Now hiring? Good luck with that!
May 12, 2022
Globally, inflation has been a main topic of conversation among investors this year, as well as the Fed’s ability to handle it. In the last few commentaries, we shared our views on the ongoing inflationary pressures and why we think the target of 2% is hardly achievable in the near future. Aside from an unprecedented monetary and fiscal stimulus, spiking energy prices and supply chain disruptions caused by Covid and the war in Ukraine, the main driving forces of current inflation include labour shortages and rising wages.
Indeed, it’s what we are currently experiencing and what some experts in the U.S. are calling the tightest labour market in 70 years. During a panel in Washington hosted by the International Monetary Fund, Fed Chair Jerome Powell described the current state of the U.S. labour market as unsustainably hot. According to the U.S. Labor Department’s Job Openings and Labor Turnover Survey, in March 2022, the number of job openings increased to 11.5 million, from 11.3 million in February. Moreover, there were almost two vacancies for every unemployed person, pointing to an intensifying tightness and further wage pressure. These trends are supported anecdotally while businesses from different sectors report difficulties hiring talent and surging labour costs. When we talk to companies in our emerging markets (EM) universe, we get similar feedback with a slightly varying magnitude in different regions.
As much as one wants to credit purely Covid, the fundamental reasons underlying labour tightness started to surface before the pandemic. Demographics, immigration policy and de-globalization trends have sowed the seeds of the current environment. Covid and the fiscal response to it only added fuel to the fire. The working-age population has slowed in many Organisation for Economic Co-operation and Development (OECD) countries since early 2000. Short-sighted immigration policies in some countries have contributed to that slowdown. A tremendous cost advantage that China enjoyed for years winded down by 2015-2016 due to wage growth and demographics. During the Covid pandemic, many governments found themselves navigating through unchartered territory. Some of those responded with massive fiscal stimulus, which created an unprecedented demand for goods and services, and eventually labour.
There is also a social component to the set-up as the relationship between capital and labour undergoes a fundamental transformation. For example, in the U.S., the population has higher savings, and as a result, this means an improved bargaining power over employers. In many instances, employees can dictate working conditions by pushing for more remote work. Low minimum wages became a major political issue a long time ago. Every year, a larger percentage of people of different ages are reported to be suffering from various mental health issues. Covid was an accelerator of many burnouts that happened in the last two years. And it’s far from being an issue only in developed markets.
For instance, the majority of office workers in India are reportedly suffering from enormous pressure because their colleagues are quitting. The pandemic has radically changed how people work and what the job means to them. As a result, it has contributed to “the Great Resignation”. These factors are reshaping how managers think about their employees, as well as their mental health and wellness. CEOs acknowledge that human capital is the most important asset in any business. Engaging in the current wars for talent, employers have no choice but to pay up. Shorter work weeks could become more common as companies across the world are experimenting with a four-day work week. Additionally, a strong corporate culture and Diversity and Inclusion (D&I) policy have become an important differentiator of successful businesses.
We believe the current labour market issues will persist and become the major drivers of inflation. So, how do we position our EM portfolio from this perspective?
- We prioritize companies that exercise a superior level of pricing power, have a strong culture and a track record of attracting and retaining talent, have a solid D&I policy, and are relatively less labour intensive. An analysis of social aspects is an integral part of the comprehensive ESG due diligence that we make on every candidate for inclusion in our portfolio.
- We prefer companies with strong balance sheets and industry-leading margin profiles. As labour shortages limit capacity to grow, companies have to gain efficiencies. An economy with excessive demands creates enough incentives for businesses to invest in productivity improvement. Although we acknowledge a time lag between investments made and productivity improvements, we believe that our holdings should come out as winners in the medium to long term.
- We look for businesses that can capitalize on this environment, especially those in the automation space.
E Ink Holdings Inc. (8069 TT)
E Ink, based in Taiwan, is the global leader in Electronic Paper Display (EPD) technology. Also known as ePaper, it allows devices to mimic the appearance of ordinary ink on paper and is widely adopted in several end applications, including Electronic Shelf Labels (ESL), eReaders and various IoT solutions.
Unlike LCD and OLED, EPD does not require power to hold an image and consumes energy only when the content is being changed, has no backlight, uses ambient light from the environment and is easy on the eyes. It’s also thinner, flexible and rugged. ESL attaches to the shelves with EPD that show price, sales promotions, and other product information and replaces conventional paper price tags.
Due to wireless data transmission capability, the solution allows for real-time information updates. ESL not only reduces the labour cost associated with a manual replacement of price tags but also minimizes the likelihood of pricing errors and enables stores to quickly improve their efficiency in a highly competitive market. Implementation of in-store technologies and the increasing adoption of smart shelves are driving the continued growth in demand for ESL. The current penetration rate in retail markets is only 4-5%, suggesting plenty of room to grow for E Ink as it commands virtually 100% of the market share in the ESL upstream material supply. The global ESL market is expected to grow at a CAGR of over 18% during 2022-2032 and will exceed US $5 billion by 2032. We like E Ink’s monopoly-like position in a niche market, with strong IP protection, vertical integration, solid R&D capabilities, and placing it in a unique stance to benefit from the rapid industry growth driven by increasing the adoption of ESL, new colour ePaper products, and wider IoT penetration.
Estun Automation Co. Ltd. (002747 CH)
Estun is one of the leading Chinese industrial robot manufacturers, with strong product competitiveness and diversified end-market exposure, including lithium batteries, solar, construction, automotive and consumer electronics. We believe the company is set to benefit from a rising demand for industrial robots in China, given labour tightness and surging wages in that country. After peaking in 2015, the labour force in China has since been on a consistent decline, likely falling victim to the former one-child policy. Moreover, we believe that labour shortages in the manufacturing industry will get only worse due to competition from the new economy companies that lure talent with higher wages and other benefits. Although fighting input cost inflation and supply chain issues in the near term, we believe Estun will be among the winners in the factory automation space, enjoying favourable demographic trends and government policy tailwinds.
Guangzhou KDT Machinery Co. Ltd. (002833 CH)
Based in China, KDT Machinery is a global leader in the production of automated equipment for panel-type furniture, with significant market share growth potential. We like its solid technological know-how, strong cost competitiveness, scale and manufacturing capabilities. As furniture producers globally chase efficiency improvements, automation solutions are expected to enjoy a robust demand in the long term. KDT Machinery not only facilitates the shift from labour to automation in the furniture manufacturing industry, which has been historically high labour intensive, but also contributes to forest protection and CO2 emissions reduction on the back of panel-type furniture replacing solid wood.