The threads of globalization that began fraying a few years ago have been unravelling more rapidly as national security takes precedence over the efficient flow of goods and services. Realigning global commerce toward this newly multipolar world could take trillions of dollars of investment and at least a decade to fully take hold. The shift is expected to sharpen competition and bring significant changes to the technology, industrials and renewable-energy sectors, creating potential opportunities, as well as pitfalls, for investors.
Defining the Opportunity
Moves by the U.S. and China to reduce their economic interdependence are driving this shift amid heightened geopolitical tensions between the world's two largest economies.
Nearshoring and friend-shoring are the new focus as the U.S. looks to its allies and neighbors for critical minerals and to meet clean-energy needs, including for electric vehicle batteries. Meanwhile, China is working to localize its advanced semiconductor industry and reduce trading partners’ dependence on the U.S. dollar. Both are increasing spending on defense, cybersecurity, space launches and communications. In the process, India, Mexico and Southeast Asia are likely to benefit from multinational firms’ efforts to rework their footprints.
“Friend-shoring of critical materials is likely to prevail as policy incentives, investment restrictions and corporate strategies are shaped to reduce risk from trade and operations,” says Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. “Companies have been looking at chokepoints in their supply chains to determine the need for diversification or localization. We also expect competition around the innovation pipeline to escalate as countries look to build or maintain an advantage in certain industries.”
Here's where analysts think the transition to a multipolar world will have the biggest impacts, and the sectors and regions that stand to gain.
Industrial Automation: In the multipolar world, there is a greater need for investments in factories, warehouses and machinery to accommodate the overhaul of supply chains. Capital equipment suppliers that provide hardware and software—the “picks and shovels” of modern industrial manufacturing—to facilitate this global transition are likely to grow faster than in the past decade. Analysts say they are incrementally bullish on the growth prospects for industrial automation and expect the market to grow to $211 billion by 2030 from $136 billion at present.
Global Technology: Diversifying production of semiconductors, the tiny chips that power mobile phones, appliances, cars and medical devices, has been of significant importance to investors, companies and policymakers. To increase capacity, companies are planning more than $180 billion of new investments in semiconductors in the U.S., with $52 billion of incentives earmarked to support the domestic chips industry under a new law passed in 2022. Smartphone and tech hardware assembly has been highly concentrated in China, but supplies are working to bring new production capacity online in India and Southeast Asia.
In the short term, companies with strong intellectual property and patents or strong brands should be best positioned. However, analysts warn of disruptive change starting in 2030, hinging on the bifurcation of innovation and standards between the U.S./EU and China around developing technologies such as 6G, internet of things and artificial intelligence (AI). Analysts say this will call into question the long-term sustainability of today's dominant global platforms and businesses, and requires a rethink of existing stock valuations.
Renewable energy and EV Batteries: Energy security and independence have become a key focus for U.S. policymakers, and electric vehicles are a crucial component of that effort. Achieving mass adoption of EVs will require a significant rewiring of the EV battery supply chain, 90% of which currently relies on China for components and manufacturing. Analysts estimate that reshoring and onshoring the parts and processes for making green vehicle batteries will take more than $7 trillion in investments through 2040 to build factories; develop battery capacity and recycling; and upgrade mining and refining infrastructure.
Regional Beneficiaries: Mexico and India are two likely winners of nearshoring and friend-shoring. India, on track to surpass Japan and Germany as the world’s third-largest economy, is expected to triple its manufacturing base by 2031. Mexico, meanwhile, should see GDP growth rise from 1.9% in 2022 to 2.4% over the next five years amid an increase in investments and manufacturing. Countries in Southeast Asia, including Vietnam and Thailand, should see a rise in manufacturing in areas such as wearables, electronic components and batteries.
“This growth is helpful in putting those countries on the manufacturing map, but is not that meaningful in the context of global economic growth,” says Daniel Blake, Asia and Emerging Market Equity Strategist. “We think the exception to this is India, which is emerging as a major force in global manufacturing for the first time.”
Manufacturers in Europe, the Middle East and Africa, as well as Japan, should also see some benefits. Meanwhile, in the U.S. industrial automation has the potential to grow 65% from $20 billion in 2023 to $33 billion through 2030.
Globalization’s Next Chapter
While this transition of supply chains and manufacturing hubs to a multipolar model should generally happen in an orderly fashion, policy actions aimed at limiting cross-border investment and nonessential blocs across multiple industries could lead to market fragmentation and divergence of technical standards. Globalization under this scenario would recede to levels seen in the 1990s.
However, the likeliest scenario is significant transformation at the microeconomic level while minimizing macroeconomic shock. “We expect that the impacts of de-risking at the macro level will be less than investors expect, despite the major implications for sectors and companies,” Zezas says.
Investments in physical plants, software and AI should bolster growth and productivity, while new capacity will pressure prices, offsetting higher supply chain costs. Multinational corporations will strive to prevent zero-sum competition and maintain cooperation on global challenges.
“Multiple power bases mean multiple challenges for companies doing business on a global scale,” says Zezas. “Corporates and investors must react as governments draw bright lines of sovereignty over intellectual property, data and cross-border investment.”
For deeper insights and analysis, ask your Morgan Stanley Representative or Financial Advisor for the full report, “Practical Guide to a Multipolar World,” (June 13, 2023).