Reindustrialized shrugged
Checking in on some of the big IRA CHIPS projects
The IRA has catalyzed an industrial spending bonanza and hope for a new industrial renaissance
Less than $10B operational, but more than $100B on track. Lots and lots of delays however
recently, mostly just patronage and graft
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During peak inflation, the administration merged its Build Back Better industrial policy with its Green New Deal industrial policy, rebranded the whole thing, and got it passed as the Inflation Reduction and Chips and Science Act.
Random Walk likes to call it the Inflation Non-Reduction Act for no other reason than injecting hundreds of billions (if not trillions) of dollars into the economy is almost certainly inflationary, at least for the foreseeable future. Plus, the guts of the bill were developed back when inflation was still “transitory,” and there was no pretense of reducing inflation at all, so it seems fair to assume that reducing inflation was neither the intended nor likely outcome of the bill.
What the IRA did do was create some promise and expectations around a domestic industrial revival, of sorts.
Having outsourced industrial capacity for years, the IRA is supposed to bring new life to American manufacturing, specifically for strategically important sectors (e.g. semiconductors) and “clean” energy initiatives (e.g. solar cells or EV batteries). The IRAs subsidies also happened to converge with the emergence of another industrial breakthrough, i.e. LLMs, and the chip, data center, and energy push that followed.
The point is that lots and lots of money is being spent on “reindustrializing” the country. Some of it is direct government spending, and some of it is private capital buoyed by government subsidies.
The hope for what follows is plenty of manufacturing jobs in the nearer term, and lots of productivity gains in the longer term. Those are both good and necessary things.
The concern is that the already over-levered Uncle Sam has a terrible track-record with this stuff—which is to be expected, given Uncle Sam’s limited incentives to generate good returns on capital—but in the meantime, the “air pocket” underneath the speculative play would get bigger and bigger (raising the stakes of any collapse). The bigger they come, the harder they fall kinda thing.1
So how’s it going? Is the reindustrial revolution underway, or are we building industrial ghosttowns ala China?
Delays and pauses
This is not remotely a comprehensive analysis of the question, but at the very least, it’s something of a mixed bag.
~$85B has been invested in projects that are delayed, paused or cancelled:
Less than $10B of investment is “operational,” but ~$105B is “on track.”
By geographic dispersion, the projects look like this:
The biggest “delayed” projects are in Arizona and New York, but beyond that, it’s hard to see a trend.
The anecdata are what you’d expect:
Among the largest projects on hold are Enel’s $1bn solar panel factory in Oklahoma, LG Energy Solution’s $2.3bn battery storage facility in Arizona and Albemarle’s $1.3bn lithium refinery in South Carolina.
While many delays have been made public, others have not been announced. Forty minutes away from Albemarle’s inactive site is a facility where semiconductor manufacturer Pallidus said last year it would relocate its headquarters from New York and open manufacturing operations, investing $443mn and creating more than 400 jobs. Operations were expected to start in the third quarter of 2023, but the building sits unused.
“You’re holding your breath and seeing what transpires,” said Ted Henry, city manager of Bel Aire, Kansas, where Integra Technologies announced a $1.8bn semiconductor factory last year but has not moved forward with the project due to uncertainty over government funding. If successful, the facility would be a “regional victory” for the small town of 8,000, Henry added.
. . . In the first year of the [IRA and CHIPS act] more than $220bn in cleantech and semiconductor manufacturing investments were announced, with companies relocating projects from other countries to take advantage of the new subsidies. But a tough macroeconomic backdrop, combined with overproduction in China, slowing demand for electric vehicles and policy uncertainty has chilled further progress . . .
“Everybody’s running into higher-than-expected costs just because of labour and supply chain,” said Craig MacFarland, mayor of Casa Grande, Arizona. An hour away from Casa Grande, Taiwan Semiconductor Manufacturing Company has delayed the start of production at its second fab — part of its $40bn project — by two years. Its suppliers in the area have also reconfigured projects, with Chang Chung Group delaying its $300mn factory by two years and KPCT Advanced Chemicals putting its $200mn factory on hold.
Lol, yes, blame the “overproduction in China” for out-subsidizing our subsidies.
Lots of big bets and, for now, not all that much to show for it.
Conditions change, cost of capital changes, competition changes, and it’s not so easy to become an expert manufacturer of sophisticated hardware just by throwing money at it—you can take the fabs outta Taiwan, but you may not be able to take the Taiwanese outta fabs.
Not a great leading signal, but the reality is that it’s way too soon to tell.
As tempting as it would be to point to the delayed projects and say “failure,” project delays are pretty ubiquitous (IRA-related or not), and whether these are unusual delays, the article doesn’t say.
Of course, it would be nice if investors underwrote the risk of those delays, instead of the taxpayer—that things don’t go according to plan is part of the argument against industrial policy at this scale—but either way, the jury is still out.
But mostly just patronage and graft
Of course, those are just the big headline projects.
Random Walk was curious as to what some of the more recent or smaller projects looked like. Maybe the faithful administrators of the IRA have gotten sharper with more experience?
Lol, no. 1000x no.
Most of the recent funding activity under the IRA seems to be straightforward patronage and graft:
Clearly, $7M in “Indian Youth Service Corps Projects” will bring inflation down.
Any day now.
Did manufacturers really need $85M to speed up heat pump manufacturing? I’m sure the DOE thought hard about the costs and benefits of that one, lots of DCF, and sophisticated scenario analysis to make sure the taxpayer gets solid disinflationary returns on its investment.
Just so you don’t accuse me of cherry-picking, here’s the next five:
Among other things inflation-reducing, farmers got $2.2 Billion from the USDA(?!) for “lending discrimination.”
Seriously, does that $2.2B (that I’ve never heard of until now) help reduce inflation or does it allow someone at USDA to be rewarded with enormous grant-giving power to obtain the undying loyalty of whatever “not for profits” (and profits) that managed to be on the receiving end of that multibillion dollar rounding error?
What’s another $2.2B amongst friends?2
Really, this is not what Random Walk was expecting to find.
I give investment managers are hard time for their poor decisions, but there is absolutely no way that anyone even intends to notice or care whether any of this money does what it’s supposed to do. It’s not a crime, but it should be. Someone call the CFPB or the FTC or . . .
Previously, on Random Walk
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Plus, as my old buddy Stan Drunkenmiller likes to say: “when you have free money, people do stupid things. When you have free money for 11 years, people do really stupid things. So there’s stuff under the hood that’s starting to emerge.”
Apparently this $2.2B was originally “covid relief” (the original inflationary impulse) but because it was illegally earmarked for “black farmers only,” it got shoehorned into the Inflation Reduction Act, at which point it appears to still be “blacks only,” but this time the subject line is “remediate discrimination,” instead of “covid relief” and therefore it’s ok.
At my off-farm job some of the 3D printers had monitoring equipment hooked up to help prove 3d printing is better for the environment. (And hopefully us get some more business, it goes without saying.)