Contract manufacturers seldom steal the limelight — Foxconn does sometimes, albeit for all the wrong reasons. Generally speaking, these manufacturers produce goods for their clients, keeping a low profile throughout.

TSMC used to be no exception, until it just got too big to be ignored. At time of publication, the Taiwanese chip contract manufacturer is the sixth most valuable company in the world, ahead of Tesla and Alibaba. The chips it produces for the likes of Apple and Qualcomm are in anything from fridges to data centres. Their ubiquity makes TSMC a tremendous proxy for the cycle of the global economy, and the message the company is sending out is loud and clear. 


“Today, as we enter another period of higher growth, we believe a higher level of capital intensity is appropriate to capture the future growth opportunities,” Wendell Huang, the company’s chief financial officer, said during an earnings call on January 14. The company plans to invest $100bn over the next three years. 

While uncertainties persist, the global economy is bouncing back stronger than expected and is now set to grow by 6% in 2021, the fastest pace since the 1970s, and 4.4% in 2022, the IMF estimates. Meanwhile, governments and central banks remain committed to generous fiscal and monetary stimuli, keeping the cost of capital at historic lows. 

This unique combination of factors is shaping up a new investment cycle. After the Covid-19 pandemic forced most companies to put investment campaigns on hold, global corporations are finally deploying cash to add new capacity, or make existing capacity more efficient. Yet the ensuing economic rebound is diverging across industries and geographies, distributing opportunities and challenges unevenly, depending mostly on the local level of intensity of the Covid-19 crisis. 

Investment rebounds 

The investment intentions of companies across the globe in March mark a sharp turning point from the previous 12 months, which were dominated by the concerns and uncertainties of the pandemic. 

“One year ago, companies tightened operational and capital expenditure (capex),” Andrew Chang, a director for corporate ratings at credit rating agency Standard & Poor’s, says. “Today, global growth is expected at over 5%, and that is extremely high. Companies are looking more bullish, and that will drive the capex cycle.”

Shareholders have already been encouraging company boards to follow the cycle and deploy cash for capital spending. A periodic survey by BofA Securities of 204 global fund managers in February found that, for the first time since January 2020, financial investors want chief financial officers (CFOs) to increase capex rather than improve the balance sheet moving forward. 

Boards are updating their strategies accordingly. US corporations, which are traditionally the largest source of cross-border investment, have already bumped up capex budgets to pre-pandemic levels. Excluding energy companies, they are planning to invest $533.4bn in 2021, up from $486.3bn in 2020 and $507.5bn in 2019, according to data compiled by analysts at Citi Research and based on the investment intentions unveiled by more than 730 non-financial publicly-traded US companies. 

Some of the sectors that struggled the most during the pandemic are now driving this rebound. 

“The industries that pulled back in 2020 now have to expand again because demand is picking up, or they expect it to pick up, or they’re trying to get more efficiencies in their production,” Tobias Levkovich, chief US equity strategist at Citi Research, tells fDi. “It is fascinating to see that companies feel confident enough to say: ‘We are going to catch up on the year we missed, plus a bit more’.” 

Green disruption drives new capex

With the winds of green disruption sweeping across the automotive and energy industries, incumbent industry leaders are pivoting their strategies to ride the change while gradually divesting from quickly deteriorating businesses. 

Although legacy original equipment manufacturers (OEMs) have been somewhat hesitant to embrace the electric vehicle (EV) revolution, they have finally taken the plunge as sustainable mobility emerges as one of the pillars of post-pandemic economies. 

Volkswagen, which shares the crown with Toyota as the world’s biggest carmaker, announced an ambitious e-mobility strategy in March. The group wants EVs to make up 70% of sales in Europe and 50% of sales in the US and China by the end of the decade, and will use 6% of its revenue as capital investment between 2021 and 2025 to accommodate the change. Battery development and procurement will also be vital, and Volkswagen plans to launch six battery ‘gigafactories’ by 2030 and thus reduce battery costs by 50%. Overall, it plans to invest more than €50bn and more in battery procurement over the coming years, the company said in a statement.

This trend has been seen across the industry, with most major carmakers announcing ambitious EV targets in the past few months. Toyota expects EVs to account for 70% of its sales in the US; Ford announced it plans to go all-electric in Europe by 2030; Volvo will go all-electric globally by 2030; Daimler plans net-zero vehicles by 2039, thus aiming to make the whole value chain of producing an EV vehicle carbon neutral. 

After a dreadful 2020, no other industry is expected to rebound stronger than the automotive sector this year. US car and component companies have set aside $24.8bn for capital investment in 2021, almost 50% higher than in 2020, Citi figures show. 

Zero-sum games

With EVs following a different production method to traditional cars, legacy OEMs have found themselves in a zero-sum game, where each investment in the EV ecosystem risks becoming effectively a divestment from the existing internal combustion engine (ICE) production industry. 

Manufacturers are now in a phase “where OEMs start to pull capital from ICE and older technologies to compensate for higher [EV] spending”, Philippe Houchois, equity analyst at investment bank Jefferies, wrote in a research note in December. “All are currently planning to gradually transition from a world of ICE to a combination of EV powertrain without knowing (understandably) the speed of adoption or whether ICE is truly doomed. While it is a responsible approach, it maintains the industry in a zero sum-game which could turn negative if ICE margins fall faster than EV improves, or if the strategy further stretches out the runway offered to emerging challengers.” 

This paradigm shift is in full display in the energy sector too, where the energy transition is propelling renewable energies to new highs. Investment into clean energy projects is set to reach a record $243bn globally in 2021, 38.9% higher than in 2020, thus further narrowing the gap with upstream oil and gas spending, which is projected to be relatively flat this year at $311bn, despite a historic downward trend, according to estimates by research company Rystad Energy. 

Power utilities, particularly in Europe, are scrambling to gain a lead in the renewable energy space. “European utilities have substantially increased their long-term capex programmes to finance accelerated expansion in renewables,” credit rating agency Fitch said in a research note in February. 

Among others, Italian Enel will be investing €70bn in the next 10 years to almost triple its installed green energy capacity from 45GW to 120GW, the company said in a note in November. Spanish Iberdrola will invest about €35bn to grow green installed capacity to 60GW in 2025, up from 32GW at the end of 2019, the company said in a note in November. 

International oil companies have also found themselves on the wrong side of this paradigm shift. While they divest from upstream oil, some of them are making growing commitments to investment into green energy, with the likes of Norwegian Equinor committing $18bn to wind and solar energy developments by 2026, Rystad Energy estimates. 

Tech is king

It is a whole different game for communications and IT companies. The digital economy is booming, with surging demand shoring up capex across industry even further. The multi-billion dollar investment plans announced by the likes of TSMC are only the tip of the iceberg. Communications services and IT companies were already in expansion mode before the pandemic, with Covid-19 only putting on hold their investment plans for a few months. 

The likes of Amazon, Alphabet, Microsoft and Alibaba combined a total of $84.2bn in capital expenditure in the past four quarters, according to companies’ figures, and fresh capex is being earmarked for 2021. 

“We’re expanding [cloud] regions globally and have a lot of upside in that area, talking with customers on their transition plans to the cloud,” Brian Olsavsky, CFO of Amazon, said in an earnings call in February. “So, we definitely do not want to run out of capacity, and we work to not do that. So, there could be a risk of forwarding spend in 2021 due to uncertainty, but we’ll see them as we move through the year.” 

Facebook has also publicly detailed assertive investment intentions for the current year. 

“We continue to expect 2021 capital expenditures to be in the range of $21–23bn (from $15.7bn in 2020), driven by data centres, servers, network infrastructure and office facilities. Our outlook includes spend that was delayed from 2020 due to the impact of the pandemic on our construction efforts,” Facebook said in a January press release.

The digital economy has deeply redrawn the capex landscape in the past decade. Communications services and IT companies have become the largest source of capital investment in the market, with an expected $224.4bn in 2021, which is 146.4% higher than in 2013, according to Citi figures. In the same period, energy companies in oil and gas halved their capex budget from $160.7bn to $81.4bn.

Political push

Governments have been accommodating this dawning investment cycle and betting on investment to trigger the economic recovery. 

The Indian government has increased budgeted public investment by 26.2% for its 2021/2022 fiscal year, also in the perspective of mobilising private investment too. The UK government introduced a super deduction on private investment that it considers “the most generous” business tax break in UK history.

“We need to unlock that investment; we need an investment-led recovery,” the UK’s chancellor of the exchequer, Rishi Sunak, said in the House of Commons while announcing the budget for 2021.

Policy-makers are designing new investment incentives with one eye on economic recovery, and the other on their political agenda. The EU approved €6.1bn in state aid to help the European EV battery industry catch up with dominant Asian players and unlock private investment worth €14bn. In the US, after losing its leadership in chip production to Asian countries over the past 20 years, Congress passed the Creating Helpful Incentives for Producing Semiconductors (CHIPS) for America Act in December to promote investment into chip production and research and development within the US. 

“In certain industries, there is some pressure to locate production more domestically to avoid the risks of supply chain disruption,” Citi’s Mr Levkovich says. “There is almost a national security element to that. Besides, in any country there is more pressure on companies to be ‘good corporate citizens’ and do more domestically to get local workers back to work.” 

Globalisation forces have already been reversing in the past 10 years, with trade and investment becoming a more like-for-like and regional game than in the past. A divide between developed and developing countries has already emerged. A record high of almost two-thirds of the investment from companies from OECD countries remained within the OECD in 2020, according to figures by investment monitor fDi Markets.

The Covid-19 pandemic has laid bare many of the world’s inequalities. The ensuing economic recovery is now mirroring those same inequalities, with growth bouncing back stronger where vaccination campaigns are in an advanced stage and the pandemic is retreating. Global investors have earmarked ambitious investment budgets for 2021, but they will not pull the trigger where they do not see real opportunities, as pointed out by Standard & Poor’s Mr Chang. 

“At the end, capex is driven by macroeconomic factors, not just by cash availability. Low interest rates mean that companies can borrow as much as they want to invest in capex. Yet, it doesn’t mean they will invest if they don’t need to.” 

Inevitably, a diverging economic recovery will lead to a diverging investment cycle, making it a clear case for some areas to reap the benefits of gigantic investment plans while others continue the struggle in the aftermath of the pandemic.

This article first appeared in the April/May print edition of fDi Intelligence. View a digital edition of the magazine here.