It All Starts With an Industrial Megasite (and 🏛️🧀)
By peeling back the layers from the US manufacturing construction boom, we uncover the true drivers propelling manufacturing investments, which reveal factors beyond simple reshoring.
As U.S. manufacturing construction spending climbs to an unprecedented $189 billion annual rate, social media is abuzz with talk of reshoring as the driving force (You’ve probably seen the chart below numerous times). The narrative being woven is one of American companies returning home, but is this the entire story? A closer examination reveals a more nuanced picture. Two significant elements – government incentives, and the strategic development of industrial megasites – appear to be playing critical roles.
Check out the Exponential Industry Factory Boom interactive map updated weekly with our digest.
Federal Government Incentives (🏛️🧀) Spur the US Manufacturing Investment
Navigating through the intricacies of the manufacturing construction spending surge, U.S. Government incentives stand out as pivotal contributors. Three economic packages - The 2021 Bipartisan Infrastructure Law, the Inflation Reduction Act (IRA), and CHIPS and Science Act, passed in 2022 - emerge as the main drivers behind the construction boom. These enactments collectively signify a determined push by the government to fortify the manufacturing sector.
Bipartisan Infrastructure Law (BIL)
According to The Bipartisan Infrastructure Deal Fact Sheet the law authorized funding for a rebuild of US roads, bridges, and ports, upgrades to the power grid to transmit more clean energy, replacement of dirty diesel buses with electric buses across school bus and transit fleets, and a national network of EV chargers in the United States and the largest investment in domestic manufacturing of batteries and the critical minerals that power them.
The BIL provides both reduced input costs and demand incentives for manufacturers:
Inputs
With roughly 70% of goods (~$10 trillion) transported by trucks in the US each year an upgrade to the roads and bridges enables lower transport costs. The Federal Highway Apportionments are up to $120 billion.
Upgrades to the power grid give reliable energy access to power-hungry factories and lower energy costs. Roughly $13.5 billion has been allocated to enhance the resilience and reliability of the power grid.
The Department of Energy “awarded 20 companies in 12 states a total of more than $2.8 billion to boost domestic production of advanced battery components and the processing of critical materials that power them.”
Demand
$1.6 billion in awards to help transit agencies, states, and territories across the country purchase low and no-emission transit buses and upgrade bus facilities.
$1.5 billion to help build EV chargers covering approximately 75,000 miles of highway across the country, with strong labor, safety and workforce standards.
Inflation Reduction Act (IRA)
On August 16, 2022, President Biden signed the Inflation Reduction Act into law. The fact book lists dozens of programs designed to help manufacturers, some of the key ones are noted below. The Department of Energy Loan Programs Office also has a helpful explainer.
Advanced Technology Vehicle Manufacturing Loan Program (ATVM)
Funding Amount: $3,000,000,000
To provide loans to support the manufacture of eligible advanced technology vehicles and components under the Advanced Technology Vehicles Manufacturing Loan Program (ATVM), including newly authorized uses from the Bipartisan Infrastructure Law. Expanded uses include medium- and heavy-duty vehicles, locomotives, maritime vessels including offshore wind vessels, aviation, and hyperloop. IRA removed the $25 billion cap on ATVM loans and appropriates $3 billion in credit subsidy to support these loans.
Advanced Industrial Facilities Deployment Program
Funding Amount: $5,812,000,000
To provide competitive financial support to owners and operators of facilities engaged in energy intensive industrial processes to complete demonstration and deployment projects that reduce a facility’s greenhouse gas emissions through installation or implementation of advanced industrial technologies and early-stage engineering studies to prepare a facility to install or implement advanced industrial technologies.
Energy Infrastructure Reinvestment Financing
Funding Amount: $5,000,000,000
To guarantee loans to projects that retool, repower, repurpose, or replace energy infrastructure that has ceased operations or that enable operating energy infrastructure to avoid, reduce, utilize, or sequester air pollutants or anthropogenic emissions of greenhouse gases. IRA places a total cap on loan guarantees of up to $250 billion and appropriates $5 billion in credit subsidy to support these loans under section 1706 of the Energy Policy Act of 2005.
Funding for Department of Energy Loan Programs Office
Funding Amount: $3,600,000,000
To support the cost of loans for innovative clean energy technologies. IRA provides $40 billion of loan authority supported by $3.6 billion in credit subsidy for projects eligible for loan guarantees under section 1703 of the Energy Policy Act of 2005. This loan authority is open to all currently eligible Title 17 Innovative Clean Energy technology categories, including fossil energy and nuclear energy, and new categories of activities, including critical minerals processing, manufacturing, and recycling.
CHIPS and Science Act (CHIPS)
The same week the IRA was signed, the CHIPS and Science Act of 2022 was signed on August 9th, 2022.
The CHIPS and Science Act provides $52.7 billion for American semiconductor research, development, manufacturing, and workforce development. This includes $39 billion in manufacturing incentives, including $2 billion for the legacy chips used in automobiles and defense systems, $13.2 billion in R&D and workforce development,and $500 million to provide for international information communications technology security and semiconductor supply chain activities. It also provides a 25 percent investment tax credit for capital expenses for manufacturing of semiconductors and related equipment.
The Result of US Government Incentives
Add all of this spending up and as Bloomberg’s Brooke Sutherland points out, in her (excellent) opinion piece: A ‘Bidenomics’ Factory Boost, But Maybe Not in Reshoring.
Technically, this is evidence of a spending boom, not a reshoring boom. As you might imagine, those airports, hospitals and wastewater projects are not being relocated from China. Even when manufacturing companies have announced new plants or factory lines — and to be clear, a lot of this has been happening — it’s rare to see an accompanying shutdown of a facility elsewhere in the world. As Rockwell Automation Inc. CEO Blake Moret has often said, what’s happening is more of a “shoring” phenomenon. Industrial manufacturers are adding North American capacity to respond to demand growth in that region and to build more resiliency into their supply chains, a process that often entails persuading smaller parts providers to also set up shop in multiple geographies. “It’s not so much that factories are being shuttered in another part of the world, it’s that the US is an outsized beneficiary of new spend,” Moret said in February at the Barclays Plc industrial conference.
Joseph Politano at Apricitas Economics breaks down that earlier chart to show the recent dominance of the Computer, Electronic, and Electrical sector factory construction. Chemical (battery materials) and Transportation Equipment (electric vehicles) are also seeing a construction uptick.
Where Are These Factories Being Constructed?
Industrial development requires a robust and well-planned infrastructure to thrive. This includes the physical components such as roads, bridges, utilities, and transportation networks that are essential for the movement of goods and services. Equally important are access to reliable power sources, and the availability of skilled labor, which forms the backbone of any industrial sector. On top of those must-haves, industrial facility design has other unique constraints like vibration control in the case of semiconductor manufacturing.
US Megasites Cluster in the Rust Belt and Sun Belt
Over the past few decades, the traditional Rust Belt states, which include parts of the Northeastern and Midwestern United States, have been taking steps to reinvent their industrial bases. Having suffered from the decline of manufacturing in the late 20th century, these states have looked to revive their economies through the development of industrial megasites. These are large, contiguous parcels of land, typically ranging from hundreds to thousands of acres, that have been prepped with the necessary infrastructure, such as roads, utilities, and connectivity, to attract large-scale manufacturing operations.
Rust Belt states have been able to cultivate these ready-made industrial megasites, often re-purposing old manufacturing sites or utilizing the existing industrial infrastructure. This approach minimizes lead time for companies to set up operations and offers them plug-and-play solutions that are both time and cost-efficient.
In contrast, Southern states have been emerging as alternative destinations for industrial companies. The Southern states, including Tennessee, Georgia, Texas, and others, offer a set of unique advantages including the availability of big land plots, cheap power, and ease of doing business, that have been central to their recruitment strategies.
So far, it appears the US South and the Sun Belt region have appeared to attract more investment in the sectors funded by US Government programs.
Ex-US Megasites Continue Expansion
While the CHIPS Act prohibits companies from expanding in ‘countries of concern’ many countries across Europe, North America, and Asia remain competitive for manufacturing investment through government incentive programs of their own. The European Commission has allocated 15 billion euros for semiconductor projects by 2030. In Asia, India, and South Korea have also offered incentives such as tax breaks to boost domestic electric vehicle and chip production and develop megasites of their own.
Manufacturing investment is not confined to any single region but is rather a dynamic global phenomenon, characterized by an intricate interplay of economic, technological, and geopolitical factors. Recognizing the pivotal role that manufacturing investment plays in driving innovation, employment, and economic growth around the world, Exponential Industry has recently launched a dedicated section called “Capital Investment” in our weekly newsletter. This section, aptly designed to be a one-stop source, meticulously tracks manufacturing facility investments across the globe. Alongside offering valuable insights into the size of investments, it also sheds light on the expected job creation, thus serving as an essential barometer for stakeholders to gauge the impact and trajectory of the manufacturing sector.
Manufacturers, particularly those that operate as multinational companies, are inherently strategic and agile in their approach to establishing production facilities. With their expansive reach across global markets, these companies undertake a meticulous analysis of various factors before making investment decisions. The size and accessibility of local markets are key considerations, as a strong consumer base can be a potent catalyst for growth. Additionally, the incentive structure offered by local governments, which can include tax breaks, subsidies, and streamlined regulations, often plays a significant role in tipping the scales.
In light of the evidence and trends, it becomes apparent that what we are witnessing in the manufacturing sector is not so much a phenomenon of reshoring, but rather a change in the strategic allocation of investments by multinational companies. These corporations are adept at analyzing global markets and incentives, and consequently, are positioning their production facilities in regions that offer the most favorable conditions for their operations. The recent surge in manufacturing investments in various parts of the world, including the United States, is more indicative of this strategic calculus than a wholesale return of manufacturing to its former bases. Thus, it is imperative to understand the nuanced distinctions and the global nature of manufacturing investments, rather than attributing the growth to reshoring alone. The landscape of manufacturing is ever-evolving, shaped by the intricate interplay of market forces, governmental policies, and corporate strategies on a global scale.