Editor’s Note: Welcome back to Jeff Brown’s prediction series. Over the next several days, Jeff will share his biggest predictions for the new year. And we’ll take stock of which predictions he got right and wrong for this year.
Today, we talk about the “Great Recalibration” – the multi-year trend of onshoring advanced manufacturing. Read on…
Van Bryan (VB): Jeff, I’d like to ask you about the “Great Recalibration.” You had a prediction along these lines when we spoke last year. But first, could you catch readers up on what this trend is?
Jeff Brown (JB): This trend has been a key area of research for me since 2019. And if I had shared it then, I doubt many people would have believed me. But enough has happened since then that I think most of us will at least partially recognize that this trend has already begun.
At a high level, the “Great Recalibration” is the trend of onshoring manufacturing; this is also often referred to as “reshoring.”
It is a global trend of moving away from centralized manufacturing in one location or region and rearchitecting manufacturing infrastructure to be closer to end markets.
This is now economically possible due to advanced manufacturing technology and automation. Put more simply, the trend of offshoring manufacturing – which has been common for the past four decades or so – has already started to reverse.
VB: And an example of this trend in action is the CHIPS Act. It provides incentives to bring semiconductor manufacturing back on U.S. soil. Last year, you predicted that the CHIPS Act would be passed and that funds would start being distributed this year. How did that prediction turn out?
JB: When we spoke last year, the CHIPS Act was just a proposal. And as of August this year, it was officially signed into law.
I’m excited to see the continued focus of bringing manufacturing back onshore that was such a major tenet of the last administration. It creates jobs, increases skill levels and competitiveness, is more ecological, and makes for far more resilient supply chains.
What has been disappointing to me this year has been how slow the CHIPS Act has been rolled out. It is hard to imagine why, but funding documents haven’t yet been provided to the industry. Almost nothing has happened.
For perspective, the U.S. government has spent almost $100 billion on a proxy war with Russia in the Ukraine this year and hasn’t done anything with the CHIPS Act. Makes no sense at all.
It does appear now that the funding documents are scheduled to be available by February of next year. And then awards will be given out on a rolling basis once funding applications have been processed.
So hopefully, we can expect awards to be made no later than the second half of next year.
The important thing is that it’s moving forward. This is smart legislation. And what’s interesting is the geopolitical backdrop that this is happening in.
VB: How do you mean?
JB: The world is mostly focused on the war in the Ukraine. But arguably, the more significant event is the question of what China will do with Taiwan.
Xi Jinping got himself reelected for a third term as Chairman of the Chinese Communist Party. Historically, China had the same two-term limits as the U.S.
Xi had to overcome critics with some key commitments if he were to be allowed to serve a third five-year term, and probably the largest commitment of all was to reunify Taiwan with the mainland.
Xi will not lose on this point. He will not lose face. He will find a way to deliver on this promise. And I am absolutely confident that his plans have already been well in place for years.
In fact, I would argue that we’re seeing this plan in action right now. Just like the U.S., Taiwan recently had elections. The DPP, which is the pro-independence party, suffered its worse elections in 36 years to the KMT, which is the pro-unification party in Taiwan.
It is well-known that China has interfered in U.S. elections in the past, is it so hard to believe that China has done the same in Taiwan?
A China-controlled Taiwan becomes a severe risk for the world because—as readers know—Taiwan is home to TSMC. It’s the world’s largest semiconductor fabrication company (FAB).
On top of that, some of the world’s most important silicon wafer companies are in Taiwan, as well as many critical electronic components manufacturers.
If China is in control of Taiwan’s economic resources, it literally means that it has the power to hold the global economy hostage. Taiwan is that strategically important to the world.
It’s pretty safe to say that just about anything that has electronics in it has ties back to Taiwan. This reality would put China in an unbelievable negotiating position on the world stage.
VB: Most assume that an invasion of Taiwan is unlikely or impossible. Do you disagree?
JB: That’s the common Western view. They assume Taiwan is fine. They have military installations. The island itself is difficult to land on. And they also assume that the U.S. would respond with force if China launched an all-out invasion.
But what this view misses is that China doesn’t have to invade Taiwan with its military. It’s a possibility. But it’s not the most likely outcome.
I lived and worked in Asia for decades as a technology executive. I’ve probably been to Taiwan a hundred times. And the reality is that China has been in Taiwan for years.
Very slowly, they’ve been asserting administrative control, placing “their people” in positions of influence and power. This is exactly what happened with Hong Kong.
One moment, Hong Kong appeared a semi-autonomous city, at least to the Western world. Then, all of the sudden, it very clearly falls under the heel of Beijing. I believe the same thing will happen to Taiwan.
And I’ll make a prediction along these lines.
I predict that China will make its move on Taiwan in 2023. I could make some strong arguments that this is already in play, but there will be a far more public proclamation which will happen next year.
Again, I don’t think it will be a military invasion. But I suspect they will assert administrative control and declare reunification.
VB: What makes you think it will happen next year?
JB: From China’s perspective, there’s never been a better time. The U.S. is so consumed with its proxy war with Russia. It’s a great distraction.
And it’s no secret that the Chinese leadership views the current U.S. administration as weak on foreign policy and very weak on leadership due to a frail and weak president. Xi knows that he’ll never have a better opportunity to make his move than over the next 12 months.
VB: And what do you think the U.S. will do?
JB: Even if there is a full-scale military invasion, I seriously doubt that the U.S. would declare war with China. Nor would the U.S. be able to use allies like Japan or South Korea to fight a proxy war with China.
Neither country is equipped to do so, nor would they be willing even if they were. Both of their economies are so tightly linked to China. They would be destroying their own economies if they moved against China.
Again, a full-scale invasion is highly unlikely. What is more likely is a “soft invasion,” which would look more like a show of force, a show of strength, more to signify the importance of the change of control.
In that case, the U.S. won’t do a darn thing.
Sure, there will be a lot of posturing. I predict we’ll hear plenty of speeches about how unacceptable it is. There may be some additional sanctions.
But the Chinese position will be that it’s a Chinese matter. It’s none of America’s business. And if TSMC is allowed to operate more or less normally, then the U.S. will back down.
China is not Russia. The U.S. government may be willing to wage a proxy war with Putin, but it won’t pull the same thing with Xi. The reality is that too much of the American supply chain is still dependent on China-based manufacturing.
Let’s take a simple example.
So much of the basic compounds we use in pharmaceuticals come from China. Ninety percent of America’s supply of antibiotics comes from China.
The impact of a war would be devastating to the global pharmaceutical industry, so it wouldn’t just be the U.S. that gets hurt, but every other country in the world.
And in the nightmare scenario, China restricts exports from TSMC and perhaps other key electronics component manufacturers. This would have an immediate and devastating global effect to the entire electronics and semiconductor industry.
The United States won’t risk that.
VB: So, America’s economic relationship with China is precarious. The “Great Recalibration” is meant to address this? And what are some examples of this trend in action?
JB: Yes, it was a difficult lesson to learn. But the Western world has finally realized that the security of critical manufacturing capacity is a matter of national security.
Plenty of executives in the industry have been warning about this for years. But it took the lockdowns and the shortages for the world to finally realize it. Better late than never I suppose.
What does the “Great Recalibration” look like? I’d say it looks a lot like some very interesting manufacturing projects in places we’d never expect.
Intel recently announced a $100 billion investment into Ohio – the heartland. It wants to build the world’s largest semiconductor manufacturing facility right next to cornfields. The company also announced a $20 billion investment into an Arizona facility.
This is the most exciting thing I’ve seen from Intel in decades. And it’s not happening in Silicon Valley. It’s extraordinary.
Samsung plans to spend $17 billion on a chip plant in Texas. And TSMC is spending $12 billion in Arizona. It needs to diversify its supply chain.
Micron is looking to spend as much as $40 billion – maybe in Arizona, maybe in Texas. On Semiconductors – another favorite of mine – has committed $720 million to take over and expand a GlobalFoundries fab.
And GlobalFoundries – a smaller competitor to TSMC – wants to spend billions on a new facility in upstate New York.
One of my favorite small-capitalization companies also has a new fabrication facility in upstate New York. I had the chance to visit the facility late last year.
Jeff Visits a Fabrication Facility
VB: Is it fair to say that a new Silicon Valley is forming in these areas?
JB: You could certainly say that. Everybody tends to think of Silicon Valley in California as the epicenter of semiconductor technology. But now we have places like Arizona that are becoming a real hub for semiconductor manufacturing with the new TSMC facility.
Intel is making a stand in Ohio. And we have companies like Micron and GlobalFoundries building out manufacturing capacity in upstate New York.
In a few years’ time, we may very well be talking about Silicon Valley West and Silicon Valley East. With more than $200 billion in commitments made for new semiconductor manufacturing in the U.S., we can expect an absolute transformation of the industry.
VB: And the obvious question. What does this all mean for investors?
JB: There will be some incredible investment opportunities along these lines over the next several years, but probably not in the way we might think.
The obvious investment is to buy stock in the companies building these new facilities: Micron, TSMC, etc.… And these are both great companies.
But the more interesting angle to me is the technology that will power the manufacturing of these components. That means artificial intelligence and robotics companies.
So, there are great automation companies like Cognex that specialize in machine vision for manufacturing applications. On the smaller side, we have companies like Ambarella, another company specializing in machine vision. We could think of these as “picks and shovels” on this larger manufacturing trend.
Additive manufacturing (3D printing), which had a tough year this year, will be a bright spot in 2023. The technology and utilization advanced significantly this year, and we’re going to see a lot more onshore, decentralized manufacturing uses of this incredible technology.
This trend will take years to unfold. And the most exciting and high-growth part of that trend is what happens in the next five to seven years, so we’ll have plenty of great investment opportunities along the way.
Editor’s Note: Tune in tomorrow for Jeff’s next prediction, where we’ll discuss autonomous technology.
Is 2023 the year of self-driving taxis? Which companies are already adopting autonomous trucks? And what will be the fate of Tesla’s new Optimus bipedal robot? Check back tomorrow for that and much more.