The Real Winners of the Coming Capex Tsunami


Plunging housing markets, China’s faltering economy and incessant recession talks could distract investors from a mounting tailwind: an emerging and remarkable transformation in US and European investment spending. Capex is back and ‘old economy’ heavy equipment, factory automation and materials companies will be among the winners.

Morgan Stanley has dubbed the coming wave the “mother of all investment cycles.”

Horrified that the chips and batteries that power the 21st century economy are mostly made in Asia and (finally) determined to reduce carbon emissions, Western governments are aiming to move strategically important supply chains closer to home to replicate, and at tremendous cost.

It’s a dramatic change after a decade in which US and European companies hesitated to invest (data centers and e-commerce warehouses were notable exceptions) and outsourced production to cheaper countries. They have often been – and still are – criticized for returning much of their money to shareholders via share buybacks.

Investment promises don’t always translate into action, of course – see the recent financial collapse of Britishvolt Ltd’s battery project. in the amount of 3.8 billion pounds (4.7 billion US dollars). So-called mega-projects (worth over $1 billion) almost always run over budget, and relocation inevitably leads to inefficiencies that eat into margins and periodic overcapacity.

Ironically, this very expensive race for technological sovereignty and self-sufficiency is taking place while corporate capital costs are rising due to inflation-dampening interest rate hikes.

Nevertheless, the machine builders and the suppliers of construction machinery and building materials are likely to record a sharp increase in demand over the years without taking as much risk as the total expenditure.

The sums involved are really gigantic. The top three chipmakers – Intel Corp., Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. (TSMC) – have pledged to build more than $300 billion in new capacity over the coming years, much of it in Europe and the US . For comparison: Exxon Mobil Corp. invests around 22.5 billion US dollars per year.

Semiconductors account for 56% of the $330 billion in North American mega projects announced since 2020, according to Melius Research, which counts $86 billion in US electric vehicle and battery factory announcements over the same period.

Taxpayers will foot part of the bill. A trifecta of recent US legislation — the clean-energy-focused Inflation Reduction Act, the Chips and Science Act, and the Bipartisan Infrastructure Law — allow for more than $1 trillion in new spending and tax credits.

Europe fears a muscular US industrial policy will deprive it of investment, but its own spending is also gargantuan, including programs like the €800 billion recovery fund ($870 billion) and the €43 billion chips Act. The latter aims to double Europe’s chip capacity to 20% of the world’s total by 2030, and it’s off to a good start, with Intel committing to investments of up to €80 billion.

Europe’s battery ambitions are no less impressive. China’s Contemporary Amperex Technology Co., for example, will invest $7.3 billion for a factory in Hungary. Meanwhile, Germany has earmarked nearly €10 billion to build floating LNG terminals now that it must find alternatives to Russian supplies.

I am skeptical that Europe and the US, having fallen so far behind their Asian peers, will be able to overcome skill shortages and rising material and labor costs. The cost of building a US fab is up to five times higher than in Taiwan, TSMC told investors last month.

Intel’s dreadful earnings report last week highlighted the difficulty of balancing a demand slump with its massive spending commitments. Similarly, investors are wary of Vestas Wind Systems A/S and wind turbine competitors, which face high repair costs and component cost inflation. Meanwhile, auto companies tend to have low stock valuations precisely because investors worry they’ll get a poor return on their massive investments — a worry compounded by recent Tesla Inc. and Ford Motor Inc. price cuts. Wisely, the auto industry is attempting to mitigate these risks by partnering with veteran Asian battery makers such as LG Energy Solution, SK On Co., and Panasonic Holdings Corp.

Fortunately, there are safer ways for US and European companies – and investors – to take advantage of the investment boom. Imagine a modern semiconductor fab that takes about three years to build and is priced at $10 billion.

Removing enough rock and soil to fill 400 Olympic-size swimming pools takes a lot of heavy equipment: Caterpillar Inc. and kit rental specialists United Rentals Inc. and Ashtead Group Inc. will certainly have a part to play. “We’re going to be talking about semiconductors for years to come,” Ashtead told investors in December.

Hundreds of thousands of cubic meters of concrete and tens of thousands of tons of steel are needed. “I think I have more concrete trucks working for me today than anyone else on the planet,” boasted Intel CEO Pat Gelsinger. That sounds positive for Holcim Ltd. and HeidelbergCement AG.

And once completed, a factory requires millions of feet of cabling and some incredibly expensive chip fabrication equipment. ASML Holding NV, Applied Materials Inc. and Lam Research Corp. will be happy to help.

Export restrictions will negate some of the benefits that chip equipment suppliers derive from reshoring. But the bottom line is that semiconductor equipment manufacturers will “sell more machines,” said ASML boss Peter Wennink when I asked him about it last week.

Automation specialists such as Rockwell Automation Inc. and Siemens AG collect orders for battery systems. However, there is a notable shortage of battery cell manufacturing companies in Europe and the US with expertise in electrode, cell and pack assembly. The big players are mostly Asians, notes McKinsey.

Western companies may be able to compete better if they join forces. Three German companies – Duerr AG, Manz AG and family-owned GROB-WERKE GmbH & Co. KG – announced that they are pooling their equipment expertise to win battery factory contracts.

With capital spending finally booming, investors should be on the lookout for companies that are able to capture a larger chunk of that spending. In the gold rush, it pays to sell shovels.

More from the Bloomberg Opinion:

• Big Oil’s big buybacks are the tip of a $1 trillion iceberg: Lionel Laurent

• Manufacturers find there’s no place like home: Brooke Sutherland

• Industry’s long coattails can carry the US economy: Thomas Black

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. He was previously a reporter for the Financial Times.

For more stories like this, visit bloomberg.com/opinion

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