained that companies affected by the pandemic have no choice but to increase their scope and reshoring plan, which expedited the relocation plans.
“The relocation of the supply chain and turning into a more local approach can positively affect larger community shareholders, employees, and consumers within the state.”Candace Browning, head of BofA’s Global Research
Due to this, the BofA would not be shocked if localized supply chain reshoring will be the most prominent trend after the post-COVID scenario.
Browning and other analysts further alluded that even if global firms would have different reshoring perspectives, the major part of the supply chain should be placed within the state borders, but failing to allied countries.
However, this localized structuring would come with a price warned by some global analysts. Relocating supply chain out of Chinese clutches would mean a staggering $1 trillion lost in cost for five years.
Reduction in equity around 70 basis points (bp) and a 100bp in free cash flow margins can be one of the effects of this change. These factors are essential when gauging the business’ profitability and capacity to sustain its operation daily. Hence, different firms shifting away from China would face a significant adverse effect on their businesses.
However, the negative effect is not entirely repressive countered by the BofA research team. Lastly, policymakers could create aggressive corporate management policies to offset increasing operating costs due to the significant reshoring changes.