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Chinese supply chain impacts from tariffs and coronavirus

26022020_Manufacturing

Chinese supply chain impacts from tariffs and coronavirus

A lot has been written in media on the current impact of the coronavirus on both the Chinese citizens and the Chinese economy. Although most of what I read is concerned with the short-term and not on the potential longer-term implications. To that extent, I wanted to relay a small snippet of information that came out of a company meeting I recently attended.

The company is Audinate (ASX:AD8), which is a technology company that develops Dante, a technology that Audinate wants to develop into the standard to transfer audio/video data streams over normal IP based networks (ethernet, wi-fi etc.) instead of the traditional dedicated cables which is the historical norm. Audinate is a company that is new to me and we at Montgomery do not own shares, nor do we have a strong investment view but that is not what this post is about.

What I found very interesting from the meeting is as a result of the US-China trade war and the tariffs imposed, Audinate has moved 20-25 per cent of their production from China to Malaysia as their products were captured by the US imposed tariffs, and manufacturing in Malaysia means that they can bypass these tariffs for their US bound products. This was according to Audinate’s management, a very easy and smooth change as they were able to use the same contract manufacturer in Malaysia as they used in China. It did not have any significant impact on the cost of production either.

Now, Audinate is very small in context of the total value chain of audio/visual products but interestingly, they mentioned that in December they conducted a survey and in-depth discussions with all their top 20 customers. The result of this is very interesting as Audinate’s experience was basically replicated in that their top 20 customers (on average) had also moved about 20 per cent of their production to other countries outside China in response to the US – China trade war.

The customers also told Audinate that this is not a temporary move but that they have permanently restructured their supply chains do diversify the risk. The major customers of Audinate includes the likes of Yamaha, Sony, Sennheiser and Shure so we are talking names that are relatively household and substantial organisations so collectively, this is definitely more meaningful.

All of this took place well before coronavirus emerged and China shut down for Chinese New Year. It is very possible that companies are taking the coronavirus outbreak as a trigger to further evaluate their supply chain configurations. If contract manufacturers are able to respond in other parts of the world, it does not bode well for the prospects of a quick recovery in Chinese manufacturing.

If the volume has moved abroad, there might, after all, not be that much to recover into once the pent-up demand from the prolonged shutdown is cleared. I will continue to keep my eyes and ears open for more indications that we might see a permanent dislocation of manufacturing out of China which would have very negative implications for the potential growth rates of the Chinese economy. China is as we all know Australia’s largest export market accounting for about one third of all Australian exports.

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Andreas is the joint Portfolio Manager of The Montgomery Fund. Andreas joined from Navigo Partners, a M&A advisory firm in Stockholm, Sweden where he was a Director responsible for origination and execution of Scandinavian projects. Before this, he worked for three years in corporate strategy at Alinta Energy in Sydney.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. Hi Andreas, I discussed that likelihood at end of last year here – http://macroedgo.com/2019/11/21/investment-theme-developing-asia-ex-china/ – interesting to see just how fast it is progressing… I would also recommend reading this which I released last Friday – http://macroedgo.com/2020/02/21/politics-vs-society-in-the-coronavirus-outbreak/ – which spells out my views on the challenges that China faces, and how it is likely to deal with them, going forward with the coronavirus pandemic… note American officials overnight were clear that this a pandemic in all but name and began preparing the American people for the inevitability that cases in the US will grow… those who have been reading my material over the last 3 weeks will be unsurprised by anything that has been reported in the press over recent days…

  2. Excellent insight here Andreas – yes, this is looking like the growth of a perfect storm for China. This is such a complex situation that it has to read how it is going to play out with issues for the Chinese such as social unrest, whether people want/and are able to continue to live and work in urban locations and so on. No doubt wider implications for the world.

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