Manufacturers find there's no place like home

Will the pandemic supply-chain disruptions prompt manufacturers to rethink where their factories are situated and build more plants closer to home? Roland Busch — chief executive officer of factory automation and software giant Siemens AG — says yes, for two reasons. 

The first is that the majority of the world's semiconductor and battery manufacturing capabilities are concentrated in Asia, and Western governments have realized that this dynamic is neither wise nor sustainable for such strategically important products. In the US, chipmaking capacity has grown at only a 1.5% compound annual rate in the decade between 2008 and 2018, well below the pace of semiconductor sales, according to a Bank of America Corp. analysis of Semiconductor Industry Association data. But the pace of announcements on new plants in recent months has been dizzying: Samsung Electronics Co. has made a $17 billion commitment; Taiwan Semiconductor Manufacturing Co. is building a $12 billion plant in Arizona and contemplating a factory in Germany; Intel Corp. is investing $20 billion in additional US manufacturing capacity and planning to plow as much as $95 billion into new European factories over the next decade.

Meanwhile, Ford Motor Co. and South Korea's SK Innovation Co. will spend $11.4 billion to build three battery factories and an assembly plant for electric F-Series pickup trucks in Tennessee and Kentucky. General Motors Co. plans to operate four electric-vehicle battery plants in the US through a joint venture with South Korea's LG Chem Ltd. Toyota Motor Corp. said this week it would invest $240 million in a new manufacturing line for hybrid transaxles at its existing plant in West Virginia. Electric-vehicle startup Rivian Automotive Inc. — whose more than $100 billion market valuation tops that of GM after an initial public offering this week — has a long list of expansion projects that reportedly include a second car manufacturing facility in the US, a plant in Europe costing billions of dollars and in-house battery production at a stand-alone facility. 

"There is definitely some reshoring or redistribution of value" in these industries, Busch of Siemens said in an interview. 

One knock against arguments for a broad Western manufacturing renaissance has been that the headlines to date have been so concentrated in the chipmaking and electric-vehicle sectors. Is this a paradigm shift or a reflection of industry specific trends and priorities? That question may miss the forest for the trees. The semiconductor plant announcements alone are material relative to US manufacturers' annual capital spending on equipment and indicate a much more robust level of domestic industrial investment, as BofA's Andrew Obin documented in an April report. Shrinking technology-related manufacturing output because of offshoring has a major drag on US industrial production in dollar terms, falling more than 50% since 2000, Obin wrote. And the ripple effects of reversing that trend are large: These new factories need automation and manufacturing equipment but also air conditioning, lights and roads. 

But announcements on US factory expansions are starting to trickle out from other corners of the economy, too. US Steel Corp. and Nucor Corp. are both planning to invest about $3 billion each in new mills. Peloton Interactive Inc. is spending $400 million to open its first US manufacturing facility in Ohio, with an aim of mitigating geopolitical risk and easing shipping challenges. In mid-September, plastic-container maker Berry Global Group Inc. announced a more than $110 million investment to expand its food-service manufacturing capabilities in North America. And then just this week, Schneider Electric SE said it would add three manufacturing plants in North America and hire more than 1,000 new employees to increase production of circuit breakers, switchboards and other electrical equipment and help it speed delivery to domestic customers. 

The Schneider facilities will be highly automated, in the vein of the company's existing factory in Lexington, Kentucky, which has been recognized by the World Economic Forum for the integration of artificial intelligence and Internet of Things technologies into its manufacturing and supply-chain operations. Thanks in part to that level of automation, Schneider already domestically produces most of the products it sells in North America. So the new facilities are less about repositioning the supply chain and more about adding capacity to meet robust demand for data-center equipment and other electrical infrastructure, Annette Clayton, CEO and president of Schneider's North American operations, said in an interview. 

And that brings us to the second argument from Busch as to why a geographical reassessment of manufacturing capacity may be underway: Automation is the great equalizer that makes European and US factories more economically attractive. China's once-in-a-decade Census survey released earlier this year showed the country's working-age population was declining as a percentage of the overall total. Labor costs, meanwhile, are rising: The average annual wage for a manufacturing worker at an enterprise in China was 74,641 yuan (roughly $11,700) in 2020, according to the National Bureau of Statistics. That compares with 58,049 yuan as of 2017, the South China Morning Post has reported. It's not a coincidence that those trends have collided with an increase in factory floor automation. There were 126 industrial robots operating for every 10,000 manufacturing employees across the globe last year, up from 50 in 2011, according to the International Federation of Robotics. 

"China's labor population peaked already," Busch said. "When you have less and less labor, you have to automate more. Once you're automating and the salaries are increased, then what's the advantage of having a footprint in China?" Labor costs aren't the only consideration: Energy expenses and government subsidies also factor into companies' manufacturing capacity decisions. One other benefit of producing goods in China is that there's already a well-established ecosystem of component suppliers. But with trans-Pacific shipping costs so high and a growing number of companies taking actions to curb their carbon emissions, this moment "really cries out for rethinking where you would put an automated factory," Busch said. 

Quote of the Week

"Regarding your question on GE, I mean we are years ahead. And we acted at that time out of a position of strength." — Siemens CEO Roland Busch

Busch made the remark on the German industrial company's earnings call this week in response to an analyst question about General Electric Co.'s blockbuster breakup announcement. GE plans to make its health-care unit a separate public entity in early 2023, something that Siemens already did with its rival medical equipment business in 2018. GE will then create a company out of its gas turbine, renewable energy and remaining digital assets in 2024. Once again, there are parallels to this energy mishmash in Siemens, which merged its wind turbine business with Spain's Gamesa in 2017 and then transferred its holdings in that business to a separate spinoff of its gas turbine assets last year. There are some quibbles over whether the Siemens breakup has gone far enough, with the factory automation and building infrastructure parent still owning large stakes in the energy and health-care spinoffs. One big reason it slimmed down sooner is because it didn't have the balance-sheet problems that its US counterpart did. That was at least partly because Siemens lost the takeover battle for Alstom SA's energy assets to GE and thus avoided the spectacular carnage that deal caused. When CEO Larry Culp took the reins at GE in late 2018, the company's cash flow was anemic, its debt load was far too large and the stock was in free fall. "It wasn't the time for grand visions," Culp said in an interview.

Even so, it seems as if there might be something to the idea of European industrial companies leading the way when it comes to innovation in dealmaking. Siemens has spent at least 10 billion euros on software acquisitions over the past 15 years to complement its factory automation business, starting with the $3.5 billion takeover of product-lifecycle-management software company UGS Corp. in 2007 and the purchase of LMS International announced in 2012. Its automation peers in the US have only just started following suit in a meaningful way in the past year — and are paying up dearly for it. "We were early and very happy about it," Busch said in an interview. "If we had to buy that portfolio right now, we can't afford it. The multiples are so high." The company is continuing to invest in software. The stub equity in the energy spinoff isn't intended to be a long-term holding, and Busch said he's not wedded to maintaining the stake in the Siemens Healthineers AG business at current levels, either. The latter holding could be sold down to finance deal opportunities if one should come along that merits such a move. 

Meanwhile, Emerson Electric Co.'s plan to merge some of its software assets with Aspen Technology Inc. is clearly modeled after a similar innovative combination orchestrated by Schneider and Aveva Group Plc. ABB Ltd. is preparing to list its electric-vehicle charging unit as a separate entity next year; could this augur a similar carveout at Eaton Corp.? US multi-industrial companies have tended to spin out their junkier assets rather than their crown jewels. There's a perception that European industrial conglomerates are sleepier, and that viewpoint seems flawed. What do you think? Email me at [email protected] 

Deals, Activists and Corporate Governance

GE's long turnaround saga could only ever end in a breakup. Each successive crisis that engulfed the company proved it was simply too complicated for its own good and perhaps too tangled to fix as a single entity. CEO Culp says the more focused aerospace, energy and health-care companies should be in a better position to serve customers, and that was his primary motivation. The appeal to investors is complicated by the fact that the aerospace business will be burdened with the legacy long-term care insurance liabilities; the health-care division's growth has historically lagged other entities and hasn't had as much financial flexibility to invest in innovation and acquisitions; and the gas-wind-digital hybrid seems a bit like Frankenstein's monster. GE has yet to detail the capital structures of these businesses, and the specifics will be key. But it still seems like a simpler GE will be a healthier GE. The shift in accountability and decision-making when companies break free from the bureaucracy of larger entities is tough to measure, but the benefits are usually large. Is this finally the end of conglomerates? This week also brought news of a breakup at Johnson & Johnson and Japanese industrial giant Toshiba Corp. But there have been a lot of proclamations over the years about the death of the conglomerate and yet they still persist. Some even thrive. There might be more industrial breakups to come, but some of the technology giants are only just getting started on their conglomerate phase. 

ADT Inc. agreed to buy solar-panel-installation company Sunpro Solar in a stock-and-cash deal valued at $825 million, including the assumption of debt. Speaking of the conglomerate model living on, it's not immediately clear why one might want to buy solar panels from a home-security company. But ADT will attempt to cross-sell the products by pitching customers on the benefits of "a protected, connected, and now powered home." The company is also betting its strong brand recognition will carry weight in the fragmented solar panel industry. 

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.