We have closed a very trying year with a bunch of good news. The first one is vaccine, and we will discuss below its very deep implications. The second one is a Brexit deal and beyond the deal, the way Europe was strengthened. The third one is America getting back to normal.

Some existing trends are being reasserted: Asia looks from Japan down to Vietnam much stronger, with a successfully disciplined approach to Covid and an efficient industrial platform. Free markets and globalisation are being curbed globally by the US and strengthened in Asia with a New Significant Fee Trade Agreement signed by the ASEAN, China, Japan, South Korea, Australia and New Zealand.

Things like global coordination, strategic thinking, industrial policy and planning that were put in the freezer in the last 30 years are back on the agenda.

Asia, who benefited from a major relocation of manufacturing during that period, is strategically stronger. Europe economy looks wrong-footed and stuck in its old fossil-based model. The US with a lot of technology on one hand but very oil friendly policy on the other stands in the middle. The former oil mighty powers are naked. Oil focused Middle East which has been the place if not the cause of most wars and tensions in the past decades is looking less relevant.

The initial shortage of masks and test kits in the first wave of the virus has worked as a wakeup call. Even in a digital brave new world, things need to be manufactured and many products and goods such as hospital beds need to be closer to their users. China, Taiwan, South Korea and Japan are the places where most of these things are produced. In these countries, semiconductors, cars, machine tools, chemical eco-systems have been kept locally despite the fact many of the factories lost money making seemingly boring products and components. Many “boring” products went back to the fore. For example, some car factories at Nissan and Toyota are currently stopped because of a shortage of semiconductors.

Positive Digital trends seen in 2020 will stay but high-quality manufacturing should significantly rerate upwards in the next years, organized around a few verticals: clean and autonomous mobility, semiconductors and electronic components, biotechnology, medical manufacturing, clean energy.

To keep this short and easy we will focus on Hydrogen, Biotechnology, and touch on other key sectors

Hydrogen:

Japan, South Korea, China and Germany to name of few are pouring money and technology in Hydrogen. Japan is ahead and willing to showcase it with the Olympics.

As often with emerging technologies, the hurdles are initial launch costs and lack of related infrastructures (such as refill station for batteries). Challenges are transportation with the costly need to liquify at very low temperatures. The potential looks promising not only for cars, but for mass transportation, long haul trucks, steel making. On cars, there is no consensus yet. Tesla’s founder Elon Musk, who has skin in the game with his Lithium battery model, has called hydrogen-powered cars a "mind-bogglingly stupid" idea.

Related names are Kawasaki Heavy Industries, Chiyoda, Nippon Yusen, Toshiba on the infrastructure side, Toyota and Honda for cars, Toray for tanks. Other interesting names are Weichai Power in China, Hyundai Motor in Korea, Ballard Industries in Canada, Plastic Omnium in France.

Biotechnology and CDMOs (contract development and manufacturing organizations):

The urgency created by the pandemic has improved and shortened the process of finding, testing, accepting, manufacturing and shipping new drugs and vaccines from years to weeks. Biotechnology nimble teams have beaten big pharmaceutical multinationals. Drug conception has moved away further from traditional chemical to biochemical.

The messenger RNA principle used by BioN Technology and Moderna can be applied to treating many other diseases. New vaccines and drugs can be developed in weeks. It turns the table of drug industry opening the way for repeat stories. In the emerging model, biotechnology teams will focus on research and CDMO platforms will provide all services from Development to Manufacturing.

This should have huge implications for the drug industry. Sanofi stampede on the vaccine epitomised the diverging trajectories between fading big drug companies and fast-moving biotechnology labs.

Autonomous Driving, solid-state batteries, 3D semiconductors, collaborative robots (cobots), logistic infrastructures, high resistance materials, medical equipment, refrigerators, flexible manufacturing capacity for clothing, masks etc. will be reconsidered and rerated upwards. 

The ROE motto and its deflationary implication on prices, margins and employment which has ruled for the last 50 years is being questioned and rebalanced with other criteria such as quality, availability, reliability, trust. The Covid has taught us that quality matters more than quantity. Manufacturing has been one of the main victims of globalisation and its desperate search for lower costs in cheaper countries. High quality manufacturing will eventually enjoy better pricing power and higher margins.

Down the road and along the same lines, quantum computer, high quality new polymer are on the radar. Still at R&D stage, polyrotaxane, Slide-ring materials, molecular engineering will have huge implications not only on much lighter and stronger polymer materials but more importantly they will open the door to very exciting outcomes such as molecular motors and artificial muscles.

Japan is a leader in that space with a couple of Nobel Prizes, numerous advanced projects such as the ItoP (an acronym standing for Iron to Polymer and also echoing the name of the leading scholar behind the project Pr. Kozo Ito). Toray and Toyoda Gosei are the two main industrial partners for the ItoP and other far-reaching Slide-ring applications.

Countries which managed to keep high quality manufacturing: factories, part makers, logistic, wholesalers inside their borders will benefit. In that context, Japan is the silent elephant in the room, followed by Korea and Taiwan. Coincidently, in the three countries, manufacturing will benefit from the newly signed Asian free trade agreement.

In most hot areas, Japan has its legion of regional or global leaders like Toray, Murata, Hoya, Fanuc, Omron, Toyota, Daifuku, Shin-Etsu, Hoya, Kubota, Daikin, Nidec, Shimano, Panasonic, etc.

Some of these manufacturing companies are focused and well managed. Others have still their fingers into too many pies. Overall, they have manufacturing skills, in-house technology and patents in many exciting and promising areas. Their curious and at times frustrating ability not to focus on quarterly targets and pursue long term cash burning projects in cooperation with scientists and universities may eventually turn out as a god blessing in the new normal.

The corona virus worked like a war accelerating progress in key technologies. The paydays are coming for all the R&D thrown in the last decade in what, until, recently, sounded like crazy or very long-term projects. The long-term in EV or m-RNA, hydrogen power is now.

Taiwan and South Korea are not far behind. Intel is not the cornerstone of the new US industry policy semiconductor independence: the Trump administration picked Taiwan Semiconductor Manufacturing Company to build and operate the next US $12BN semiconductor mega plant. The two mega battery plants planned in Europe in 2020 will be built by LG Chemicals and Panasonic.

From an investment perspective…

Most of these companies have significant exposure to the economic cycle and their revenues and profits have been hit by the huge 2020 cyclical downturn. The current weakness in their share price should prove temporary and offer an attractive entry point for long term investors. In that group, Toray, Panasonic, Denso, JTKET, Asahi Kasei, Yaskawa Electric are worth a look. Value can also be found in names such as Takara Shuzo, Olympus, Fujifilm or Sanyo Chemical. 

Murata, Nidec, TSMC, LG Chemical, Shimano are high quality franchises trading at fair value with growth scenario attractive for a long-term risk adverse investor. In China, we are looking into SMIC. In Europe and the US, along the same lines, we find Teradyne and Plastic Omnium interesting.