High-Tech Manufacturing Overview With ITR Economist Director Eric Post

In recent years we have seen a boon in manufacturing tied to high-tech applications including semiconductors, computers, and communications equipment. With semiconductors and high-tech playing a more significant role in several industries today, ITR Economist Director Eric Post provides an overview of what the state of high-tech manufacturing is today and where it is headed in the future.

Q: Why is high-tech manufacturing so important in 2024?

Eric: High-tech manufacturing has been one of the leading growth segments of overall US Industrial Production for quite some time. We are seeing more and more dollars and production flow into domestic high-tech manufacturing.

Q: What is the CHIPS and Science Act and how does it impact the US economy?

Eric: The CHIPS and Science Act is designed to boost domestic semiconductor capacity.

There are incentives related to that and, as a result, we have recently seen a lot of domestic production increase whereas we might have otherwise imported chips from somewhere like Taiwan.

Other countries are still producing chips, but the US government has made it clear they want a lot of production to be domestic. This is both for national security reasons and because it is very lucrative industry that the US wants to be associated with. If we could not have a specific chip made outside of the US because of an external conflict, it could have a huge ripple effect throughout our economy.

There is a saying that semiconductors are now the oil of the new economy, as many things now have semiconductor capabilities in one way or another.

Q: What are ITR Economics’ expectations for US high-tech manufacturing over the next few years?

Eric: Semiconductor production is going to continue to accelerate, at least in the near term. Growth might begin to slow late this year, but there will still be growth as we produce more and more semiconductors domestically.

Even if there is additional softening further out in 2025 or 2026, we are still going to see semiconductor production jump a whole level, as a higher percentage of chips globally will be made in the US.

Q: What will be some of the biggest challenges for clients?

Eric: It depends on the industry. Some of those in HVAC and certainly those in agriculture, automotive, or anything transportation-related will see an impact. We are seeing a lot of changes. What may have been your competitive advantage or what worked well for you over the last 30 to 40 years might not be the same competitive advantage moving forward.

It is essential that you think about ways to align your business with the way things are developing. Firms are going to have to be more nimble than they were previously

If you are the market leader used to winning the race, be prepared. Once the race resets and puts everyone back to the starting line, it will necessitate a big change to the way you do business.

That is where we can help. We can determine which segments are likely to do well over the next few years, explain why they are likely to do well, and highlight how critical it is to implement specific management objectives on a timely basis.

Q: What are some key pieces of advice you would give when it comes to the high-tech space over the next few years?

Eric: You need a clear vision. Determine where opportunity lies within your industry and strategize how you can better serve those needs than your competition. If you want to compete by having top quality service, along with goods and services for a particular niche, then you must focus on that quality and on an excellently trained workforce. If you are consistently putting out a superior product to your competition, make sure you have enough R&D dollars flowing into it to remain at the top of the heap.

If you prefer to be the big volume name in a category, have a strategy in place to ensure that your costs are the same or lower than your competition.

Having that clear vision is most important, and collaborating with your economist in a consultative program to figure out where the opportunities are will improve your strategy. Engage with a speaker that really knows your industry, someone that can help you through your process, as they can be an invaluable asset.

Q: What are some of the biggest upside or downside risks to the forecast looking forward?

Eric: I think the biggest downside risks, not just for high-tech, but for the economy at large, are asymmetric payoffs.

We can use AI as an example. I was reading a study by MIT that if AI is deployed correctly, it can increase productivity by up to 40%. But, if deployed incorrectly, AI could lower productivity by an average of 19%. I think we are going to see some firms make this investment but execute on it poorly and funded with a really high interest rate. A poor execution, especially in a high-interest-rate world, will end up making that investment a painful one.

I think with high interest rates and an uncertain payoff, we could see more of a pullback in the future should some of those investments sour.

In terms of an upside risk, the main driver of these investments will likely be social or government interest in green energy and in reducing carbon footprints.

We are also contending with a labor shortage. How are you going to deal with the labor shortage to be more efficient? I think there is going to be a lot of interest in automation, electronification, AI, etc.

How effective will those investments ultimately be? That is the million-dollar question.