The sectors and stocks that can withstand supply chain shocks – Glenn Freeman

The numbers are pretty staggering. Supply chain chaos has hit two in three businesses in Australia, according to a survey conducted by the Australian Industry Group. And globally, in February, it took more than 10 times longer to get cargo from Asia to the US than it did across the border in Mexico.

However, some companies can thrive despite – or in some cases because of – supply chain shocks, as detailed in the third and final part of this supply chain series.

In part one, our four contributing fund managers discussed what they see as the key factors driving the supply chain challenges we’ve all faced in recent years.

investment theme

4 faces the challenges of the global supply chain

And in the second part, they gave their opinion on whether they see the crisis as a temporary or a longer-term phenomenon.

investment theme

Will the global supply chain crisis be temporary?

In the following discussion, they each address some of the attributes their teams are targeting, including several companies they believe are well positioned to weather the ongoing supply chain issues.

2 beneficiaries of the challenges

Francyne Mu, Franklin Templeton

As global growth investors, we have focused on companies that leverage innovation to increase supply chain efficiency and reliability. We believe the following companies are well positioned to benefit from helping their customers navigate a challenging and dynamic supply chain environment.

Zebra Technologies Corp (NASDAQ:ZBRA)

The mobile computing company has been able to adapt to supply chain pressures while helping companies increase their supply chain efficiencies. The company develops, manufactures and sells products for automatic identification and data collection. Its barcode printers and scanners help companies manage inventory and asset investments more accurately and efficiently. Zebra’s products and solutions facilitate the digitization of an organization’s physical workflows so they can be more effectively implemented, tracked and analyzed in real-time.

For example, Zebra’s RFID solutions improve the capacity to inspect and record inbound and outbound cargo by enabling significantly faster throughput and reduced error rates. Combining these RFID capabilities with Zebra’s barcode scanning technology enables real-time, point-to-point cargo tracking, improving resource planning and customer response. These scanner and data capture capabilities allow retailers to accept returns and reintegrate merchandise into existing inventory.

DSV Spedition (CPH: DKK)

The Dutch global transport and logistics company acts as a facilitator and coordinator, supporting companies wishing to send goods worldwide via a variety of modes of transport such as land, sea and air. DSV acts as metaphorical grease in the wheels of a complex global supply chain. In 2021, the company has transported over 4 million tons of air and sea freight, including coordinating the unique requirements of each shipment.

The size and capabilities that DSV possesses put it in a strong competitive position to serve its customers.

For example, with a large proportion of transcontinental passenger planes grounded – planes typically carry 40-50% of all air cargo – a severe shortage of air cargo capacity developed almost overnight, often stranding cargo in different regions. DSV’s large scale and existing agreements with dedicated cargo aircraft owners have enabled DSV to secure air cargo space for its customers to keep their cargo moving.

Why tracking and transparency are key

Bill Pridham, Ellerston Capital

The ability for companies to track raw materials throughout the supply chain is fast becoming a key differentiator. The need to address supply chain challenges posed by COVID and geopolitics is now fairly well known, including secondary effects such as spikes in consumer demand. These revealed problems with the rigidity of existing supply chain regulations.

As part of companies’ efforts to rebuild their supply chains to address these challenges, other aspects of sustainability are becoming increasingly important. Improved traceability of raw materials and products is a key factor here.

Improving the transparency of these inputs into companies’ manufacturing and distribution processes also leads to the need to comply with industry certifications such as the following:

  • Initiative for sustainable forestry and
  • Modern Slavery Act.

This requires significant technology investment across industries, requiring massive data collection to build the required “supply chain map”.

Some examples of companies that we believe are well positioned given their efforts in the above areas are:

Bureau Veritas (EURONEXT: BSV)

The French certification and testing company has almost 200 years of history and operates in most industries including:

  • buildings and infrastructure

  • food and raw materials,

  • marine and offshore,

  • Industry,

  • certification and

  • consumer products.

ASOS (LSE:ASC)

The UK-listed online fashion retailer aims to provide full public transparency for all private label products by 2030. The partnership with Bureau Veritas includes product testing in more than 10 countries. It also includes an assessment of factory operations at more than 15 locations worldwide to review suppliers’ use of raw materials and chemicals.

Sysco (NYSE:SYY)

The US foodservice distributor has been working with the World Wide Fund for Nature to improve the sustainability of seafood harvesting for more than a decade. The company is committed to working with WWF to source responsibly farmed and traceable fish that avoids destroying natural ecosystems.

“We prefer industrial companies”

Vince Pezzullo, Perpetual Asset Management Australia

We believe these disruptions, and the resulting hikes in inflation and interest rates, are unraveling markets’ longstanding reliance on cheap bonds and companies’ ability to exploit the intricacies of what is known as “DuPont ROE” to maximize the value of corporate equity.

For decades, CEOs have been able to leverage global supply chains and cheap offshore labor to continuously improve margins, asset turnover, and other factors to generate exceptional returns. We believe the fragmentation of this model poses challenges for organizations vulnerable to these changes.

As investors, we focus on companies that are less vulnerable to the above risks. Our longstanding focus on quality accounts means we weed out heavily indebted companies.

We also favor companies with a strong industrial base, such as Brambles (ASX:BXB)which is well positioned in its sector and enables the company to master the current challenges.

Companies that are more resilient than most

Catherine Yeung, Fidelity International

We see companies emerging from the current supply chain crisis with revamped, more diversified supplier networks that will only make them more resilient to external shocks over the long term. This is exactly what we mean by reglobalization.

Here we take a regional look at how companies in some key industries in Asia are evolving their supply chains, particularly in apparel and semiconductor manufacturing.

Shenzhou International Group (HK: 2313)

This apparel company, which makes clothes for Nike, Uniqlo and Lululemon, has diversified its customer base and added overseas factories in recent years. These serve to protect its supply chain from a turbulent global economy.

Silergy Corp (TWSE: 6415), SG Micro Corp (SZSE: 300661) and Texas Instruments (NASDAQ: TXN)

The chip manufacturers Silergy Corp and SG Micro Corp – both based in Asia – and the US company Texas Instruments. All have “localized” their raw materials to avoid global bottlenecks. The first two in particular have accelerated those efforts over the past two years, trying to outpace rising geopolitical tensions between the US and China.

Tesla (NASDAQ: TSLA) and Midea Group (SZSE: 000333)

US electric vehicle maker Tesla and Chinese consumer technology company Midea Group both make products that are benefiting tremendously from the increasing connectivity of technology devices. They’re also both on an extensive hiring frenzy, cultivating staff with expert knowledge and ties to highly respected Taiwanese chipmaker TSMC.

The conclusion

In this series, we asked four fund managers what, how long and who is supply chain. A few common threads run through their answers. Everyone largely agrees on the three core drivers of supply chain challenges – COVID, geopolitics and deglobalization. But we saw some other points raised in the way sustainability in general (Bill Pridham) and decarbonization in particular (Vince Pezzullo) play a role.

When asked if the changes companies are making in response to the challenges are enduring, the answer is yes. Both Pezzullo and Mu said at least some parts of how companies manage their supply networks have changed forever. And my colleague Hans Lee aptly summed up Pridham’s view by stating that “supply chains are fulfilling their ESG moment” – again consistent with the structural view.

Those points came together in this last part, which I hope has helped to reflect on the types of global companies that are likely to weather the changes better than some.

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Enjoyed this wire? Give it a like by clicking the button below. You will also be notified when other parts of this series are released. In parts one and two, the fund managers commented on what is behind the supply chain challenges and whether they are likely to be structural or temporary in nature.

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