An automation supercycle?

On August 9, 2022, Joe Biden signed the CHIPS and Science Act into law,¹ firing the starting gun for a wave of “reshoring” activity in the semiconductor industry. In fact, all major economic regions are now moving to offer incentives and subsidies to encourage investment into semiconductor fabrication plants along with other manufacturing and technology investments to safeguard the supply of critical products and protect intellectual property.

This is not just a semiconductor trend. Both the US and Europe want to be hubs for electric vehicles and green energy, which will require a huge wave of spending on the development of battery production and charging infrastructure, as well as on new forms of energy production and storage.

To keep European industry attractive, there is a need to be competitive with offers and incentives that are currently available outside the European Union.

Ursula von der Leyen, World Economic Forum in Davos 2023²

The EU is a large producer of textiles and apparel. While it is the world’s second-largest exporter with EUR 58 billion, its imports total EUR 106 billion. Of these imports, 45% comes from China.³ With an aging workforce and evolving consumer demand for clothing to become part of the circular economy and include more local sourcing and labor transparency, the automation opportunities for the industry are great.

Tough geopolitics in the world today are eroding confidence in traditional trade partners and sources of supply, and this, in turn, is driving large-scale efforts to reshore globally. As developed countries start to take back some parts of production that have been outsourced for decades, they are struggling with high land costs, higher minimum wages, weak population growth, and a lack of workers with specific manufacturing skills. While government subsidies and incentives might provide the initial stimulus for reshoring, we believe it will be the adoption of automation solutions in manufacturing that will allow these businesses to thrive commercially in the long-term.

Today, semiconductors are found in almost everything, from our trusty cell phones to children’s toys, airplanes, cars, and missile defense systems. Trade tensions, COVID-19-related supply chain disruptions, and war have made the strategic importance of semiconductors clear over the last few years, with governments drawing up legislation to encourage the domestic manufacturing of chips to ensure access to supply.

Table 1: Geographic support programs for semiconductor manufacturing

Industry experts estimate that the cost of building and operating a fabrication plant in the US (over the course of ten years), taking government incentives into account, is 30% higher relative to other major hubs in Asia (South Korea, Taiwan, and Singapore). This difference reaches a massive 50% when compared to the costs in China. The cost differential stems from higher US construction, labor, and utility costs, but also because government incentives in other countries are significantly higher. In South Korea, for example, incentives account for 65% of the total cost difference.⁴

With the passing of the CHIPS Act, the industry in the US saw commitments of nearly USD 200 bn in private capital.⁵ Clearly, there is a significant multiplier to the capital the government aims to provide (USD 52.7 bn), which is intended to help bridge the gap in the economics of domestic production.

The big players are leading the pack, with Taiwan Semiconductor Manufacturing Company (TSMC), Intel, Samsung, and Micron committing huge sums to new factories. TSMC is planning to spend USD 40 bn on two state-of-the-art fabrication plants in Arizona, where it plans to produce leading-edge semiconductors for the likes of Apple. According to TSMC, the plants will create 13,000 high-paying jobs and produce billions of dollars annually in revenue.⁶ Intel has announced large investments in the US and in Europe. It wants to invest EUR 80 bn in European manufacturing over the next decade. The European Chips Act is vital to securing this type of investment, but, as often seems to be the case, Europe is lagging behind the US in terms of progress. The bill is not yet law, and first needs to pass through the European Parliament in the first half of 2023. It seems there is a long road ahead to achieving the stated ambitions of European Commission President Ursula von der Leyen,

We have set ourselves the goal to have, in 2030, 20% of the global market share of chip production, here in Europe. Right now, we are at 9%.

Ursula von der Leyen⁷

The US, the EU, and China have huge ambitions. When the purse strings loosen, providers of automated semiconductor equipment should benefit. Ultimately, regional supply chains may lead to overspending and overcapacity on a global basis, perhaps exaggerating cycles within the secular semiconductor growth trajectory. As a case in point, 2023 is likely to be a down year for semiconductor equipment, despite all the secular tailwinds. The downturn in electronic goods demand combined with panic ordering due to COVID-19 has resulted in short-term inventory accumulation and a pause in capital spending for 2023. Although we see this as temporary, it does show that while the direction of travel seems clear, there will be bumps in the road.

The textile and apparel industry is not one we readily associate with technology. We are all accustomed to seeing the words “Made in China,” “Made in Bangladesh,” or “Made in Vietnam” on our clothing labels. This is due to the historically plentiful supply of cheap labor in those countries. Additionally, soft materials, like the ones our clothes are made of, are notoriously difficult for robotics and automation systems to handle. Today, sewing remains a largely manual process. However, change is in the air.

While the COVID-19 pandemic may have played a role in reducing consumer choice for a year or two, bigger drivers for reshoring are coming in the form of the use of recycled materials, the desire to be transparent with fair labor practices, and perhaps even the pride in knowing that your sweater is locally made and sourced from a sustainable production process. In some cases, this can trump the price of the goods – not at any price and not for all clothing, but a new trend feels like it is emerging. As the industry looks to maintain its strong position in the EU, we could expect lobbying and policy incentives for domestic production to lead to greater adoption of automation solutions.

Meanwhile, green shoots are visible in a growing reshoring trend. We can look to an example in the US, where denim jeans manufacturer Saitex USA (producing for brands like Calvin Klein Jeans) opened an automated jeans factory in 2021. The facility promises extremely fast cycle times from design to shop floor by utilizing an industry 4.0 smart factory approach, where jeans are created using design software and are manufactured with a significant amount of automation, such as laser-cutting material, semi-automatic sewing, laser-customizing detail, robotic spraying of jeans, and, of course, quality inspection throughout production. Four robots can spray 3,000 pairs of jeans per day – hazardous work that normally requires about 25 people.⁸

Perhaps this points toward a future of highly customized clothing, machines capable of cutting thousands of different shapes daily, quicker and superior quality production, all while heavily focusing on the circular economy. The company claims that the new production process only uses 1.5 liters of water per pair of jeans compared to 80 liters with traditional techniques – resulting in savings of USD 400,000 per year. Wastewater is used to manufacture bricks instead of being released into the environment, thus reducing pollution, while at the same time new drying techniques are helping them to reduce CO₂ emissions by 80%. All of this is highly relevant to an environmentally conscious consumer. The factory can produce 720,000 pairs of jeans annually, and there are plans to roll out this type of facility globally.⁹

In Europe, C&A is the clearest example of a clothing company following a similar path with their Factory for Innovation in Textiles (FIT) automated jeans facility in Mönchengladbach, Germany. Their rationale is strikingly similar to that of Saitex – focusing on local production and sourcing (organic cotton) from a local, sustainable supply chain, as well as introducing automation systems for quality improvement and to redesign the production process in order to reduce water consumption, CO2 emissions, and waste materials.¹⁰

At C&A, 400,000 jeans were produced in the first year, and 800,000 is now the target. Greater capacity should enable production costs and consumer-facing prices to fall. Nevertheless, it should still be noted that the costs are still higher than in Asia, and that C&A sells these jeans at a premium price – almost twice that of their standard range – and with a slightly lower margin, suggesting further evolution of the process lies ahead.¹¹

These leading facilities boast an automation component at about 40%,¹² but industry executives clearly believe that innovation and automation are coming to textiles and clothing production, making it a vital aspect of any successful reshoring initiative.

The automotive industry is going electric. In Europe, VW, Daimler, and Volvo have all committed to reaching a 50% electric vehicle (EV) sales share by 2030.¹³ Pricewaterhouse-Coopers (PWC) estimates that in 2021, the EU was at 8%, China 12%, and the US 2%. In 2030, with a projected EV total production share of 65%, the EU is expected to top the China EV percentage of 56%, with the US lagging around 26%. The demand for batteries will be huge and is projected to grow at a compounded annual growth rate (CAGR) of 34% from 2021 to 2030.¹⁴

All regions are striving for self-sufficiency, which means huge investments ahead. China is in the driver’s seat given the fact that it has the leading battery producers Contemporary Amperex Technology (CATL) and BYD. These companies have a combined global share of around 45%,¹⁵ a huge amount of scale production knowledge, and a large amount of the raw materials and processing capacity.

By 2025, the EU hopes that 30% of cars produced will be EVs. Yet it is home to only 7% of battery production capacity and has almost no critical material production or processing facilities.¹⁶

To date, announced capacity additions suggest that the US is likely to suffer a 40% capacity shortfall in 2030.¹⁶ It should come as no surprise that the Inflation Reduction Act in the US offers various tax and production credits across the entire battery supply chain, from mineral mining and processing to battery production, assembly, and recycling of key materials. It seems clear that the US will speed up its battery capacity additions. Will this take planned capacity away from Europe? Initial political rumblings in Germany and France suggest that they believe the EU will need to do more. Either way, a lot of capital expenditure (capex) is coming – PWC estimate up to USD 300 bn.¹⁶

This discussion is relevant to robotics as both battery production and EV assembly lend themselves to automation. With investment in batteries in Europe expected to surge, there is a big opportunity for European champions to emerge. After all, Europe is home to many major car companies and suppliers.

We are also starting to see alliances form. For example, Duerr Group, a major supplier of robotics solutions to the automotive industry, has expertise in battery electrode production and is also a world leader in automation technology for coating, drying, and solvent recovery. Others are better at battery cell and pack assembly, however. As a result, they have formed a three-pronged German alliance together with Grob-Werke and Manz AG in order to offer a full solution to car companies. This pooled expertise allows for greater technology refinement potential and a focus on cost reduction to increase competitiveness with Asian suppliers.

It seems clear that a new automation-driven capex supercycle is underway, focused on strategic industries such as semiconductors and the energy transition. With its roughly USD 500 bn in spending and tax breaks to benefit US companies,¹⁷ the US Inflation Reduction Act is worrying European leaders, and it seems likely there will be further countermeasures to encourage firms to produce in Europe. As this policy battle plays out, many industries will have the chance to invest in technology on more favorable terms and to build out an infrastructure that will see manufacturing regaining importance in the Western world. At the same time, consumer expectations and preferences are shifting toward goods that are produced locally and in a sustainable manner benefiting the circular economy.

It is hard to arrive at a definitive answer when we try to determine the precise cost advantage that Asia enjoys over the West in many manufacturing areas, but we think it may reach around 30%.

Incentives that help close this gap combined with environmental benefits, surety of supply, and time to market advantages are likely enough to tip the balance toward reshoring. Industry experts suggest that the benefits from production and tax credits to US producers of solar inverters could be about 30% of today’s production costs,¹⁸ and, as with semiconductors, it seems that this approximately 30% level of subsidy would be more than enough to incentivize a Western world manufacturing renaissance.

While it would be naïve to think that all investments will pay off, or to believe that they will all end up in the right hands or go toward the best solutions, the direction of travel is clear. Industries from clean energy to textiles to semiconductors are all set to benefit from incentives. As they do so, the providers of robotics and automation equipment, which are integral to the economic viability of these facilities, will likely see prolonged demand and growth rates above historical ranges for many years to come.

The individual companies mentioned on this page are meant for illustration purposes only and are not intended as a solicitation or an offer to buy or sell any interest or any investment.

To the extent that these materials contain statements about the future, such statements are forward looking and are subject to a number of risks and uncertainties and are not a guarantee of future results/performance.

¹ Special Address by the President at the World Economic Forum (europa.eu); retrieved on 20.02.2023.
² CHIPS: The Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 FACT SHEET: CHIPS and Science Act Will Lower Costs, Create Jobs, Strengthen Supply Chains, and Counter China | The White House; retrieved on 02.02.2023.
³ The European Apparel and Textile Confederation, Page 18&19. EURATEX Facts & Key Figures 2022; retrieved on 20.01.2023.
⁴ Government Incentives and US Competitiveness in Semiconductor Manufacturing, September 2020, Boston Consulting Group (BCG) and Semiconductor Industry Association, retrieved on 31.01.2023.
⁵ The CHIPS Act Has Already Sparked $200 Billion in Private Investments for U.S. Semiconductor Production - Semiconductor Industry Association (semiconductors.org) – projects announced May 2020–Jan 23; retrieved on 23.01.2023.
⁶ TSMC triples Arizona chip plant investment, Biden hails project | Reuters, accessed on 31.01.2023.
⁷ Statement by the President on the European Chips Act (europa.eu); retrieved on 10.02.2023.
⁸ The New Automated Jeans Factory In L.A.—A Blueprint For Reshoring Apparel Manufacturing? (forbes.com); retrieved on 14.02.2023.
⁹ Commitments - SAITEX International (sai-tex.com); retrieved on 20.02.2023.
¹⁰ Textile production in Europe (c-and-a.com); retrieved on 15.02.2023.
¹¹ A visit to C&A’s flagship factory in the heart of Europe (fashionunited.com); retrieved on 20.02.2023.
¹² The New Automated Jeans Factory In L.A.—A Blueprint For Reshoring Apparel Manufacturing? (forbes.com); retrieved on 14.02.2023.
¹³ The Future of the EU Automotive Sector, Study for the European Parliament Committee on Industry, Research and Energy. Published October 2021. Page 28, accessed on 26.01.2023.
¹⁴ Gigafactories and raw materials | Strategy& (pwc.com) August 2022; accessed on 26.01.2023.
¹⁵ The Top 10 EV Battery Manufacturers in 2022 (visualcapitalist.com); retrieved on 09.02.2023.
¹⁶ Gigafactories and raw materials | Strategy& (pwc.com); retrieved on 20.02.2023.
¹⁷ What’s in the Inflation Reduction Act (IRA) of 2022 | McKinsey; retrieved on 20.02.2023.
¹⁸ US capacity, Europe penetration and California weather likely highlight 4Q. Enphase Energy company update. Page 4 – IRA potential Benefit. 20.01.2023.