- Companies putting the brakes on some IRA-backed investments
- Microchip and EV supply chains bounce back from deficits
Even with hundreds of billions of dollars of government subsidies, US manufacturing projects are being delayed as slowing growth in electric vehicle (EV) sales and semiconductors are making investments less viable. Donald Trump's potential return to the White House after November's election also casts a shadow over companies planning long-term investments, given he could quickly end government support for energy transition technology.
In 2022, President Joe Biden passed two of the most significant industrial policy acts in US history to stimulate domestic investment. The Chips and Science Act set aside $280bn (£222bn) to invest in research into and manufacturing of semiconductors. Meanwhile, the Inflation Reduction Act (IRA) earmarked $500bn in new spending and tax breaks for clean energy, EVs and lower healthcare costs.
The IRA offers purchasers $7,500 in tax credits for some EVs. However, the cars are subject to criteria around the origins of the batteries and materials. At least 40 per cent of critical minerals in batteries must be extracted and processed in the US, rising to 80 per cent by 2027, encouraging significant spending on local facilities.
These policies were made in response to two of the biggest supply challenges faced by the US in 2022. Plenty of the pandemic stimulus cash handed out to US residents was spent on consumer electronics, which increased demand for chips, which were mostly manufactured in Taiwan and South Korea. This, coupled with disruptions to shipping channels, led to a shortage of the chips needed for cars, computers and games consoles.
At the same time, the outbreak of war in Ukraine and the sanctions on Russia pushed up the price of oil. In June 2022, the price of Brent Crude hit $122, up around 80 per cent from the year before. Coupled with aggressive Chinese posturing around Taiwan, the US decided it was time to take control of its energy and semiconductor supply chains.
Big investment
The Acts were initially seen as a success, with companies immediately committing billions of dollars to expansion projects. By July 2023, the cumulative total of all announced clean energy and semiconductor projects had reached $224bn, according to analysis by the Financial Times. The biggest pledges came from semiconductor manufacturers TSMC (TW:2330) and Intel (US:INTC), which committed $40bn and $30bn respectively to expand or build new plants in Arizona. Meanwhile, memory chip manufacturer Micron (US:MU) earmarked $20bn to invest in upstate New York and $15bn in Idaho.
Similarly, the IRA attracted big investments from Korean battery manufacturers. LG Energy (KR:373220) said it would invest $5.5bn in a battery manufacturing plant, also in Arizona, while SK On and Hyundai are planning a $5bn EV joint venture in Georgia. SK On already has a 22 gigawatt hour (GWh) annual capacity plant in Georgia, but plans to boost this capacity with the 35GWh joint venture, which would be enough batteries for 300,000 electric vehicles a year. Almost all these investments, both in semiconductors and batteries, were hoping to start production by 2025.
Since these projects were announced, demand growth for semiconductors and EVs has slowed. So, even with government support, these projects look expensive compared with similar projects in Asia. In December, TSMC chief financial officer Wendell Huang said it could be four to five times more expensive to build in the US than in Taiwan. “The high cost of construction includes labour, costs of permits, cost of occupational safety and health regulations, and learning curve costs,” said Huang.
Initially, TSMC had hoped to get its Arizona plant online by 2024, but a lack of qualified workers meant it had to push this back to 2025. The company said it has hired 1,100 workers in the US, but it has had to fly some of them back to Taiwan to receive training. Despite this, TSMC is still asking the government to fast-track visas for 500 Taiwanese workers. This caused local unhappiness, with the Arizona Pipe Traders 469 Union launching a petition to block these visas.
Not only are these projects expensive, but there is a concern that demand will fall below the soaring capacity. At the time the bills were passed, the world was facing a shortage of semiconductors and demand for EVs was expected to grow rapidly. However, since then, the shortage of semiconductors has turned into oversupply.
In the third quarter of this year, US EV sales were up 50 per cent year on year to 313,000, according to Cox Automotive. This is impressive, however, it is a big slowdown from the same period last year when annual growth was 68 per cent.
Even long-term plans are changing on the back of this outlook. Last month, LG Energy announced it was laying off 170 workers in its plant in Michigan while SK On said it was putting workers on furlough in Georgia, as it needs to reduce its output. SK On had already laid off 100 workers in September and has delayed the launch of another plant in Kentucky.
In October, Ford (US:F) announced it was pushing $12bn of EV spend into the future because the margins on battery production were too low and there wasn’t enough demand for the cars. On the results call, Ford chief financial officer John Lawler blamed the “flatter growth curve that we are seeing compared to what the industry expected”.
Lawler didn't make any guarantees about when the $12bn would be spent. “We are going to match demand and capital needed to meet that demand,” said Lawler. “There’s a lot that’s going to change between now and 2026 and 2030 and we are going to adjust appropriately.”
Cash flows falling
The slowdown in volume growth looks even more severe when the price cuts are taken into account. The largest electric vehicle maker, Tesla (US:TSLA), which has 50 per cent of the US market, has cut its prices by 25 per cent this year. Tesla’s industry-leading operating margins give it room for significant cuts, unlike its competitors which are already struggling to turn a profit. Ford recorded a $1.3bn loss in its EV division in the third quarter.
Similarly, investments in the semiconductor industry have helped balance the market. Consumer electronics are cyclical, and the cost of living pressures have forced consumers to scale back. Sales have even fallen, as opposed to sales growth dropping off. Last year, Apple’s (US:AAPL) iPhone revenue dropped 2 per cent in the year to September. TSMC, which manufactures iPhone chips, saw its revenue fall 11 per cent year on year in the third quarter.
The drop in revenue coupled with the continued high level of capital expenditure has hit cash flows. In the nine months to September 2023, TSMC’s operating cash flow fell 28 per cent year on year to $39.1bn. Its capital expenditure remained flat at $25.6bn, meaning there was a 77 per cent drop in free cash flow.
The semiconductor industry is notoriously cyclical, and management teams will expect to see a return on this investment after the economies start recovering. Overstocked semiconductor inventories are now shrinking as demand picks up. “Consumer and PC markets appear to be nearing a bottom while the correction is now in full swing across the broader industrial market and parts of auto,” said broker Stifel.
Similarly, the EV market still has very strong potential. Just 4 per cent of Americans currently own an EV, according to a Gallup poll. Another 12 per cent are seriously considering a purchase. Given the recent pullback, it's obvious that huge promises will falter in the face of lower returns, even with hefty government support.
