The manufacturing opportunity
#25 | On where I believe the opportunity lies
A big part of being a venture investor is thinking about trends. This piece is me thinking out loud about where this manufacturing opportunity everyone is talking about is.
My buddy Chris Spillane edited this edition of Unbeaten Path amid his shameless gloating on social media about this newsletter's growing popularity.
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VC is an industry that lives off bubbles and hype cycles - there's nothing that can be done about it because it’s baked into the model.
The latest hype is about the physical world, manufacturing and more generally, the re-industrialization of the West. Although I am sure many are driven by genuine interest in the topic or high ideals like patriotism and security, I question how they come to articulate their investment thesis.
Much of what I have read around the web is full of optimism and grandiose statements, but fails to grasp the reality of what manufacturing really means, what re-industrialization really implies and, most importantly, the consequences for the VC industry.
I'm no manufacturing expert - in fact, I have never worked in a factory, nor have I been responsible for the high-volume production of any physical goods. For this reason, I will try to articulate what the manufacturing opportunity is using common sense and real-world data as much as possible. The hope is to scratch a bit deeper than what hype-filled LinkedIn posts usually do.
The first note I want to make is on the very definition of what “re-industrializing” the West should mean and why tariffs à la Trump are stupid.
A perfect trade balance of goods is not what we want, as it creates weird incentives – $1M worth of socks is not the same as $1M worth of semiconductor equipment. Certain things are strategic for a country and pleasant to work on; some others are not, and the West should aim to re-shore the strategic and pleasant part of manufacturing that attracts and retains talent and nurtures innovation.
By pushing for a perfect trade balance of goods, you push other countries to treat socks like manufacturing equipment - and that is not good if you don’t want to manufacture socks.
And that’s the frustrating part - we shouldn’t dream of making socks here. The real pivot to the US is advanced technology like AI, chips, biotech. By decoupling or punishing foreign partners, we might accelerate them building their own R&D ecosystems. If they succeed, they’ll rely less on this really important American technology. Then we’re not just ceding a shoe factory or whatever, we’re ceding the next wave of innovation. That’s a deeper, darker implication.
What seems like a superficial consideration actually has some deeper implications.
As I wrote in “Europe, it’s time to build”, the main issue with China is that it has moved up the value chain and, by controlling the foundational layers of it, now is able to own also the highest value-added piece of the chain – the strategic and pleasant part.
Western companies’ strategy to delocalize the low value-added pieces of the chain has worked amazingly for long - and we shouldn’t be surprised it did!
By making the hardware on which their SW runs cheaper, these companies have commoditized their complements. If you’re Apple, you make a 50% margin on your iPhones, but you also make much, much more from the software ecosystem you have built around it. In this case, the iPhone is a complement of the App Store, cloud services and the rest: since the demand for a product increases when the price of its complement decreases, if Apple can sell its low-margin hardware products for less, the rest of their offering benefits from it.
This strategy works damn well - no wonder Apple had a market cap of $360B when Tim Cook became CEO (and started Apple’s Chinese strategy) and has reached a peak of $3.5T in 2024.
Now, however, Apple is losing market share to Chinese competitors in many markets - the same competitors that were once suppliers and that have moved up the value chain. Maybe now it would make sense for Apple to reshore part of its production to protect the advantage it still has and to keep the products of their USD-fuelled R&D away from its enemies’ eyes, but it can’t because the US has lost know-how and wouldn’t be able to produce the same things China does.
This consideration brings us to the core of what re-industrialization is all about.
Service economies are different than manufacturing economies, and shifting from a service-heavy economy to a manufacturing-heavy economy requires changes at many different levels.
I believe this shift is an inflection point, an exogenous shock to a well-oiled system that opens up opportunities both in markets that are directly affected and in many other adjacent ones.
The most obvious beneficiaries of this shift will be the companies directly tackling the re-industrialization needs, which I will call “the primes” now on.
The primes take the spotlight, tackling the biggest opportunities and making great stories.
Primes in robotics and automation, energy, defense and computing have a great opportunity in front of them: disrupting large markets dominated by slow incumbents by leveraging this inflection point.
Often these companies look very similar: they are vertically integrated, they make extensive use of technology to build their product, they are lean and move fast, first tackling these markets from the edges and later expanding their scope, eating market share from incumbents.
Moreover, they have the benefit of having to set up their supply chain from scratch and thus don’t have to go through the painful process of reshoring or rethinking their relationships with suppliers.
The opportunity is so big that this is what most of the funds targeting re-industrialization are financing. These companies might be capital intensive, but if financed early enough, they can be exceptional investments.
So much has been written about why vertical integrators win during inflection points (including something by me) that I won’t add more on the topic here.
However, for these primes to be successful, there must be a broader change in our economies, providing the support they need to scale.
I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. […] I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple.
Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year.
The main question is: how vertically can the vertical integrators integrate? How much can they build by themselves?
The complex thing about supply chains is that they are… complex. Every component of a product consists of other components, each of which has its own supply chain. If you go down to the raw material, you will face the same problem: where do we source the machines to extract the raw material, and where do we source the pieces to build the machines to refine the raw materials?
Take Tesla, the poster child of vertical integrators.
One of their innovations that fascinates me the most is their Gigapress, a giant robot shaping aluminum sheets in one go. Well, Tesla doesn’t build that robot on its own: some of them are built by an Italian company, Idra Group, and others by a Chinese company, LK Machinery.
Even the most die-hard vertical integrators will have to source machinery, materials, and energy from somewhere. That’s where a service economy will fail to provide what they need.
Robots are a good example to show the problem.
China is leading the way in robotics, and we are lagging behind.
China invested heavily and now is starting to export its robots here.
Coco Robotics, which has just signed a global partnership with DoorDash, built its fleet of robots on top of a Chinese-made chassis. Chinese producer DJI is the world’s biggest manufacturer of drones.
This opens up a big opportunity for robotics primes, which often vertically integrate, going end-to-end and solving a specific problem – take Monumental, Exotec, or Verity as examples.
These primes build their own robotics platforms; they own the software stack and take care of deployment themselves.
However, we shouldn’t forget that building a robotics company means sourcing raw materials, batteries, sensors, and actuators.
Unfortunately, we can’t produce these things on European or American soil.
In 2024, for example, China produced 44,700,000 tonnes of aluminum, while the USA produced only 1,360,000 tonnes. What are we going to build robot frames with?
Another stunning example is magnets for electric actuators, which are key for automotive, robotics, and defense but also for semiconductor manufacturing. Well, China has a complete monopoly in heavy rare earth metals and produces 90% of the world’s rare earth metals - materials required to manufacture the magnets in electric motors.
What happens when China cuts the supply?
China has suspended exports of a wide range of critical minerals and magnets, threatening to choke off supplies of components central to automakers, aerospace manufacturers, semiconductor companies and military contractors around the world.
Shipments of the magnets, essential for assembling everything from cars and drones to robots and missiles, have been halted at many Chinese ports while the Chinese government drafts a new regulatory system. Once in place, the new system could permanently prevent supplies from reaching certain companies, including American military contractors.
https://www.nytimes.com/2025/04/13/business/china-rare-earths-exports.html
Other examples of areas where China leads include sensors like cameras and lidars, as well as batteries that power these robots.
Even companies operating in the most sensible sectors - such as defense in the US - can’t build without sourcing components from China.
If we really want to go down the route of re-industrialization, then all these sectors become “investable” sectors with big growth perspectives.
Continuing our example on the tech stack needed to build robots, we find chips giving them intelligence.
Also here, the primes are the ones taking the scene - have you ever heard of this tiny company called Nvidia? But there are monopolies at every step of the chain.
This is probably one of the most fascinating industries to study. People like Chris Miller and his book “Chip War” have helped educate the public on the importance of certain single points of failure.
To make a chip, it takes many steps, from sourcing and refining silicon into 99.9999999% purity to printing, testing and packaging, and no country can really make it on its own.
It’s important that we understand how our countries need to change to be more resilient and sustain the re-industrialization efforts properly - what happens if China invades Taiwan, or if the US decides they won’t export quartz from Spruce Pine anymore?
Each one of these single points of failure represents an opportunity for those who are brave enough to invest.
Energy is another obvious example. Manufacturing is power intensive, and a manufacturing-heavy economy must be able to provide its industries with cheap and reliable energy if it wants to be successful.
Also in energy, there are some obvious needs that are being addressed by the primes, like energy production or energy storage, for example. But there are also some second-order needs like reliable grids and more efficient energy markets, that still make big and interesting opportunities, and on whose growth depends the fate of the primes.
Energy, like automation, is a sector that is highly dependent on a few technologies that the West doesn’t control. Let’s take two examples (but we could make many more): transformers and photovoltaic cells.
Transformers are boring but essential components of our grids. Won’t digress much on what they do, but if you feel a little nerdy, check here for a good article. A shortage of transformers has been slowing down the development of new energy projects and, in general, any project that needs lots of energy (think datacenters, for example).
The problem is that Europe and the US can’t produce enough of them because we lack skilled labor and we lack raw materials needed to build them - China alone produces 50% of the world’s electrical-grade steel.
How do we build offshore wind farms, solar farms, nuclear reactors, datacenters, and anything that needs energy if we can’t build enough transformers?
Solve this problem, and you’ll have a very valuable company.
Photovoltaic (PV) cells are another unsung hero of our energy system, but also another piece of the stack that the West doesn’t control.
China has nearly a monopoly in this sector because producing photovoltaic-grade silicon is very energy intensive, and they have built enormous production facilities near huge power plants that supply them with cheap (often renewable) energy.
Energy-intensive processes are, by the way, also one of the reasons why China is leading in the production of many other raw materials such as steel and aluminum.
China is, for example, the biggest exporter of iron and steel articles – structures, pipes, fasteners, springs, etc. – with around 25% of the world's total world’s export amount.
The interesting thing is that China doesn’t even have enough domestic iron ore production to fulfill its needs and imports around $112B of it a year, mainly from Australia.
They managed to become top exporters of products made of a material they needed to import from other countries because they mastered the refinement process (with a little help from the government).
Steel is absolutely essential if we want to get back at building:
Not everything in the world is made of steel, but nearly everything in the world is made with machines made of steel
Ed Conway, “Material World”
How can we catch up?
Notice that most of the chemical processes to manufacture these materials were invented in the late 1800s or early 1900s: Bessemer process – 1856, Siemens process – 1953, Czochralski process – 1915, etc.
Is there a better way to produce these materials? Can we find more efficient steps that don’t require high temperatures? Can we invent better catalysts to facilitate the chemical reactions?
We must, if we want to fulfill the energy needs of a manufacturing-heavy economy.
This shift to manufacturing-heavy economies also implies shifts that are not directly “VC opportunities” but that could be growing markets for many companies to find customers with a high willingness to pay.
Think about infrastructure, for example.
With all of the talk of reshoring American industry and building manufacturing capability, one target of this effort should be on public infrastructure. At times overlooked for its more visually-appealing cousin, manufacturing, infrastructure builds the foundation with which manufacturing can take place. I’m talking about roads, bridges, electric transmission, water desalination & piping, dams, deepwater ports, airports, high speed rail, and more.
Someone Please Build This: America’s Industrial Construction Co.
An increased need to move things around is a second-order effect of an industrial economy: you move energy, you move people, you move goods, and you move heavy machinery. To move things, you need infrastructure.
To see what the creation of a manufacturing economy looks like from an infrastructure perspective, check these graphs from … you guessed it, China.
It's no secret that China is years - perhaps decades - ahead of the US in building the aforementioned infrastructure projects, and the US needs to catch up. While I won’t go into all of the reasons why, the fundamental argument here is that the reshoring of American industry cannot happen without infrastructure to support it. The most efficient, automated factory in the world is hamstrung without a proper road or rail network for transporting raw materials in and finished goods out. The most awesome nuclear plant, built at record speed and cost, has no way to get its electricity to millions of homes and businesses if there isn’t a highly capable transmission network. I could go on…
Someone Please Build This: America’s Industrial Construction Co.
We need ports and trucks and rails and ships.
Are we ready to get back to building them?
A lot of valuable and interesting data here. Glad to see more people writing and thinking about this. This is what we need.
I work in manufacturing and believe you are pointing out effects more than causes. Manufacturing moved out of the US because of low cost and available labor. Had we had low cost and available labor, we would have kept it, then we would have built more rail lines, electricity, etc. you name it. Instead the infrastructure we very much built is the container, massive global shipping, canals, and the world's largest navy to police and secure those ships. For re-industrialization, the question is about affordable, available labor.
There are two key variables we can seek to address (1) how much can AI and smart manufacturing increase the productivity of people in the factory and (2) what can be done by automation, by robotics or AI alone. Right now we have an aging workforce, 2.8M people will retire in the next 10 years from manufacturing jobs leaving 1.9M open. Labor is expensive, not very available, and unfortunately with record low productivity in our country. We need to drive a major productivity boost through human-AI partnership and we need to strengthen both our domestic and our regional efforts balancing a re-industrialization just of our country vs of our region to diversify.
Then in coordination with fundamentally enhancing and supporting our work force, we industrialize the surrounding infrastructure and systems around increased manufacturing and integrated supply chains that is not only global shipping.
I agree with you, the West de-industrialized because it was the optima thing to do. It served us very well, and we're probably much better off than before. But going back to an industrial economy is very hard, and many people simplify the argument too much - that's why I also wanted to explore the second order needs.
This is a thread that inspired my thinking: https://x.com/Molson_Hart/status/1908940952908996984