The Real Winners of the Coming Capex Tsunami

(Bloomberg Opinion) -- Slumping housing markets, China’s stuttering economy and incessant recession talk risk distracting investors from a gathering tailwind: a nascent and remarkable transformation in US and European capital spending. Capex is back and “old economy” heavy equipment, factory-automation and materials companies will be among the winners.  

Morgan Stanley has described the coming wave as the “mother of all capex cycles.” 

Aghast that the chips and batteries that underpin the 21st century economy are mostly produced in Asia and determined (at long last) to decarbonize, western governments aim to replicate strategically critical supply chains closer to home, at huge cost. 

It’s a dramatic change following a decade in which US and European businesses were hesitant to invest (data centers and e-commerce warehouses were notable exceptions) and outsourced production to cheaper countries. They were often criticized — and still are — for returning much of their cash to shareholders via stock buybacks.

Capex Boom

Investment promises, of course, don’t always translate into action — see the recent financial collapse of Britishvolt Ltd’s £3.8 billion ($4.7 billion battery project; memory chipmakers have recently trimmed their 2023 capex budgets in response to what they hope is a temporary supply glut. So-called megaprojects (those exceeding $1 billion in value) almost always run overbudget and re-shoring is bound to cause profit margin-sapping inefficiencies and periodic overcapacity.

Ironically, this very expensive race for technological sovereignty and self-sufficiency is happening as companies’ cost of capital is rising due to inflation-damping interest-rate hikes.

Nevertheless, machinery producers, along with construction-equipment and building-materials suppliers, should see a big, multiyear increase in demand, without shouldering as much risk as those doing all the spending.

Talking About Reshoring

The sums involved are truly gigantic. The three largest chip manufacturers — Intel Corp., Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. (TSMC) have pledged to build more than $300 billion of new capacity in coming years, much of it in Europe and the US. By comparison, Exxon Mobil Corp. invests around $22.5 billion a year. 

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

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

Still Building

Europe fears muscular US industrial policy will deprive it of investment, but its own spending is also gargantuan, encompassing programs like the 800 billion-euro ($870 billion) post-pandemic recovery fund and 43 billion-euro Chips Act. The latter aims to double European chip capacity to 20% of the global total by 2030, and it’s off to a good start with Intel promising up to $80 billion of investment over the next decade, including a new $17 billion plant in eastern Germany.

Europe’s battery ambitions are no less impressive. China’s Contemporary Amperex Technology Co. will invest $7.3 billion for a factory in Hungary, for example. Meanwhile, Germany has earmarked almost 10 billion euros to construct floating liquified natural gas terminals now that it needs to find alternatives to Russian supplies. 

I’m skeptical whether Europe and the US — having fallen so far behind Asian rivals — will be able to overcome a dearth of skilled workers and the soaring cost of materials and labor. Building costs for a US fab are up to five times greater than in Taiwan, TSMC told investors last month. 

Intel’s horrible earnings report last week showed the difficulty of balancing a demand slowdown with its massive spending commitments. Investors are similarly wary of Vestas Wind Systems A/S and wind-turbine peers who are facing high repair costs and component-cost inflation. Meanwhile, car companies mostly have low stock market valuations precisely because investors fret they will earn a low return on their massive investments — a worry reinforced by Tesla Inc. and Ford Motor Inc.’s recent price cuts. Wisely, the auto industry is trying to alleviate these risks by partnering with experienced Asian battery manufacturers like LG Energy Solution, SK On Co. and Panasonic Holdings Corp.

Fortunately, there are safer ways for US and European companies — and investors — to profit from the capex boom. Consider a modern semiconductor factory, which takes around three years to build and has a $10 billion price tag.

Removing enough rock and soil to fill 400 Olympic size swimming pools demands a lot of heavy equipment: Caterpillar Inc. and building-kit hire specialists United Rentals Inc. and Ashtead Group Inc. are bound to play a role.  “We’ll be talking about semiconductors for years to come,” Ashtead told investors in December.

Mega-Project Winners

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 any other human on the planet,” Intel boss Pat Gelsinger has boasted. That sounds positive for Holcim Ltd. and HeidelbergCement AG.

And once completed, a fab requires millions of meters of cabling, and some incredibly expensive chipmaking equipment. ASML Holding NV, Applied Materials Inc. and Lam Research Corp. will be keen to help.

Export restrictions will counteract some of the benefit chip-equipment suppliers get from reshoring. But on balance semiconductor-equipment companies “will sell more machines,” ASML boss Peter Wennink said when I asked him last week.  

Automation specialists like Rockwell Automation Inc. and Siemens AG have been collecting battery-plant orders. Still, there’s a notable dearth of battery-cell manufacturing equipment companies in Europe and the US with electrode, cell assembly and pack assembly expertise; the big players are mostly Asian, notes McKinsey. 

Western companies may be able to better compete by joining forces. Three German companies – Duerr AG, Manz AG and family owned GROB-WERKE GmbH & Co. KG — announced they’re pooling their equipment expertise to win battery-factory orders.

With capex poised to boom at last, investors should look for companies able to capture a bigger slice of that spending. In a gold rush, it pays to sell shovels.