Manufacturing Update - 5 December 2024
Insights from articles and reports of interest on manufacturing technology, management, policy, and economics in the US and abroad
Table of contents for article summaries below:
Globalization is not dead – it’s just changed
There was so much promise: How Northvolt tumbled into bankruptcy
How did it go so wrong for Germany? The former economic superpower is mired in a deep structural slump
News Briefs:
Private markets have ballooned over the past decade - Aggregate Value of Venture Capital backed companies
Semiconductors and modern Industrial Policy - data on industry leaders and structure
Intel gets Up to $7.9 billion award for US chip plant construction
Intel CEO Pat Gelsinger resigns after struggling to turn around chip maker
US to Introduce new restrictions on China’s access to cutting-edge chip
China bans rare minerals exports to the US
America the Petrostate – the US now produces 50% more oil each day than Saudi Arabia
1. “Globalization is not dead – it’s just changed,” Gillian Tett, Financial Times (opinion), November 22, 2024
Many assume that trade tensions between the US and China have led to declines in the flows of goods, services and investments. But if you actually look at the data, rhetoric does not entirely match reality. Yes, America is threatening to become less globalist and US-China ties are weakening. But flows between other countries are rising. What we are seeing is a shift to a multipolar world — not necessarily towards deglobalization.
The usual way that politicians and voters track this is by looking at trade. Data from the World Trade Organization, for example, projects that trade growth will accelerate next year to 3 per cent, up from 2.7 per cent this year. However, arguably a better way to frame this is in an update released this week to a March study by the NYU Stern School of Business and the DHL shipping group. This series, which uses data starting in 2001, provides a bigger picture since it covers four different categories of global flows — not just trade but people, information and capital, too. Echoing the WTO data, the NYU series shows that overall global trade in goods and services remains strong. And while population flows collapsed during the pandemic, they have since rebounded. What is even more interesting is that information flows have exploded dramatically in the past two decades — although this is now flatlining due to spreading internet and patent controls. And the movement of money? Well, capital flows were at the same level in late 2023 as in 2008, the last peak.
Thus, the overall global connectedness index, which measures international activity against domestic across all categories, was around 25 per cent in 2023. That is roughly the same level as in 2022, which was a record high.
There are some caveats, but the pattern is arresting and sometimes counter-intuitive. As you might expect, the data shows that flows between America and China have declined since 2016, or when Trump became president, by around a quarter. But what is less obvious is that these two countries were still more interconnected in late 2023 than any other pair of nations, except America and the UK.
Second, worsening US-China relations and Western sanctions on Russia appear to have raised — not reduced — overall global flows, since many companies have reoriented their supply chains through different countries and channels. Third, this series finds no evidence that regional trade is growing at the expense of global links, except in North America. Supply chains were on average 5,000km long in 2022, a record high, and appear to have hit a new peak during the start of 2024.
Fourth, a notable group of countries is not locked into any geopolitical bloc, and they are trading with each other and a wide range of partners. “The global economy is increasingly multipolar.... today’s multipolarity could support globalization,” the March report notes. This might change if geopolitics deteriorate. But the key point is this: what happens next to globalization does not depend on Trump alone. Other countries are stepping into the breach — including, but not limited to, China.
Excerpted with edits; more at (paywall): https://www.ft.com/content/1cfa6b3e-16c2-41e9-a1f6-fc90afaa7a98
2. “‘There was so much promise’: How Northvolt tumbled into bankruptcy,” Richard Milne, Financial Times, November 22, 2024
The dramatic rise and fall of Northvolt, Europe’s one-time battery champion, has the elements of a Nordic noir thriller. A desire for global domination, intense hubris and disagreements, vast amounts of cash and several unexplained safety deaths: the Swedish start-up has had it all on its journey to filing for Chapter 11 bankruptcy on Thursday. Founded in 2016 with the promise of loosening the stranglehold of Asian companies on battery manufacturing, Northvolt became the symbol first of Europe’s ambitions, and then its failings to find a place in the green transition against the massive subsidies of China and President Joe Biden’s US.
Now, as it aims to find a fresh $1.2bn in investment on top of $15bn it has already received, there is a question of what can be salvaged for Northvolt. It was started with the premise of using the Nordic region’s abundant and cheap green energy to challenge the likes of China’s CATL and BYD in batteries, a crucial technology for an automotive industry that employs almost 14mn people in Europe. It soon gained the commercial and financial backing of some of the biggest industrial names in Europe. These included not just automotive groups such as Volkswagen, BMW and Scania but the likes of Siemens and ABB.
By 2022, Northvolt had $55bn in customer orders, and this year reached $15bn in equity and debt capital as well as government support. What started off as plans for just one Swedish factory — in the sub-Arctic town of Skellefteå where production started in late 2021 — quickly ballooned. Northvolt was soon planning a second Swedish battery factory, and plants in Germany and Canada, as well as an energy storage facility in Poland, and separate cathode and recycling businesses in Sweden.
But its biggest problem remained its inability to increase production in Skellefteå, where last year it produced less than 1 per cent of the batteries its capacity theoretically allowed. A combination of factors had added up to big delays. These included bringing in thousands of new workers from more than 100 different nationalities, getting new processes right, the effect of the coronavirus pandemic on the construction phase, and being the first western customers of Chinese and Korean equipment makers. The machinery worked, but needed continual support from Asia, leading to communication difficulties with Northvolt workers. There were also worker safety problems.
Operating a battery factory when not producing at scale is a hugely costly business. Northvolt, which made a net loss of $1.2bn last year, had $2.1bn of cash at the start of this year. But by Thursday, when it filed for bankruptcy, it had just $30mn — enough to operate for about a week. Its debts were $5.8bn. With Northvolt’s future under threat, the real winners are existing Asian battery makers that are already producing at scale and increasingly cheaper cost – European firms are now signing up to work with them.
Excerpted with edits; more at (paywall): https://www.ft.com/content/09938004-21b9-4750-8fa2-9ed15c566d4e
3. “How did it go so wrong for Germany? The former economic superpower is mired in a deep structural slump,” Wolfgang Münchau, The New Statesman, November 7, 2024 (summary of Münchau’s new book Kaput, from Swift Press)
There are three types of economic crisis. The first responds to stimulus. The second responds to reforms. And then there is the type of crisis that the people of Germany are experiencing right now: a crisis about who they are, who they are in partnership with, what they are good at, and their role in the world. The Germans have always told themselves that theirs is an old-fashioned industrial economy, that they must run trade surpluses against the rest of the world, and they must resist the pernicious influence of a US-dominated digital world. But this decade has brutally undermined the German world-view and the economic model on which it is based. The political gridlock in the European Union, and its inability to carve out an ecosphere in a world dominated by geopolitical bullies, has a lot to do with Germany’s structural slump.
It has only recently been noted in the UK, but this crisis started a while ago. When the UK voted for Brexit in 2016, Germany was still regarded as the economic power on the continent. Angela Merkel was seen as Europe’s most powerful leader. The Economist called her “the indispensable European”. What only few saw was that all the fateful decisions had already been taken by then: the close relationship of successive German chancellors with Vladimir Putin that led to Germany’s growing dependence on Russian gas; the overreliance on China for the supply chains of German companies; and Merkel’s unilateral decision in 2011 to close nuclear plants. Another problem that did not appear on people’s radar back then as much as it does now is Germany’s chronic under-investment in digitalization. China and Russia had become Germany’s strategic partners and I still remember my shock when a fellow columnist in Berlin ten years ago said: “We Berliners are looking east, towards Moscow and Warsaw. Paris and London are yesterday’s cities.”
I had never heard this expressed with such brutality. That was Germany in the age of Merkel. The German-Russian relationship had become the most important bilateral axis in Europe. Its symbols were the Nord Stream gas pipelines through the Baltic Sea. It brought cheap gas for German companies, but eastern Europeans regarded it as a threat to their national security. Germany’s delusions ended overnight with Putin’s invasion of Ukraine in February 2022 and the decision by the chancellor, Olaf Scholz, to re-anchor his country firmly within the Western alliance.
Scholz talked about an epochal change in German foreign policy. I think he meant it, but the German economy could not support such a change in direction. The great bet of German industry had been that the age of globalization would continue; the new cold war was a shock for which the country was not prepared.
The way companies are dealing with this problem now is to close factories and offshore production to the US and to eastern and southern Europe. Volkswagen (VW) recently announced the closure of at least three factories in Germany and massive job losses, marking the first domestic plant closures in the company’s history. This year, the German economy will be stuck in a second year of near-zero growth. A German business association just came out with a forecast that 2026 will be much the same. This is what a structural slump looks like.
How did Germany get to this point? The intricate relationship between politics and business in Germany is often underestimated, and not easily visible to the outside world. German politicians – from all parties – have been using corporate networks and government-owned banks as a launch pad for political power. One of them was Gerhard Schröder, the former German chancellor. When he was premier of the northern German state of Lower Saxony, he was a member of the supervisory board of Volkswagen due to Lower Saxony’s 20 per cent stake in the company. In 2003 he, as German chancellor, let a VW executive write his labour market and welfare reforms. It was the industry’s need for stable and affordable supplies of gas that prompted Schröder to build a close political relationship with Putin, whom Schröder still calls a friend. After leaving politics in 2005, Schröder became an executive at Gazprom, in charge of Nord Stream. Some of his ministers took up lucrative jobs in the German energy sector.
Russia’s story is similar in some respects to that of Germany. Both countries have made themselves dependent on just a few economic sectors – Russia on raw materials, Germany on engineering and chemicals. They also made themselves dependent on each other. The Social Democratic Party (SPD), the party of Schröder and Scholz, was the political group that took ownership of the bilateral relationship with Russia. Many senior SPD politicians invested into this relationship – and they are often the same politicians who express skepticism about Scholz’s support for Ukraine. It seems as if that, at some point in the past, they had told themselves that Germans and Russians would never again find themselves on opposing sides of an international conflict.
Scholz himself was not a member of his party’s pro-Putin sect, but he was the leader of the pro-China club. The Chinese courted him early. During 2011 and 2018, when he was mayor of Hamburg, Scholz went on increasingly frequent visits there. When the EU recently voted to impose tariffs on Chinese cars, Germany was the only large member state that voted against them. Scholz is obsessed with tariffs. He is currently whipping up a strong anti-EU sentiment in Germany over this decision. Germany has made itself so dependent on China that it has left itself without sufficient political freedom, especially in trade policy. This is what trade surpluses do. You earn money, but then you become dependent.
Many of Germany’s largest companies have over-exposed themselves to the Chinese market. VW and Mercedes-Benz derive more than 30 per cent of their sales from China. BASF, the German chemical company, has increased its dependence on China, which it regards as its most important future market.
But China has become a huge problem for Germany. China has crowded into previously German-dominated markets, such as cars. The Chinese are hyper-competitive. Unlike Germany, China also invested in 21st-century digital technologies. Chinese electric cars are not only cheaper than their German competitors but are also more advanced.
This is what makes Germany’s economic decline a structural slump, rather than a normal economic crisis. Right now, the policy is to double down on what they did before. No one in Germany talks about diversification, the only known remedy for excessive dependence. Scholz wants to address the problem through more subsidies to save jobs. I would expect the next German government to push for an extension of the 2035 deadline for the EU’s ban on fuel-driven cars. This would be another short-sighted response. The reasons German car makers are in so much trouble is the loss of market share outside of Europe and especially in China. This is happening now, not in 2035.
Comparing Germany’s industrial decline to the five stages of grief, the country can be seen to have been stuck in the first stage – denial – for a very long time. But now Germany is transitioning to the second phase: anger. This is the stage in which factories close and jobs go, and where everybody blames one another – with particular blame reserved for the EU. Brexit, too, was preceded by decades of verbal and written abuse directed at the EU. I am not predicting a German exit from the EU, but I see progressive disengagement. People blame EU regulation; Scholz is blaming EU tariffs. The Franco-German relationship is also not nearly as good as it used to be under Helmut Kohl and François Mitterrand. Emmanuel Macron and Olaf Scholz are polite to each other, but they are not close.
Germany is also becoming less willing to bankroll the EU. During the eurozone’s sovereign debt crisis, Germany did the minimum required to stop the break-up of the monetary union. Germany is by far the biggest contributor to the EU’s budget. It was the biggest contributor to the EU’s recovery fund, which it set up during the pandemic. Successive German chancellors tried to keep a lid on the EU budget, with some success, but they never managed to roll back Germany’s net contributions. Right now, they stand at around €30bn (£25bn) a year. At a time of austerity, this is a lot of money that is not being spent on German motorways, roads and trains.
The EU’s budget is negotiated for seven-year periods. The current period ends in 2027. By that time, we may be at a different stage in the structural slump, but the crisis will not be over. I don’t think that Friedrich Merz, the leader of the Christian Democratic Union (CDU) and potentially the next chancellor after next year’s elections, would call for the money back, as Margaret Thatcher once did. But I doubt that he will agree to an increase in the German contribution either. But without an increase, it is hard to see how Ukraine’s accession to the EU could be financed. It would depend on other Eastern European countries, particularly Poland, to accept that they, too, would need to become net contributors.
Perhaps the biggest foreseeable crisis could be between Germany and the US. I struggle to see how Germany can remain economically intertwined with China to the degree it is today and also remain dependent on the US for its national security. The transatlantic alliance, and the US-German relationship in particular, will face a monumental test if it ever comes to a military confrontation between the US and China over Taiwan. The Dutch have already bowed to US pressure to end the export to China of lithography machines that produce high-performance semiconductors. It is relatively easy for the US to lean on a small country like the Netherlands; Germany would not be nearly as compliant. Germany’s structural slump is also a European political crisis.
The decline is also a cautionary tale about how close economic success can be to economic failure. The Germans were extremely lucky in the first two decades of this century. Everything aligned for them perfectly. In the early 2000s, they improved their price competitiveness through economic reforms; globalization opened up new markets; cheap container shipping allowed companies to run global supply chains; Russia brought cheap gas; and China needed German plants and machinery for its economic expansion.
Gamblers know about lucky and unlucky streaks. Germany’s luck started to run out soon after the UK voted for Brexit. German exports to the UK dropped sharply. The pandemic damaged supply chains. Russia’s invasion of Ukraine upended the country’s energy policies. Germany’s main trading partners today are the US and China. This is not a great position to be in, but it is symptomatic of an underlying problem: a general denial of geopolitics. Had Germany chosen to open up to new technologies, to detach itself from its many dependencies on companies, countries and technologies, it would be in a very different place today: more pro-European, more secure, less extreme in its political discourse, and clearer about its position in the world.
Successive German governments have found out the hard way that the corporate interests they defended are not the same as the national interest. It would have been in the national interest to diversify away from the companies upon which the country relied too much. Now it is the companies that are diversifying away from Germany.
Excerpted with edits; more at: https://www.newstatesman.com/international-politics/2024/11/how-did-it-go-so-wrong-germany
4. News Briefs
4a. “Private markets have ballooned over the past decade - Aggregate value of venture capital backed companies (US only),” George Hammond, Financial Times, Nov. 21, 2024 (part of a longer article on Thrive Capital)
As private markets have ballooned over the past decade, venture capital has mutated from a cottage industry into an institutionalized asset class, and a vital engine of America’s economy. The shift has left venture capital firms with a choice: remain faithful to early-stage investing and hope for outsize returns, or scale up funds to meet increasingly massive private companies. The chart below shows an increasing shift of VC funding away from early-stage startups, towards “unicorns” – startups valued at over $1 billion:
Excerpted with edits; more at (paywall): https://www.ft.com/content/44c4504c-8d79-4b09-bf72-b04cf8082736
4b. “Semiconductors and modern industrial policy” (data on industry leaders and structure),” Chad P. Brown and Dan Wang, v. 38, n.4, Fall 2024, pp. 81-100
The chart below shows shifts in the firms that dominate the global semiconductor industry, by sales revenue:
The next chart shows how the global semiconductor sector has become structured into materials, equipment, design, fabrication, foundries, assembly and packaging:
Excerpted with edits; more: https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.38.4.81
4d. “Intel CEO Pat Gelsinger resigns after struggling to turn around chip maker,” Sarah Needleman and Dean Seal, Wall Street Journal, Dec. 2, 2024
Pat Gelsinger retired abruptly, ending a nearly four-year run that saw the chip maker fall behind rivals in building semiconductors to power the artificial-intelligence boom. The company on Monday said it named Chief Financial Officer David Zinsner and Michelle Johnston Holthaus, general manager of Intel’s client computing group, as interim co-CEOs. The board has formed a search committee to find a permanent successor to Gelsinger, 63 years old, who stepped down Sunday.
Gelsinger’s exit comes in the middle of his multiyear turnaround strategy to build a so-called foundry business manufacturing chips for other companies. At the same time, Intel’s stock has underperformed both the market and rivals. Strategic missteps and missing out on the artificial-intelligence boom have combined to reshape the fortunes of the company, which reportedly was a takeover target earlier this year.
Gelsinger joined Intel in 1979, when he was just 18 years old. The Pennsylvania farm boy turned engineer rose up the ranks to become the company’s youngest-ever vice president at 30 and its first chief technology officer in 2001. That role effectively made him responsible for upholding Moore’s Law, which is named after one of Intel’s founders and posits that the number of transistors on a chip doubles roughly every two years.
In his first three decades at Intel, Gelsinger played a key role in designing some of its most successful and lucrative chips that were the computational workhorses inside the personal-computer boom of the 1980s and 1990s. He became a disciple of legendary Intel CEO Andy Grove and helped pioneer USB ports and Wi-Fi, both of which are ubiquitous. Gelsinger left in 2009 to run VMware Inc., a maker of business software, where he spent eight years, roughly doubled sales by abandoning the company’s cloud-computing business and opting to profit through partnerships.
His return was supposed to mark a turning point for Intel in its battle against market-share losses and address questions about its business model of both designing and manufacturing chips when most rivals have specialized in one or the other. Gelsinger’s inability to reverse Intel’s fortunes in the semiconductor world shows that even with decades of industry experience, “this stuff takes a long time to correct,” said Eric Ross, analyst at Cascend.
Excerpted with edits; more at (paywall): https://www.wsj.com/tech/intel-ceo-gelsinger-retires-leaves-board-cb2478e6
4e. “US to introduce new restrictions on China’s access to cutting-edge chips,” Will Knight and Louise Matsakis, Wired, November 27, 2024
The Biden administration announced a sweeping set of measures designed to further restrain China’s ability to develop advanced artificial intelligence. The controls include sanctioning dozens of Chinese companies that produce equipment for making semiconductors, as well as placing restrictions on a handful of chip manufacturing plants, some of which have ties to the Chinese tech giant Huawei.
The US Department of Commerce also discussed controls on the sale of high-bandwidth memory, or HBM, an advanced kind of 3D-stacked computer memory component that is often used in high-performance GPUs and customized AI chips.
Excerpted with edits; more at (paywall): https://www.wired.com/story/memory-restrictions-china-advanced-chips/
4f. “China bans rare mineral exports to the US,” David Pierson, Keith Bradsher and Ana Swanson, New York Times, Dec. 3, 2024
China announced that it would begin banning the export of several rare minerals to the United States, an escalation of the tech war between the world’s two biggest powers. The move comes a day after the Biden administration tightened Chinese access to advanced AI semiconductor and related technologies.
The ban signals Beijing’s willingness to engage in supply chain warfare by blocking the export of important components used to make valuable products, like weaponry and semiconductors. Sales of gallium, germanium, antimony and so-called superhard materials to the United States would be halted immediately on the grounds that they have dual military and civilian uses, China’s Ministry of Commerce said. The export of graphite would also be subject to stricter review.
Excerpted with edits; more at (paywall): https://www.nytimes.com/2024/12/03/world/asia/china-minerals-semiconductors.html
4g. “America the Petrostate – the US now produces 50% more oil each day than Saudi Arabia,” Kevin Crowley, Bloomberg, November 5, 2024 (from a longer article, plus material from Google AI overview)
The United States now produces 50% more oil than Saudi Arabia, and the US lead is growing:
Production
In 2023, the US produced 15.6% of the world's oil, which was more than Saudi Arabia. In September 2023, the US produced a record 13,247,000 barrels of crude oil per day. In 2024, the US is expected to produce an average of 13.22 million barrels of crude oil per day, while Saudi Arabia is expected to produce 11.13 million barrels per day.
Technological advancements
The US has seen a large increase in oil production due to technological advancements like hydraulic fracturing and horizontal drilling. These technologies allow oil and gas to be extracted from shale formations.
Exporting
The US has become a leading oil exporter, surpassing other petrostates like Kuwait and the UAE.
Gas production
The US also leads the world in natural gas production, with production increasing by 50% over the past decade.
Excerpted with edits; more at: https://www.bloomberg.com/news/articles/2024-11-05/can-the-top-oil-producer-lead-on-climate-action-the-us-is-trying-it
Since 2022, MIT has formed a vision for Manufacturing@MIT—a new, campus-wide manufacturing initiative directed by Professors Suzanne Berger and A. John Hart that convenes industry, government, and non-profit stakeholders with the MIT community to accelerate the transformation of manufacturing for innovation, growth, equity, and sustainability. Manufacturing@MIT is organized around four Grand Challenges:
1. Scaling advanced manufacturing technologies
2. Training the manufacturing workforce
3. Establishing resilient supply chains
4. Enabling environmental sustainability and circularity
MIT’s Bill Bonvillian and David Adler edit this Update. We encourage readers to send articles that you think will be of interest to us at mfg-at-mit@mit.edu.