Some four years after the pandemic supply-chain disruptions sparked calls for a US reshoring boom, there’s still little consensus about what a reshoring boom actually looks like.
US manufacturing construction spending has surged to a record annualized pace of more than $200 billion, but few companies are shuttering factories elsewhere in the world in order to build in America. Analysts and companies alike have instead taken to tracking megaprojects — defined as construction blueprints valued at more than $1 billion — as a way to measure the manufacturing renaissance. By Melius Research’s count, about $700 billion worth of megaprojects have been announced in North America since the start of 2021; electric-equipment company Eaton Corp., which also tracks the data, pegs the total at $933 billion.
Shovels in the Ground
Factory investments in the US have soared, with most of the spending tied to facilities that support computer, electronic and electrical production
Source: Census Bureau
The majority of these big-dollar factory plans, though, are concentrated in two industries: electric vehicles/batteries and semiconductors. And while there have been few outright cancellations (yet), construction timelines for these projects are getting vaguer amid the slow trickle of US subsidies, labor shortages, inflation, higher interest rates and shifting market dynamics. Taiwan Semiconductor Manufacturing Co.’s $40 billion chip manufacturing complex in Arizona is behind schedule, and a $20 billion Intel Corp. facility in Ohio reportedly is, too. Ford Motor Co., General Motors Co. and Tesla Inc. are rethinking new facilities as electric vehicle demand growth sputters and consumers seek cheaper options. Rivian Automotive Inc. last week said it’s pausing construction on a new $5 billion plant outside of Atlanta.
But the story is a bit different for smaller projects. French electrical equipment giant Schneider Electric SE is spending $85 million to add more manufacturing capacity in Tennessee for switchgear and power distribution products. Zurich-based ABB Ltd. officially opened a robotics manufacturing facility and US headquarters building in Michigan that it spent $20 million to expand and retrofit. General Electric Co.’s aerospace arm is investing $450 million this year in new equipment and building upgrades for factories in Alabama, Massachusetts, North Carolina and Ohio, plus another $100 million for specialized tools and custom dies for its forging and casting supply chain and $100 million on plants outside the US. Dutch paint-manufacturer Akzo Nobel NV is investing more than $30 million to expand its powder-coating operations in Indiana, Pennsylvania, Tennessee and Monterrey, Mexico. And those are just the announcements from this week.
This kind of spending isn’t as eye-popping and it’s not enough on its own to fuel the kind of manufacturing super-cycle investors salivated over just a year ago. But these investments are real and happening in fairly short order; they’re related to but not directly dependent on government stimulus packages that have been slow to manifest; and they add up over time to a more robust US industrial economy. The motivations for these factory projects vary, but they’re all focused on making supply chains more reliable and a bet that future demand growth will require more heavily automated manufacturing capacity positioned closer to the end customer.
Read more: Industrial Outlook Is a Mixed Bag for 2024
“These are not singular events — if you want to build data centers, you have to think about how the grid is going to respond. If you want to build a battery facility, you have to think about raw material supply chains,” Aamir Paul, president of Schneider Electric’s North American operations, said in an interview. To build a factory in the US and make it economically viable, “you need to automate,” Sami Atiya, president of ABB’s robotics and discrete automation division, said in an interview. To build a jet engine, you have to think about forgings and castings. GE has said more than 80% of the delivery delays in its aerospace business are caused by holdups at parts and materials manufacturers operating outside its own walls. To build an electric vehicle, you need specialized powder coatings that provide insulation from electric currents and help prevent battery fires — one area of focus for Akzo Nobel’s new investments.
“This is a systems problem that we’re trying to solve,” Paul said. One reason why industrial companies have little to show yet for the pair of stimulus deals President Joe Biden signed more than 18 months ago to encourage domestic production of semiconductors and clean-energy technologies is because “we underestimated the ability to strengthen and expand our supply chain,” Paul said in an earlier interview. He gave the example of electric steel, a magnetic iron alloy that’s a key input for transformers that help connect energy-intensive sites like battery plants to power providers. There’s such a shortage of electric steel that the wait for that utility connection is 36 months, he said.
Read more: Stimulus Boost Comes in ‘Drips and Dribbles’
“That constraint ripples through the supply chain. When all of this started, we were recovering from the disruptions of Covid and it wasn’t obvious which ones were temporal,” he said. “Now we’re realizing, ‘Oh, actually there’s not enough structural capacity.’ And so we have to build more. And that’s what’s driving the manufacturing boom. But then that has a lag effect.”
A 16-Month Slump
While the decline in factory activity was much sharper during the 2008 financial crisis, the recent stretch of contraction has been more persistent
NOTE: The ISM’s gauge of manufacturing production is a diffusion index. Readings above 50 indicate expansion while readings below indicate contraction
The new Schneider Electric facility in Mt. Juliet, Tennessee, will build electrical products for data centers but also battery, semiconductor and electric vehicle plants. Schneider Electric picked the site because it already has factories in Tennessee and the region’s labor pool is robust enough to fill the 455 jobs it’s planning to add between the new Mt. Juliet site and an existing plant 20 miles down the road in Smyrna. Schneider Electric is spending another $55 million to add more jobs and upgrade equipment at other US facilities, on top of the $300 million it’s already invested in the country since 2020.
The company also has a large electrical product manufacturing presence in Texas, but resiliency isn’t just about spreading out factories across the globe, it’s also about diversifying within the US — lest a tornado or a hurricane blow through, Paul said. Plus, so many manufacturers are expanding in Texas right now that it’s hard to find real estate, he said.
Read more: Why Build a New Factory in US? Not Politics
ABB first opened its facility in Auburn Hills, Michigan, in 1993 and started making robots there in 2015, back when most of the automation investment in the US was concentrated in the automotive industry. The company still benefits from the clustering of robotics skills in the area for its own manufacturing work but the $20 million overhaul includes an onsite customer problem-solving hub and an expanded training center capable of educating 5,000 of its customers’ employees annually on how to work with robots. This is particularly important as advancements in artificial intelligence make robots more accessible and economical for many more industries beyond automotive, whether that’s health care or bakeries, and for smaller companies.
Automated Reboot
US robot installations have climbed in recent years, although the pace of investment pales in comparison to China
Source: International Federation of Robotics
“If we have a problem with a customer, it used to take months to react; now we can react in days,” Atiya said. “We need to be in the US to serve the market and be close to customers. That’s why we are doing it.” Almost 90% of the robots ABB delivers to customers in North and South America will be made at the Auburn Hills plant, which will also support the company’s Atlanta facility focused on the logistics and packaging industry, as well as its health-care hub in Houston. ABB’s Auburn Hills investment was supported by a $450,000 grant from Michigan’s business development program. The facility overhaul is part of a broader $170 million investment in ABB’s electrification and automation businesses in the US.
Automation adds more precision to Akzo Nobel’s quality control, makes it more affordable to expand in the US and helps the manufacturer keep up with the just-in-time inventory demands of its automotive customers, Jeff Jirak, the global managing director of Akzo Nobel’s powder coatings business, said in an interview. “Any time you’re putting in new equipment these days, it’s highly automated,” he said. But even with the upgrades to the “latest and greatest” technology from both an automation and sustainability standpoint, Akzo Nobel can set up new manufacturing capacity for coatings “probably five times faster” than it takes an electric-vehicle company to build a new plant, Jirak said.
The four sites that Akzo Nobel is investing in as part of the just-announced $30 million push “are targeting quite a bit of that reshoring” of automotive manufacturing work into North America, he said. “Part of this is about giving them the assurance that suppliers will be at their door step. They don’t want a very long supply chain, either.” But because Akzo Nobel can have new factory lines up and running fairly quickly, it doesn’t have to expand to meet all the future demand from the electric vehicle industry in one shot. The company has plenty of extra land around its existing facilities in case it needs to tack on more capacity later.
This kind of flexibility is its own form of resilience, should the shift toward electric vehicles and the broader electrification of the economy take longer than expected to play out or if the US slips into a recession. Schneider Electric similarly can adjust how “hot” it runs its factories from an inventory and staffing perspective, Paul, the North American president said. There are “one-way doors and there are two-way doors and there are still a lot of two-way doors that we can use to adjust to the real time demand requirement,” he said. “But long term, we see really positive growth trends in the market, as do our peers in the industry. And we’re investing to prepare for that.”
Quote of the Week
“We all need Boeing to be stronger — two years from now, five years from now, 10 years from now… Boeing needs to become a better company and the deliveries will follow that.” — Southwest Airlines Co. Chief Executive Officer Robert Jordan
Jordan made the comments this week at the JPMorgan Chase & Co. industrials conference. After a midair blowout on an Alaska Airlines flight in January, the Federal Aviation Administration temporarily capped production increases for Boeing’s 737 Max until it’s satisfied that the company’s quality-control systems are rigorous enough. That might not be for awhile: Boeing failed 33 of 89 safety audits, with 97 cases of noncompliance recorded, the New York Times reported, citing an FAA presentation. “It wasn’t just paperwork issues, sometimes it’s the order in which the work is done, sometimes it’s tool management, which sounds kind of pedestrian but is really important in a factory,” FAA Administrator Mike Whitaker told reporters on Monday. “It’s really plant-floor hygiene.”
Read more: Boeing Crisis Derails Airline Growth Plans as Output Stalls
The slower output means airlines won’t get as many Boeing planes as they had been counting on this year. Southwest only expects to get 46 of Boeing’s Max 8 model this year, down from an earlier plan for 79 total jets. The airline doesn’t expect to get any of the Boeing Max 7 variant, which along with the Max 10 has yet to be certified by regulators. United Airlines Holdings Inc. CEO Scott Kirby said he’s told Boeing to stop making the Max 10 models the airline has ordered and to build it more of the smaller Max 9 instead. The Max 9 was the model involved in the Alaska Airlines incident. Kirby is also shopping for Airbus SE’s A321neo jet but that plane has a long waiting list. United is close to securing three dozen or more of the Airbus planes from aircraft lessors, Bloomberg News reported, citing people familiar with the matter.
Boeing “deliveries are going to be way behind,” said Kirby, speaking separately at the JPMorgan conference. “I am glad that that’s the case. As much as I would like those deliveries, this is not a 12-month issue. This is a two-decade issue. I’d rather Boeing do what they need to do, and I think they are now.”
Deals, Activists and Corporate Governance
United States Steel Corp. should remain American-owned, President Joe Biden said in a statement. US Steel agreed in December to sell itself to Japan’s Nippon Steel Corp. in a deal that swiftly drew bipartisan criticism. US Steel isn’t the industrial powerhouse it once was, but the company traces its roots back to 1901 and comes with plenty of baggage in the politically charged steel sector. Still, it’s rare for a US president to directly weigh in on corporate takeovers — especially before regulators have made a decision. Biden didn’t outright call for the deal to be blocked and it’s unclear what his opposition to the Nippon deal will mean for US relations with Japan, a key ally. It’s an interesting shift for an administration that has embraced “friend-shoring” — a strategy that calls for refocusing manufacturing supply chains in countries that are geopolitical and economic allies. Friends are great when they’re building new factories across the US but apparently not when they’re buying US companies.
Nippon Steel, responding to Biden’s statement, said its takeover proposal delivers “clear benefits to US Steel, union workers, the broader American steel industry and American national security” and that it’s “determined” to see the transaction through. Cleveland-Cliffs Inc. CEO Lourenco Goncalves, who kicked off the bidding war for US Steel back in August, told Bloomberg News he’d consider another offer for the company if its current deal falls apart, albeit at a much lower price than what Nippon is willing to pay.
3M Co. is getting a new CEO. The maker of Post-it notes and N95 masks announced this week that Bill Brown, the former CEO of defense contractor L3Harris Technologies Inc., will replace Mike Roman in the top job effective May 1. Roman has been 3M’s CEO since 2018 and oversaw a more than $50 billion slide in the company’s market value. To a large extent, Roman was the victim of bad timing and poor decisions by previous 3M CEOs. The bulk of the decline in 3M’s market value during his tenure is linked to a pair of legal headaches over military earplugs and legacy manufacturing of per- and polyfluoroalkyl substances (PFAS) that have come to the forefront in recent years. But 3M’s pedestrian sales growth and profit margins and a bad habit of earnings disappointments and guidance cuts didn’t help matters. 3M is spinning off its health-care unit and has made progress recently in resolving its legal liabilities. But 3M is likely several more multibillion-dollar settlements away from putting its legal woes behind it.
The situation could use some fresh eyes, but “appointing an outsider as CEO is rarely an immediate seamless transition,” RBC analyst Deane Dray wrote in a note. “It takes time to ramp on issues, evaluate the leadership team, do a ‘listening tour’ and formulate a strategy.” Brown is well-respected and has a reputation for operational rigor. He also helped oversee Harris Corp.’s merger with L3 Technologies Inc. Still, it’s somewhat interesting that most of his expertise is in aerospace and defense — the one corner of the industrial world that doesn’t make up a meaningful part of 3M’s conglomerate sprawl.
Siemens AG’s Innomotics heavy-duty motors business has attracted bids from Japan’s Nidec Corp. and private equity firm KPS Capital Partners, Bloomberg News reported, citing people familiar with the matter. Siemens last year carved out the Innomotics business in preparation for a public listing but said it was also weighing a potential sale. The business could be worth about €3 billion ($3.3 billion), Bloomberg News has reported.
