Contact

Menu

Article

An Automation Supercycle?

The reshoring trend observed in developed countries and the development of new industries, such as battery production for electric vehicles, are both likely to benefit from automation. While government subsidies and incentives may act as initial stimuli, we believe that it will ultimately be the adoption of automation solutions that will allow local manufacturing to thrive.

April 17, 2023

Julian Beard

Senior Portfolio Manager, Credit Suisse Asset Management Thematic Equities

On August 9, 2022, Joe Biden signed the CHIPS and Science Act into law,2 firing the starting gun for a wave of “reshoring” activity in the semiconductor industry. In fact, all major economic regions are now moving to offer incentives and subsidies to encourage investment into semiconductor fabrication plants along with other manufacturing and technology investments in order to safeguard the supply of critical products and protect intellectual property. 

This is not just a semiconductor trend. Both the US and Europe want to be hubs for electric vehicles and green energy, which will require a huge wave of spending on the development of battery production and charging infrastructure, as well as on new forms of energy production and storage. 

"To keep European industry attractive, there is a need to be competitive with offers and incentives that are currently available outside the European Union." Ursula von der Leyen, World Economic Forum in Davos 2023¹

The EU is a large producer of textiles and apparel. While it is the world’s second-largest exporter with EUR 58 bn, its imports total EUR 106 bn. Of these imports, 45% comes from China.3 With an aging workforce and evolving consumer demand for clothing to become part of the circular economy and include more local sourcing and labor transparency, the automation opportunities for the industry are great.

Tough geopolitics in the world today are eroding confidence in traditional trade partners and sources of supply, and this, in turn, is driving large-scale efforts to reshore globally. As developed countries start to take back some parts of production that have been outsourced for decades, they are struggling with high land costs, higher minimum wages, weak population growth, and a lack of workers with specific manufacturing skills. While government subsidies and incentives might provide the initial stimulus for reshoring, we believe it will be the adoption of automation solutions in manufacturing that will allow these businesses to thrive commercially in the long-term. In this Thematic Insight, we explore some reshoring examples and build on the findings of our previous Thematic Insight on Robotics, “Home Made,” which was published in September 2022.

Semiconductors are first out of the gate

Today, semiconductors are found in almost everything, from our trusty cell phones to children’s toys, airplanes, cars, and missile defense systems. Trade tensions, COVID-19-related supply chain disruptions, and war have made the strategic importance of semiconductors clear over the last few years, with governments drawing up legislation to encourage the domestic manufacturing of chips to ensure access to supply.

Table 1: Geographic support programs for semiconductor manufacturing

Geography Legislation Detail
US CHIPS Act 2022 Total $52.7bn in semis R&O, manufacturing, workforce development
EU EU Chips Act Total $42.3bn through 2030
China   Total $143bn proposed, allocated over next 5 years
Japan   $6.8bn in domestic semiconductor funding through subsidies
Korea K Semiconductor Belt Investment tax credits. Attract up to $450bn private sector investment to 2030
India   Total $10bn

Source: Bank of America Securities research report – “US Semiconductors 2023 The Year Ahead: Recovery, Reshoring, Repositioning” 16/12/2022, page 4.

Reprinted by permission. Copyright© 2023 Bank of America Corporation ("BAC"). The use of the above in no way implies that BAC or any of its affiliates endorses the views or interpretation or the use of such information or acts as any endorsement of the use of such information. The information is provided "as is" and none of BAC or any of its affiliates warrants the accuracy or completeness of the information.

Under no circumstances shall BofA Securities or affiliates be liable to you or any third party for any damages (including but not limited to direct, indirect, special and consequential damages), losses, expenses, fees, or other liabilities that directly or indirectly arise from this license, the Report or the Content or your use of the materials.You hereby waive and release BofA Securities and affiliates from any claims for damages, losses, expenses, fees, liabilities, causes of action, judgments and claims arising out of or related to your use of the Report or the Content, whether now existing or arising in the future.
You recognize that information contained in the Content or Report may become outdated and that BofA Securities and affiliates are under no obligation to update the Content or Report or notify you of any changes to the Content or Report. The Report and Content are provided 'AS IS,' and none of BofA Securities and affiliates make any warranty (express or implied) with respect to the Report or any content including the Content, including, without limitation, any warranty of ownership, validity,enforceability or non-infringement, the accuracy, timeliness, completeness, adequacy, merchantability, fitness for a particular purpose, or suitability of the material for any intended audience.

Industry experts estimate that the cost of building and operating a fabrication plant in the US (over the course of ten years), taking government incentives into account, is 30% higher relative to other major hubs in Asia (South Korea, Taiwan, and Singapore). This difference reaches a massive 50% when compared to the costs in China. The cost differential stems from higher US construction, labor, and utility costs, but also due to the fact that government incentives in other countries are significantly higher. In South Korea, for example, incentives account for 65% of the total cost difference.4

With the passing of the CHIPS Act, the industry in the US saw commitments of nearly USD 200 bn in private capital.5 Clearly, there is a significant multiplier to the capital the government aims to provide (USD 52.7 bn), which is intended to help bridge the gap in the economics of domestic production.

The big players are leading the pack, with Taiwan Semiconductor Manufacturing Company (TSMC), Intel, Samsung, and Micron committing huge sums to new factories. TSMC are planning to spend USD 40 bn on two state-of-the-art fabrication plants in Arizona, where they plan to produce leading-edge semiconductors for the likes of Apple. According to TSMC, the plants will create 13,000 high-paying jobs and produce billions of dollars annually in revenue.6 Intel has announced large investments in the US and in Europe. They want to invest EUR 80 bn in European manufacturing over the next decade. The European Chips Act is vital to securing this type of investment, but, as often seems to be the case, Europe is lagging behind the US in terms of progress. The bill is not yet law, and first needs pass through the European Parliament in the first half of 2023. It seems there is a long road ahead to achieving the stated ambitions of European Commission President Ursula von der Leyen,

"We have set ourselves the goal to have, in 2030, 20% of the global market share of chip production, here in Europe. Right now we are at 9%." Ursula von der Leyen⁷

The US, the EU, and China have huge ambitions. When the purse strings loosen, providers of automated semiconductor equipment should benefit. Ultimately, regional supply chains may lead to overspending and overcapacity on a global basis, perhaps exaggerating cycles within the secular semiconductor growth trajectory. As a case in point, 2023 is likely to be a down year for semiconductor equipment, despite all the secular tailwinds. The downturn in electronic goods demand combined with panic ordering due to COVID-19 has resulted in short-term inventory accumulation and a pause in capital spending for 2023. Although we see this as temporary, it does show that while the direction of travel seems clear, there will be bumps in the road.

Textiles and apparel

The textile and apparel industry is not one we readily associate with technology. We are all accustomed to seeing the words “Made in China,” “Made in Bangladesh,” or “Made in Vietnam” on our clothing labels. This is due to the historically plentiful supply of cheap labor in those countries. Additionally, soft materials, like the ones our clothes are made of, are notoriously difficult for robotics and automation systems to handle. Today, sewing remains a largely manual process. However, change is in the air.

While the COVID-19 pandemic may have played a role in reducing consumer choice for a year or two, bigger drivers for reshoring are coming in the form of the use of recycled materials, the desire to be transparent with fair labor practices, and perhaps even the pride in knowing that your sweater is locally made and sourced from a sustainable production process. In some cases, this can trump the price of the goods – not at any price and not for all clothing, but a new trend feels like it is emerging. As the industry looks to maintain its strong position in the EU, we could expect lobbying and policy incentives for domestic production to lead to greater adoption of automation solutions.

Meanwhile, green shoots are visible in a growing reshoring trend. We can look to an example in the US, where denim jeans manufacturer Saitex USA (producing for brands like Calvin Klein Jeans) opened an automated jeans factory in 2021. The facility promises extremely fast cycle times from design to shop floor by utilizing an industry 4.0 smart factory approach, where jeans are created using design software and are manufactured with a significant amount of automation, such as laser-cutting material, semi-automatic sewing, laser-customizing detail, robotic spraying of jeans, and, of course, quality inspection throughout production. Four robots can spray 3,000 pairs of jeans per day – hazardous work that normally requires about 25 people.8

Perhaps this points towards a future of highly customized clothing, machines capable of cutting thousands of different shapes daily, quicker and superior quality production, all while heavily focusing on the circular economy. The company claims that the new production process only uses 1.5 liters of water per pair of jeans compared to 80 liters with traditional techniques – resulting in savings of USD 400,000 per year. Wastewater is used to manufacture bricks instead of being released into the environment, thus reducing pollution, while at the same time new drying techniques are helping them to reduce CO2 emissions by 80%. All of this is highly relevant to an environmentally conscious consumer. The factory can produce 720,000 pairs of jeans annually, and there are plans to roll out this type of facility globally.9

In Europe, C&A is the clearest example of a clothing company following a similar path with their Factory for Innovation in Textiles (FIT) automated jeans facility in Mönchengladbach, Germany. Their rationale is strikingly similar to that of Saitex – focusing on local production and sourcing (organic cotton) from a local, sustainable supply chain, as well as introducing automation systems for quality improvement and to redesign the production process in order to reduce water consumption, CO2 emissions, and waste materials.10

At C&A, 400,000 jeans were produced in the first year, and 800,000 is now the target. Greater capacity should enable production costs and consumer-facing prices to fall. Nevertheless, it should still be noted that the costs are still higher than in Asia, and that C&A sells these jeans at a premium price – almost twice that of their standard range – and with a slightly lower margin, suggesting further evolution of the process lies ahead.11

These leading facilities boast an automation component at about 40%,12 but industry executives clearly believe that innovation and automation are coming to textiles and clothing production, making it a vital aspect of any successful reshoring initiative.

Electric vehicles and the battery issue

The automotive industry is going electric. In Europe, VW, Daimler, and Volvo have all committed to reaching a 50% electric vehicle (EV) sales share by 2030.13 Pricewaterhouse-Coopers (PWC) estimates that in 2021, the EU was at 8%, China 12%, and the US 2%. In 2030, with a projected EV total production share of 65%, the EU is expected to top the China EV percentage of 56%, with the US lagging around 26%. The demand for batteries will be huge and is projected to grow at a compounded annual growth rate (CAGR) of 34% from 2021–2030.14

All regions are striving for self-sufficiency, which means huge investments ahead. China is in the driver’s seat given the fact that they have the leading battery producers Contemporary Amperex Technology (CATL) and BYD. These companies have a combined global share of around 45%,15 a huge amount of scale production knowledge, and a large amount of the raw materials and processing capacity. 

By 2025, the EU hopes that 30% of cars produced will be EVs. Yet it is home to only 7% of battery production capacity and has almost no critical material production or processing facilities.16  

To date, announced capacity additions suggest that the US is likely to suffer a 40% capacity shortfall in 2030.16 It should come as no surprise that the Inflation Reduction Act in the US offers various tax and production credits across the entire battery supply chain, from mineral mining and processing to battery production, assembly, and recycling of key materials. It seems clear that the US will speed up its battery capacity additions. Will this take planned capacity away from Europe? Initial political rumblings in Germany and France suggest that they believe the EU will need to do more. Either way, a lot of capital expenditure (capex) is coming – PWC estimate up to USD 300 bn.16

This discussion is relevant to robotics as both battery production and EV assembly lend themselves to automation. With an huge anticipated investment in batteries in Europe, there is a big opportunity for European champions to emerge. After all, Europe is home to many major car companies and suppliers. 

We are also starting to see alliances form. For example, Duerr Group, a major supplier of robotics solutions to the automotive industry, has expertise in battery electrode production and is also a world leader in automation technology for coating, drying, and solvent recovery. Others are better at battery cell and pack assembly, however. As a result, they have formed a three-pronged German alliance together with Grob-Werke and Manz AG in order to offer a full solution to car companies. This pooled expertise allows for greater technology refinement potential and a focus on cost reduction to increase competitiveness with Asian suppliers. 

Conclusions

Get in touch with Asset Management

Contact us to learn about exciting investment opportunities. We are here to help you achieve your investment goals.

1 Special Address by the President at the World Economic Forum (europa.eu); retrieved on February 20, 2023.
2 CHIPS: The Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 FACT SHEET: CHIPS and Science Act Will Lower Costs, Create Jobs, Strengthen Supply Chains, and Counter China | The White House; retrieved on February 2, 2023.
3 The European Apparel and Textile Confederation, Page 18&19. EURATEX Facts & Key Figures 2022; retrieved on January 20, 2023.
4 Government Incentives and US Competitiveness in Semiconductor Manufacturing, September 2020, Boston Consulting Group (BCG) and Semiconductor Industry Association, retrieved on January 31, 2023.
5 The CHIPS Act Has Already Sparked $200 Billion in Private Investments for U.S. Semiconductor Production - Semiconductor Industry Association (semiconductors.org) – projects announced May 2020–Jan 23; retrieved on January 23, 2023.
6 TSMC triples Arizona chip plant investment, Biden hails project | Reuters, accessed on January 31, 2023.
7 Statement by the President on the European Chips Act (europa.eu); retrieved on February 20, 2023.
8 The New Automated Jeans Factory In L.A.—A Blueprint For Reshoring Apparel Manufacturing? (forbes.com); retrieved on February 14, 2023.
9 Commitments - SAITEX International (sai-tex.com); retrieved on February 20, 2023.
10 Textile production in Europe (c-and-a.com); retrieved on February 15, 2023.
11 A visit to C&A’s flagship factory in the heart of Europe (fashionunited.com); retrieved on February 20, 2023.
12 The New Automated Jeans Factory In L.A.—A Blueprint For Reshoring Apparel Manufacturing? (forbes.com); retrieved on February 14, 2023.
13 The Future of the EU Automotive Sector, Study for the European Parliament Committee on Industry, Research and Energy. Published October 2021. Page 28, accessed on January 26, 2023.
14 Gigafactories and raw materials | Strategy& (pwc.com) August 2022; accessed on January 26, 2023.
15 The Top 10 EV Battery Manufacturers in 2022 (visualcapitalist.com); retrieved on February 9, 2023.
16 Gigafactories and raw materials | Strategy& (pwc.com); retrieved on February 20, 2023.
17 What’s in the Inflation Reduction Act (IRA) of 2022 | McKinsey; retrieved on February 20, 2023.
18 US capacity, Europe penetration and California weather likely highlight 4Q. Enphase Energy company update. Page 4 – IRA potential Benefit. January 20, 2023.
19 With the “pure-play” concept, we mean companies that have at least 50% in revenues directly attributable to the corresponding theme.

To the extent that these materials contain statements about the future, such statements are forward looking and are subject to a number of risks and uncertainties and are not a guarantee of future results/performance.

The individuals mentioned above only conduct regulated activities in the jurisdiction(s) where they are properly licensed, where relevant.

The individual companies mentioned are meant for illustration purposes only and is not intended as a solicitation or an offer to buy or sell any interest or any investment.

Fund Related
UBS (Lux) AI and Robotics Equity Fund

The Investment promoted in this marketing material concerns the acquisition of units or shares in a fund and not of any underlying assets. The underlying assets are owned by the fund only.

The full offering documentations including complete information on risks may be obtained free of charge from Credit Suisse representative or where available via FundSearch (credit-suisse.com/fundsearch).

Fund Risks
UBS (Lux) AI and Robotics Equity Fund

  • No capital protection: investors may lose part or all of their investment in this product.
  • The emphasis on Robotics companies can create significant exposure to certain sectors or regions.
  • Exposure to small and mid caps can result in higher short-term volatility and may carry liquidity risk.
  • Due to the possibility of increased exposure to the emerging markets the fund may be affected by political and economic risks in these countries.
  • Equity markets can be volatile, especially in the short term.

This material constitutes marketing material of Credit Suisse Group AG and/or its affiliates (hereafter "CS"). This marketing material is not a contractually binding document or an information document required by any legislative provision. Nothing in this material constitutes investment research or investment advice and may not be relied upon. It is not tailored to your individual circumstances, or otherwise constitutes a personal recommendation, and is not sufficient to take an investment decision. The information and views expressed herein are those of CS at the time of writing and are subject to change at any time without notice. They are derived from sources believed to be reliable. CS provides no guarantee with regard to the content and completeness of the information and where legally possible does not accept any liability for losses that might arise from making use of the information. If nothing is indicated to the contrary, all figures are unaudited. The information provided herein is for the exclusive use of the recipient. The information provided in this material may change after the date of this material without notice and CS has no obligation to update the information. This material may contain information that is licensed and/or protected under intellectual property rights of the licensors and property right holders. Nothing in this material shall be construed to impose any liability on the licensors or property right holders. Unauthorised copying of the information of the licensors or property right holders is strictly prohibited. The full offering documentation including, the prospectus or offering memorandum, the Key Investor Information Document (KIID), the Key Information Document (KID), the fund rules, as well as the annual and bi-annual reports ("Full offering documentation"), as the case may be, may be obtained free of charge in one of the languages listed below from the legal entity/entities indicated below and where available via FundSearch (credit-suisse.com/fundsearch). "Information on your local distributors, representatives, information agent, paying agent, if any, and your local contacts in respect of the investment product(s) can be found below. The only legally binding terms of any investment product described in this material, including risk considerations, objectives, charges and expenses are set forth in the prospectus, offering memorandum, subscription documents, fund contract and/or any other fund governing documents. For a full description of the features of the products mentioned in this material as well as a full description of the opportunities, risks, and costs associated with the respective products, please refer to the relevant underlying securities prospectuses, sales prospectuses, or other additional product documents, which we will be pleased to provide to you at any time upon request. The investment promoted in this marketing material concerns the acquisition of units or shares in a fund and not of any underlying assets. The underlying assets are owned by the fund only. This material may not be forwarded or distributed to any other person and may not be reproduced. Any forwarding, distribution or reproduction is unauthorized and may result in a violation of the U.S. Securities Act of 1933, as amended (the “Securities Act”). The securities referred to herein have not been, and will not be, registered under the Securities Act, or the securities laws of any states of the United States and, subject to certain exceptions, the securities may not be offered, pledged, sold or otherwise transferred within the United States or to, or for the benefit or account of, U.S. persons. In addition, there may be conflicts of interest with regard to the investment. In connection with the provision of services, Credit Suisse AG and/or its affiliates may pay third parties or receive from third parties, as part of their fee or otherwise, a one-time or recurring fee (e.g., issuing commissions, placement commissions or trailer fees). Prospective investors should independently and carefully assess (with their tax, legal and financial advisers) the specific risks described in available materials, and applicable legal, regulatory, credit, tax and accounting consequences prior to making any investment decision. The alternative investment fund manager or the (UCITS) management company, as applicable, may decide to terminate local arrangements for the marketing of the shares/units of a fund, including terminating registrations or notifications with the local supervisory authority. A summary of investor rights for investing into European Economic Area domiciled investment funds managed or sponsored by Credit Suisse Asset Management can be obtained in English via www.credit-suisse.com/am/regulatory-information, local laws relating to investor rights may apply.

Distributor: Credit Suisse Fund Management S.A.1, 5 Rue Jean Monnet, L-2180 Luxembourg I Language versions available: German, English, and/or French I Supervisor (Entity of Registration): Commission de Surveillance du Secteur Financier (CSSF), 110 Route d’Arlon, L-1150 Luxembourg, Tel.: +352 2625 11, Fax: +352 2625 1, Website: https://www.cssf.lu/

1 Legal entity, from which the full offering documentation, the key investor information document (KIID), the fund rules, as well as the annual and bi-annual reports, if any, may be obtained free of charge.