Marlborough’s Macdonald: Look to Asia to tackle inflation

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As inflation starts to rise, investors look for companies able to maintain profit margins. However, the real prize will go to businesses that do not just cut their own costs, but offer services and products that can help other companies become more efficient. That includes the providers of technologies such as automation, 3D printing and the Internet of Things.

Automation

The US, Europe and Japan lead the automation industry, but as Asia’s giant supply chain faces rapidly rising wages, the need for cost reductions is driving huge growth in domestic solutions. As new factories are built in Asia, companies typically start with at least 20-50 per cent of their plant already automated. Until now German and Japanese technology has been most popular, but increasingly companies are turning to machinery made in China, using components made in Taiwan and Korea. According to Global Automation Research, Asian suppliers of this machinery are growing faster than their US, European and Japanese counterparts, and the Asian companies we meet in this space are typically posting earnings growth of circa 25-40 per cent per annum.

3D Printing

3D printing has captured the imagination of the world. It saves money at every stage of the manufacturing process, from design (around 90 per cent time savings) to manufacture (around 30 per cent of materials costs) to transportation (potentially almost all of it).

Asia has taken this new technology to heart and while the West may have pioneered 3D printing, the Koreans, backed by favourable regulation, lead the world in 3D bio-printing. The country was the first to approve 3D-printed cranial implants and has developed open source bio-printers. Now, 3D-printed heel bone implants save weeks of medical costs once spent waiting for matching bone tissue.

In China, Shanghai-based Jala Group and its French joint venture partner, LabSkin, are printing human skin. Organovo first commercialised this technology in the US and both are now running neck and neck with Spanish supplier BioDan. However, Jala has a vast domestic market and favourable regulation behind it, enabling Asia’s cosmetics and pharmaceutical companies to gain a competitive advantage and dramatically reduce the costs associated with testing on animals. How long before the West knocks on their door?

Internet of Things

But what if 3D printing or automation really do not suit your business? Asia is the home of wireless technology, radio-frequency identification (RFID), CCTV cameras, semiconductor chips, sensors and drones. As the Internet of Things connects everything, Taiwan’s vast brand-agnostic supply chain is leading in almost every area. Years of pressure from Apple and the giant multinationals have bred a culture of innovation in cost control and now Taiwan looks poised to reap the rewards.

So, whether it is monitoring your crops by drone, integrating your salesforce with personal wifi or just beaming your service to consumers in their own homes by wifi, the widgets and gadgets that make that possible almost all come from Asia. Behind those connected items, there is probably a Taiwanese Wistron NeWeb antenna or Sercomm Home Gateway router.

At a time of rising inflation, it pays businesses that want to improve their efficiency to look East to Asian companies at the forefront of so many cost-cutting technologies. For investors too, we believe a number of these companies offer attractive opportunities.

Sally Macdonald is head of Asian equities at Marlborough Fund Managers