2020 was mostly a virtual year spent at home and on-line. Investors sent software stocks through the roof allowing for crazy valuations and dumped almost anything else. In early 2021, reality strikes back. 

There is no problem of supply in the beautiful digital world, services can be produced and scaled at a zero-marginal cost. But a big part of the world is not digital, and it enjoys limited and constrained supply. This creates shortages for real things such as test kits, vaccines, bioreactors last year. As we move into 2021, shortages are spreading everywhere: semiconductors, batteries, bicycle parts and increasingly commodities from copper to corn. In recent history, shortages were created by unexpected natural disasters or political events and proved short-lived. 2021 shortages are different. It seems there is a structural lack of supply in many key sectors mostly in Europe and the US. This is expected to last months and to have a lasting impact on downstream manufacturing mostly in and around cars. 

In terms of Covid-19, Western countries are struggling. Asia is back to normal. Euro Covid-19 is morphing into new variants, creating new waves and a sentiment that it will never end. At the same time, in India, the virus has come off without any single reason and history tells us that pandemics come and go in a rather mysterious way. 

What multiple shortages suggest is that, without knowing, a big part of the world is back to normal. The second message is that making (real) things matter. Europe sounds strained. Sanofi vaccine failure is an illustration. Europe car makers reliance on LG Chemical or Panasonic for EV batteries is a big issue as these batteries account for 30% of the final cost of electrical cars. According to the Semiconductor Industry Association, Europe accounts for 3% of the Global semiconductor manufacturing capacity. Thierry Breton European Commissioner in charge of Industrial Policy had to ask TSMC and Samsung Elec for help. Renault is announcing a huge loss, Nissan is in trouble. The shareholder friendly narrative of the past 20 years is ending in a dead-end. Yes, costs have been killed but with them investments and then revenues. 

Globally, Northern Asia has become the biggest manufacturing hub. There are many surprising moves among old-economy players. Taiheyo Cement is moving into cobalt-free batteries. Companies, factories and employees have stuck together. Uninspiring growth and returns have been tolerated in order to maintain stability. Western shareholder activists have been kept at the gate. What sounded unreasonable and old-fashioned then is suddenly sounding smart. 

The Financial Times is reporting on a daily basis on shortages. One of yesterday top story was on polymer resins prices up 25% since December hitting a six-year high. US President Jo Biden is set to sign this month an executive order to accelerate efforts to build supply chains for chips and other strategically important products such as EV Batteries and medical equipment. 

This is a ticking point for high quality manufacturers who have stuck to the book: low key execution, client relationship, long-term thinking on employment, investment and innovation. Europe, despite a huge and unfortunate wave of plant closure, has still some assets: factories in Northern Italy and brain everywhere. Hopefully, there are still quite a few European manufacturers, Thierry Breton wants to talk to. 

Most equity investors seem quite complacent with shortages, higher prices and higher rates. This explains why old-school quality manufacturing stocks can be found at reasonable valuation in Northern Asia and certainly elsewhere.