Industrial Finance for the Twenty-First Century
The United States has outsourced so much of its expertise and industrial capabilities that it is unable to produce even basic materials, such as face masks, at the height of the Covid-19 pandemic. This outsourcing was done under the assumption that freer trade would not only promote closer ties between rising powers but also yield greater productivity for businesses, new jobs for workers, and sustainable economic growth. Yet, as seen recently with China’s trillion-dollar trade surplus being leveraged to block critical minerals and basic semiconductor exports, this proved to be wishful thinking. Instead of the promised economic golden age, the country saw a depleted industrial base and an aging skilled workforce. Deindustrialization has been a poor choice, but reindustrialization will be a greater challenge.
Many entrepreneurs are taking this challenge head-on and have started impressive firms, building everything from autonomous factories for component manufacturing to autonomous ships. Yet despite the serious potential many of these start-ups hold, these new industrialists will need to access sufficient capital to scale their businesses. Take semiconductor reshoring as an example: a new semiconductor fabrication plant can cost between $10 billion and $25 billion, with Intel’s Arizona fabs projected at $15 billion each and Samsung’s Texas facility at $25 billion. Advanced battery manufacturing facilities, which are critical for energy and autonomous systems, are also expensive: a full-scale gigafactory may require $2 billion to $5 billion before it starts operations. Start-ups may not require such capital, but even smaller-scale precision manufacturing operations, such as machine tools, engines, or drones, require hundreds of millions of dollars for the up-to-date equipment.
Traditional financial institutions have been unable to finance these needs, as most bankers are accustomed to investing in less capital-intensive sectors, such as software or real estate, rather than manufacturing. This has left these firms in a difficult middle spot where they need far more capital than what private markets like venture capital typically fund, but their valuations are too low and credit risk is too high for traditional financial markets to finance at an affordable rate. With higher Treasury rates and concerns over an AI bubble, the economic landscape is relatively unforgiving for new industrialists seeking capital.
Read more at American Affairs.
