A European Paradox In The Automation War

On November 7, during Tesla’s annual shareholder meeting, Elon Musk gave an update on Optimus, its humanoid robot that is set to conquer the world (commercially, of course). Musk argued that the production of Optimus would lead to a future of abundance where all “boring, repetitive, and dangerous” tasks (e.g., factory work, cleaning, grocery shopping) would be performed by non-humans. He expects that Optimus will boost productivity and production around the world, massively lowering the production costs of goods (and services, as humanoid robots will also be able to wait tables, cut hair, baby-sit older folks), thereby ushering in an era where poverty is eliminated. No less.

At this stage, it is highly unlikely that any European player will be able to dominate the production of robots. More likely, Europe will be forced to buy its first generations of robots from Asia (China’s Unitree actually races ahead of Optimus), or the United States (coming from Chinese plants anyway).

But does this mean that Europe is doomed in such a scenario? Let’s take a minute to assess the situation.

In a world where the cost of labour is drastically reduced and where, by construction, capital massively replaces labour as the dominant factor of production, there are three elements to consider: the cost of capital, transportation costs (for goods), and the cost of power.

The cost of capital is likely to level up in capitalist/rule of law countries

In today’s world (at least in the pre-Trump era), capital is readily available almost everywhere at similar costs. US firms finance projects all over the planet, and the globalisation of finance means that differences in cost between regions are now marginal.

We believe this levelling trend will continue uninterrupted. If goods cannot be easily moved (from a European plant to Asia or the rest of the world because of tariffs), this will be counterbalanced by more capital being invested locally (as demonstrated by the legions of European / Asian firms supposedly deploying capital in the US).

Overall, we believe that the cost of capital is fairly irrelevant when choosing where to build the next plant. The only brake will be the legal cost of doing business in countries where property rights may not be respected, and legal recourse is uncertain. Effectively the cost of capital would then be higher.

However, assuming that most countries will enforce a strict rule of law and protect foreign investment, the cost of capital should be broadly equal.

Transportation costs and energy are key components

Assuming labour costs converge to the same level worldwide, and that the cost of capital becomes equivalent, what will determine the location of your next plant?

The answer is both simple and surprising: where energy is readily available at minimal cost and where transportation costs are minimised.

Demand for energy/electrification is likely to grow worldwide as long as the population does not contract (2100). Having a reliable and affordable electricity production system (whatever its source), will be a key pillar of a country’s competitiveness. In his speech, Elon Musk also predicted that money will eventually disappear and that energy would be the most important commodity on Earth (and on Mars for that matter).

Transportation costs matter just as much. This is twofold:

First, one wants inputs (raw materials and manufactured components) to arrive easily, which requires either proximity to production sites or an efficient logistics network.

Second, one wants to minimise the cost of delivering one’s output to customers, which means locating plants near large catchment areas (a large, affluent population within limited mileage).

Why could Europe be a relative winner

It seems that Europe benefits from several assets in that brave new world.

First, while it is losing in terms of relative wealth, the Eurozone and Europe at large,  remain the largest market in the world, and compared to the US, its population density is massively higher (c 100 person per sqm vs 35-40 in the US).

Furthermore, the European continent benefits from a dense network of roads as well as an unparalleled coastline. In his famous book Wealth, Poverty and Politics, Thomas Sowell explained that Europe’s rise was largely due to these transportation advantages (waterways then…), which eased the movement of goods and people and enabled the rapid diffusion of improved production techniques.

This situation has not changed. If anything, Europe has strengthened its advantage with a high-quality transportation network — railways and motorways enabling efficient logistics. Its port infrastructure is also exceptional, with access to the North Sea, the Atlantic Ocean, and the Mediterranean. This would be a Russian dream, incidentally.

On the energy side, the situation is … European, ergo more complex. Once a dominant player in this field, political decisions over the last 30 years may have jeopardised Europe’s leadership. However, the continent still has key building blocks: its energy utilities are among the largest in the world, France used to be (and to some extent still remains) a major nuclear power expert — a segment now set for strong growth. Last but not least, Europe is home to several energy giants such as Shell, TotalEnergies and BP, and thanks to the North Sea, still has access to oil and gas reserves.

Overall, the battle for the next wave of industrial asset allocation is far from lost to the US or China. We also believe that Europe at large (and the EU in particular), has key structural advantages to become a relative winner.

When asked what the Constitutional Convention had created, Benjamin Franklin famously replied: “A republic, if you can keep it.” Europe is today in a similar situation and could become the home of a new wave of industrialisation — if Brussels allows it.

In such a scenario, sectors/stocks to play include (but are not limited to):

• Energy utilities
• Grid players
• Logistics companies
• Raw materials players (mining, steel, petrochemicals….)