US industrial policy to spearhead new wave of growth and innovation
- Recent US legislation should usher in a new era for investment in key areas such as infrastructure, clean energy, technology, automation, and transportation
- Under new laws companies are essentially getting a discount for manufacturing domestically, which should accelerate activity
- We expect the Inflation Reduction Act and the CHIPS Act will provide a potentially very significant multi-year tailwind for US equities
Despite the current backdrop of geopolitical uncertainty, still-high inflation and tighter monetary policy, the future for technological advancement and the path to net zero looks bright.
The next phase of the industrial revolution looks set to deliver better, cleaner, more sustainable long-term growth. Science and ever-greater technological developments will help drive and accelerate the structural trends already in place.
A spate of recent US legislation is being viewed as something of a gamechanger which should usher in a new era for investment in key areas such as infrastructure, clean energy, technology, automation, and transportation.
The Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 - i.e., the CHIPS Act - signed into law by President Joe Biden in August 2022, is providing $280bn of investment to ramp up and ‘reshore’ US technology such as semiconductor production.
According to the White House it will “strengthen American manufacturing, supply chains, and national security, and invest in research and development, science and technology” to ensure the US remains “the leader in the industries of tomorrow, including nanotechnology, clean energy, quantum computing, and artificial intelligence”.1
US accelerates in the race to net zero
In addition, the introduction of the Inflation Reduction Act (IRA), which also went live in August 2022, has heralded something of a sea change in the US; the World Bank expects it will dramatically change the economics of industrial decarbonisation.2
It has accelerated areas that people never thought the US would take a lead in. After being viewed as a laggard it now could be a significant decarbonisation leader, driven by government policy and the ensuing economic opportunities.
And underpinning both these rulings is the Infrastructure Investment and Jobs Act, which came into play in November 2021; the $1trn package proposes, and will be used to improve, highways, roads, and bridges, and modernise city public transport systems and rail networks.3
The priorities of these three pieces of legislation are intertwined – and certainty protectionism appears to be part of this considering the trade wars witnessed in recent years. But together they are proposing some $2trn in US government spending over the next decade.4
There is no doubt their introduction and implementation could have a potentially dramatic impact on several industries and sectors. Significant investment opportunities are developing as a result.
Cleaner energy, cleaner technology
We expect the IRA will go some way in helping the private sector – and investors – decarbonise hard-to-abate industries. It has earmarked billions in new spending and tax breaks designed to increase clean energy investment, cut healthcare costs, and raise tax revenues. The goal is to significantly cut the US’s carbon emissions by 2030.
According to McKinsey, approximately $43bn in IRA tax credits aim to lower emissions by making electric vehicles (EVs), energy-efficient appliances, rooftop solar panels, geothermal heating, and home batteries more affordable.5
The money is coming via a combination of loan guarantees, tax incentives and grants – with clean electricity and transmission expected to get the lion’s share, with clean transportation also set to enjoy a hefty cash injection too.
Given the size of the legislative package, at some $400bn, it should drive significant investment in clean energy and clean technology for years to come which in turn should present a wave of potential long-term investment opportunities.6
Corporates will be the biggest beneficiaries of the tax credit – at some £216bn – which is expected to spur on private investment in clean energy, transport, and manufacturing.7 For example, investment in the manufacturing and recycling of lithium batteries is expected to be a key beneficiary and be part of the general reshoring of critical technologies that will progress alongside much of this investment.
In all this should provide an added boost to the considerable tailwinds of renewable energy technologies such as wind and solar, energy efficiency and storage, as well as the wider infrastructure and services that support them.
Notably Biden has set a target to employ tens of thousands of workers to deliver 30 gigawatts of offshore wind by 2030 – comfortably enough to supply 10 million homes with clean energy while still creating new jobs.8
But it’s not just corporations that the US is targeting and encouraging to switch to cleaner energy. According to the White House, families who take advantage of clean energy and EV tax credits will save more than $1,000 per year while there is $14,000 in direct consumer rebates for families to buy heat pumps or other energy efficient home appliances, saving families at least $350 per annum.
In addition, some 7.5 million more families will be able install solar panels on their roofs with a 30% tax credit, saving them $9,000 over the life of the system or at least $300 per year.9
Automation and manufacturing spend ramps up
Semiconductors are ubiquitous – they are a vital part of industrial systems and machinery and found everywhere from fridges and smartphones to robotics and the technologies tackling climate change, such as EVs and renewable energy.
They are also a politically contentious commodity as highlighted by the US’s decision to restrict exports of advanced semiconductors and advanced manufacturing equipment to China.10
While the US is at the forefront of the chip design industry, it accounts for just 12% of global semiconductor manufacturing. Most of the production, at some 75%, is concentrated in East Asia.11
As such semiconductors are big business; shortages hit US GDP growth by an estimated $240bn in 2021.12 The global semiconductor market enjoyed sales of $600bn in 2021, with analysis from McKinsey suggesting an annual growth rate of 6% to 8% a year, up to 2030 – meaning a potential $1trn industry by the end of this decade.13
The 2022 CHIPS Act provides $52.7bn of new funding to boost research and manufacturing of semiconductors within the US. The US administration is aiming bolster investments in domestic semiconductor manufacturing capacity.
It is also looking to boost research and development and commercialise cutting-edge technologies, especially for artificial intelligence, quantum computing, nanotechnology, and clean energy. Many US semiconductor manufacturing companies have already announced increased investment in fabrication while foreign manufacturers are expected to be a source of direct investment in the sector.
A reinvigorated backdrop
The potential impact of the CHIPS Act on the automation and manufacturing industries is considerable. New technologies mean that the use of robotics in society will increase efficiency, precision, and safety. This is a significant growth opportunity, and we are still in the early stages of this disruptive long-term trend.
For example, historically companies have spent an average of $6bn dollars a year on semi-conductors, and now they are spending about $21bn – and this is because of the CHIPS Act offering subsidies in the region of 25% to manufacture semiconductors domestically.14 It takes about three years to build a semiconductor fabrication plant, or fab – so this spending is here to stay. And US firms are investing heavily in manufacturing; the overall spend tally has risen from an annual average of $49bn to approximately $120bn now.15 This significant spike can be at least partly, if not mainly, attributed to the IRA, and the CHIPS Act. What is important here is that this capital expenditure is underpinned by the government so is less economically sensitive and the projects are long-term, which should support this growth for a long time.
In addition, US machinery is the oldest it has ever been, and these legislative measures have created a very benign environment for investment and capital expenditure.16
Ultimately this legislation has overhauled the previous backdrop of the former US President. Donald Trump was raising and imposing tariffs, and getting international responses in kind, which resulted in a big slowdown in activity due to uncertainty. However, under Biden’s wave of new laws, companies are essentially getting a discount for manufacturing domestically, which should in turn accelerate activity.
Electric vehicle sales on track to soar
All of this and more is having – and is likely to continue to have – a very big impact on the EV industry. It is increasingly recognised that EVs are starting to get more interest from consumers as the costs of the vehicles come down, battery technology improves, and consumers focus on environmental trends. What is perhaps less visible is the huge investment needed to manufacture the cars and batteries and the capital expenditure being committed today is for cars which will be produced in 12 to 24 months’ time, so the investment needs to start being made now.
In addition, as part of the Inflation Reduction Act, US citizens are being offered up to $7,500 in tax credits to purchase new EVs and $4,000 for used EVs.
Research estimates that EV market revenue will reach $457.6bn this year and grow at an annual rate of over 17%, resulting in a projected market volume of $858bn by 2027.17
EVs and the automation and semiconductor industry are heavily linked, as internal combustion engines are built manually while EVs and batteries are built by automation and robotics. What’s more, there is a significant increase in semiconductor content as vehicles transition from internal combustion engines to electric.
The average internal combustion engine vehicle has about $500 worth of semiconductors while an EV has $1,000 – soon expected to be closer to $1,300 - $1,500 as technologies develop. And as of 2022, around one in eight cars sold was electric, and between a third and half of vehicles sold are expected to be electric by 2027.18
The legislation put in place by the Biden Administration is a forceful demonstration of the US’s desire to bolster its manufacturing base. It is also aimed at industries that the US deems to be strategic – in terms of preserving US leadership in technology, bolstering defence capabilities and strengthening supply chains.
The pandemic revealed supply chain weaknesses in several industries – semiconductors and pharmaceutical production for example. Boosting domestic production and encouraging reshoring of economic activity is a response to this.
And while the headline numbers accompanying the IRA are impressive, what’s of vital importance is that it is essentially inexhaustible. Many of its elements – such as its EV incentives and zero-carbon electricity - are ‘uncapped’ tax credits. Therefore, provided their terms are met, the US government will honour them - there’s no limit restricting how much the government can spend.19
Given the huge amount of public money being put to work, looking ahead, we expect this to be a potentially very significant multi-year tailwind for US equities.
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