Emerging markets companies have learned the hard lessons of Covid and are placing increased emphasis on resilience, even at the cost of maximum efficiency. Covid and its after-shocks have exposed the fragility of global supply chains and just-in-time management philosophies. Container ships delayed, auto manufacturers unable to source computer chips, increased energy costs, and inflation, are among the after-effects of the pandemic.


Supply chain failings have persisted well after the worst of the pandemic is over, in an economic “long Covid” shock. Travel bans, border restrictions, social distancing rules, and factory closures, have combined to wreak logistical havoc. Container shipping has suffered the worst disruption in its history. Hundreds of container ships have been delayed outside ports. At the end of October about 70 ships, carrying about half a million containers, were waiting in the Pacific Ocean offshore the West Coast of the United States, unable to dock at Los Angeles or Long Beach ports in Southern California. Docking has also been delayed at Savannah port in the southeastern US, on the coast of the North Atlantic Ocean; at Europe’s largest port, Rotterdam; and at the major Chinese ports of Ningbo (East China Sea), and Shenzhen (South China Sea).


Costs of freight along the main shipping routes between China, the US and Europe have skyrocketed. The index for freight costs between Shanghai and Los Angeles is five times higher than pre-Covid levels (see chart).

Freight costs have soared


Freight costs have soared

Source: Bloomberg, as at 28.10.2021

The automobile industry has been badly affected by supply chain snarl ups. A modern automobile has thousands of computer chips. Car production at many factories has been delayed by a lack of chips, in part because auto manufacturers, having cancelled orders during the peak of the pandemic, underestimated the speed of post-Covid recovery in demand. By the time auto manufacturers found out they needed more chips, semiconductor manufacturers were already fully booked with orders from manufacturers of smartphones and other consumer electronics — in many cases the more important customers. TSMC, the Taiwan-based semiconductor manufacturer, wins ten times more revenue from smartphone manufacturers than it does from carmakers (see chart).

TSMC sells more to smartphone- than to car-makers

TSMC sells more to smartphone - than to car-makers

Source: TSMC, as at 14.10.2021. 3Q 2021 revenue by platform.

Just-in-time caught out by Covid

Just-in-time is a management philosophy that minimizes inventory in order to maximize efficiency. Originating in the Japanese automobile industry, the philosophy is designed to reduce waste by closely matching supply orders to productions schedules. However, for just-in-time to work well, future orders must be forecast with great accuracy — and this proved impossible during Covid.


Learning the lessons of Covid, company managements are now preparing against the risks of other kinds of disruption in the future. Next time the cause might not be a pandemic: it could be the weather, a natural disaster, or even a war — China’s designs on Taiwan are one potential flash point.


Some emerging markets managements have come to believe that the most prudent approach is to diversify their geographical presence. They think it worth sacrificing some cost efficiencies, in return for increased resilience. In deciding where to build a factory, they might choose to be closer to customers, and less exposed to long-distance transport, even if that means higher labour costs. They might hold higher levels of inventory, in order to be sure of satisfying spikes in customer demand, even though that means lower return on asset ratios.


Techtronic, the Hong Kong-based manufacturer of power tools, is an example of a company that has been diversifying its manufacturing base. Already with facilities in various countries, including Vietnam (where labour costs are lower than China), it recently decided to build a battery lawn mower factory in the US. Its management has clearly decided that higher labour costs in the US are outweighed by the advantage of location nearer to its customers, and the benefits of avoiding high ocean freights costs and the sustainability issues raised by long-distance transport.


TSMC is located in the most geopolitically sensitive country in the world – Taiwan, a small island 100 miles offshore mainland China. TSMC has begun construction of a new computer chip factory in Arizona, US, at the considerable cost of US$12 billion. The size of the financial commitment demonstrates the importance TSMC management places on being close to customers.


On 9 November, TSMC announced a joint venture with Sony to build a US$7 billion chip factory in Japan. Construction of the plant is due to start in 2022, and chip production in 2024. Again, being physically close to Japan’s electronics and automobile industries is a key consideration. TSMC is also thinking about building a factory in Germany.


We seek to invest in companies with long-term sustainable business models. Companies that prioritise resilience often enhance the long-term sustainability of their profits. We find this is increasingly appreciated by managements of emerging markets companies.


Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Company and stock examples are for illustrative purposes only and are not a recommendation to buy or sell.

Please note: Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.  The views expressed are those of the individuals mentioned at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change.  This is particularly true during periods of rapidly changing market circumstances.

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