The politics of capital investment
Fewer companies are manufacturing where it's cheaper and instead are relocating to their biggest markets. It's a politically savvy move.
This trend is prevalent across sectors.
Last month Roche announced it was investing a further $50bn in the United States over the next five years. This follows similar announcements from Novartis, J&J and Eli Lilly.
Some of these are reheated announcements designed to placate the Trump administration, but others are genuinely new. These are indicative of a broader shift, particularly acute in the United States, toward large companies deciding to base their manufacturing operations in non-traditional markets.
Part of a longer term pattern
The scale of some of the investments, particularly in pharma, suggests companies recognise that the preference for reshoring is not temporary, but part of a broader political realignment that unites political parties. If Roche et al believed that a post-Trump presidency wouldn’t care that much, they would have delayed decisions or focused on mitigating any retaliatory measures.
The clamour in advanced economies to reshore manufacturing since COVID has steadily increased and become politically potent. This is driven by many complicated factors and is leading governments in North America and Europe to prioritise domestic supply chain security - sometimes by introducing incentives (CHIPS & Science Act and the European Chips Act) and other times by using a linguistic stick (mostly Trump).
It isn’t just about manufacturing either. Tech companies like Palantir are taking a values based approach, refusing to do business with governments not aligned to ‘Western’ values. This buys them considerable support in target countries, who view engagement with companies in defence through a values-based prism.
Globalisation is now uncertain
The traditional approach companies used to develop their thinking assumed unfettered globalisation, which led manufacturing decisions to largely be based on price: where is cheapest to make Z? This maximises profits and was commercially sensible.
That assumption is now less stable. Trade offs are required. The sudden arrival of tariffs and supply chain distribution (due to conflict, domestic legislation and other factors) means that boards now need to factor geopolitical risk into their decision making. This is especially true given some governments are moving away from awarding public sector contracts to the cheapest or best value bidder.
This is leading to companies making politically astute decisions about where they set up shop. Increasingly, they are deciding to make investments in valuable markets where domestic production (though more expensive) will prevent restricted market access and improve the effectiveness of lobbying. This isn’t intrinsically cheaper, but once market access is factored into the equation, is proving to be the least worst choice.
What should you do?
If you’re in a politically sensitive sector - like life sciences, defence or energy, you need to consider the domestic political climate before making infrastructure and machinery investments.
Is your sector considered critical from a national security or industrial strategy point of view? If it is, are you a vital part of the supply chain, or one of many viable options? How is support for reshoring reflected in domestic legislatures and executive branches, and how can each of these impact your market access and treatment?
You should conduct a political risk analysis assessment to evaluate the risks, opportunities and probabilities of various outcomes so that you can plan properly for a range of possible scenarios.
The macro trend suggests inevitable globalisation is stuttering. If and how exactly this impacts your business is a more precise question that merits proper due diligence.
