Speaker 1: This is Dana Perkins and you're listening to Switched on
Speaker 1: the B and EF podcast. China is churning out clean
Speaker 1: energy technology at a breakneck pace, driving down costs on
Speaker 1: everything from solar panels to lithium ion batteries, with supply
Speaker 1: far exceeding domestic demand. Extremely competitively priced equipment necessary for
Speaker 1: the energy transition is available all over the world. At
Speaker 1: the same time, many countries are looking at onshoring and
Speaker 1: near shoring production of the very same things that China
Speaker 1: is producing. Many China based clean tech manufacturers are experiencing
Speaker 1: razor thin profit margins all the while, six hundred and
Speaker 1: forty nine billion dollars of new factories are set to
Speaker 1: come online between twenty twenty four and twenty twenty seven,
Speaker 1: which would bring prices even lower. On today's show, I
Speaker 1: speak with bnaf's head of Trade and Supply Chains and
Speaker 1: Twan Wagner Jones. We talk about how China and other
Speaker 1: parts of the world are addressing over supply through policy,
Speaker 1: and whether the US's Inflation Reduction Act and the European
Speaker 1: Union's net zero Industry are going to be enough to
Speaker 1: stimulate more local manufacturing. BNF subscribers will be able to
Speaker 1: find Antoine's research note titled China's clean Tech overcapacity threatens
Speaker 1: on Shoring Dreams at BNF dot com or at BNF
Speaker 1: on the Bloomberg terminal. Make sure to subscribe to switched
Speaker 1: on if you want a reminder when we publish future episodes.
Speaker 1: And if you like this show, if you give us
Speaker 1: a review on Apple Podcasts or on Spotify, it's going
Speaker 1: to make it easier for others to find us. Right now, though,
Speaker 1: let's talk to Antoine about overcapacity in the clean tech
Speaker 1: manufacturing sector. Anton thank you for joining today. We're going
Speaker 1: to be talking about oversupply and some of the most
Speaker 1: important parts of the energy transition AIDIA.
Speaker 2: It's great to be back.
Speaker 1: So there were this old three of things that were
Speaker 1: considered Chinese exports that were quite dominant in the industries
Speaker 1: that they were in, which were household appliances, furniture, and clothing.
Speaker 1: But now there's this new three. So what are the
Speaker 1: new three and how long have these been things that
Speaker 1: essentially China's been dominating.
Speaker 2: Yeah, in the early two thousands, China's just joined the
Speaker 2: WTO and it's in this big boom of export lead growth,
Speaker 2: which is really leading to the economy expanding at a
Speaker 2: rapid rate, and it's producing these goods at low costs
Speaker 2: and exporting some of them to the rest of the
Speaker 2: world in the sectors that you just mentioned. Since there's
Speaker 2: been a bit of a shift and right now the
Speaker 2: Chinese economy is in a very different position, and we're
Speaker 2: seeing basically an implosion of the housing sector, which is
Speaker 2: a real drag on growth, and that's a situation that
Speaker 2: sort of persisted. So the Chinese government's thinking about what
Speaker 2: are some of the other levers that can be pulled on,
Speaker 2: and going back to this idea of export lead growth
Speaker 2: and identifying a few priority areas has been part of
Speaker 2: the solution, and electric vehicles, solar modules, and lithium ion
Speaker 2: batteries are the three sectors that have been picked out
Speaker 2: as especially full of potential when it comes to being
Speaker 2: sectors that are expanding rapidly and for their being growing
Speaker 2: markets outside of China for those goods. And what's really
Speaker 2: interesting is we've seen a shift recently where this has
Speaker 2: been a priority that's been identified by the Chinese government
Speaker 2: in terms of exporting these different goods, but we're also
Speaker 2: starting to see the likes of Bloomberg News Goldman Sachs
Speaker 2: the Financial Times start to draw comparisons looking at those
Speaker 2: sectors and their contribution towards Chinese GDP at a time
Speaker 2: where things are slowing down a bit, and comparing it
Speaker 2: explicitly with the real estate sector and its contribution to GDP.
Speaker 2: So really a repositioning of the energy transition, not just
Speaker 2: talking about China's role in sectors that could be labeled
Speaker 2: as strategic or key to the energy transition, but also
Speaker 2: talking about the macroeconomic weight of those different sectors and
Speaker 2: their contribution to the Chinese economy, which is a pretty
Speaker 2: new shift and one that's quite exciting. Now.
Speaker 1: We did a show not that long ago on battery
Speaker 1: manufacturing in China and this set of new facilities that
Speaker 1: are coming online called gigafactories, which are at a scale
Speaker 1: never seen before anywhere in the world. Can you talk
Speaker 1: a little bit specifically about the battery part of it
Speaker 1: and kind of what's happening there.
Speaker 2: Absolutely. So, what we do at BNF is we track
Speaker 2: inment in lots of different sectors, and we started doing
Speaker 2: the same for the supply chain side of the energy
Speaker 2: transition story. As of last year. We recently re updated
Speaker 2: our numbers in a report, the Energy Transition Investment Trends
Speaker 2: Report that was published earlier this year, and we tracked
Speaker 2: about one hundred and twenty five billion in supply chain
Speaker 2: related investment over the last year, and a big part
Speaker 2: of that was from battery cell factories coming online. So
Speaker 2: huge part of what's being invested what we think will
Speaker 2: we be invested across all clean energy factories are in
Speaker 2: the battery value chain because of the fact that that
Speaker 2: specific supply chain is so capital intensive. Now, when we
Speaker 2: look at where stuff's coming online, that's where things get
Speaker 2: really interesting. So when we look at clean energy supply
Speaker 2: chain investments written large, there's a lot of excitement about
Speaker 2: onshoring and localizing things outside of China, But when we
Speaker 2: look at where new factories are actually coming online and
Speaker 2: still doing so, things are still more than ninety percent
Speaker 2: concentrated in one place, and that's China. So we're seeing
Speaker 2: we're still seeing a lot of momentum bekind new factories
Speaker 2: coming online in one part of the wor world, and
Speaker 2: they're doing so at a massive scale. In the past,
Speaker 2: a lot of the reasons for why Chinese manufacturers were
Speaker 2: starting to try and find footholds in certain sectors was
Speaker 2: due to low labor costs or significant public support. But
Speaker 2: now we've reached a situation where those battery manufacturers are
Speaker 2: at the technological frontier of what's being done in that space,
Speaker 2: where we've reached levels of scale and sort of the
Speaker 2: accompanying networks of providers in certain regions that just allow
Speaker 2: them to outcompete basically any other sort of nascent battery
Speaker 2: making industries outside of China. And that's a real big
Speaker 2: part of why China is so competitive is really down
Speaker 2: to scale at this stage and down to investments in
Speaker 2: supply chains that stretch back quite a few years now.
Speaker 1: So another one of the industries that China has been
Speaker 1: very dominant in arguably for much longer than even the
Speaker 1: battery space is the solar sector. Can you talk about
Speaker 1: some of the history there and how they have also
Speaker 1: used scale in order to really be the largest manufacturer
Speaker 1: in the world for solar modules.
Speaker 2: So now we're going to talk about overcapacity, and we're
Speaker 2: going to talk about it in a way in which
Speaker 2: is quite specific to the two sectors we're talking about
Speaker 2: just now, batteries and solar. What's really interesting with solos
Speaker 2: we've seen sort of cyclical over capacity be a feature
Speaker 2: of the market stretching back for as long as China's
Speaker 2: been involved in manufacturing at scale, so over the last
Speaker 2: decade plus. But right now things are a little bit different.
Speaker 2: So right now we've actually got a situation where in
Speaker 2: twenty twenty two, by the end of the year, China
Speaker 2: had more than enough manufacturing capacity, and whether it was
Speaker 2: in the upper bit of the value chain in polosilicon
Speaker 2: manufacturing or whether it's all the way down downstream to
Speaker 2: module making, it had enough manufacturing capacity within its own
Speaker 2: borders to supply the whole of the world's demand. But
Speaker 2: what we saw over the last year is a pretty
Speaker 2: unexpected boom in continued investments in new factories. They're built
Speaker 2: so quickly in China that many of them came online
Speaker 2: in twenty twenty three. And right now, when we look
Speaker 2: at Chinese manufacturing capacity and we compare it to global demand,
Speaker 2: so China's nameplate manufacturing capacity is more than twice what
Speaker 2: would be required to meet global demand. And based on
Speaker 2: what's been announced, and many Chinese manufacturers don't announce manufacturing
Speaker 2: capacity investments that far ahead of time, but just based
Speaker 2: on announcements that will continue to be the case even
Speaker 2: as demand grows according to our optimistic scenario over the
Speaker 2: next two years. So pretty shocking levels of over capacity.
Speaker 2: That's the case for solar modules. It's also the case
Speaker 2: for polysilicon, where there's over one point one terrawatts of
Speaker 2: polysilicon manufacturing online in China today, and then if we're
Speaker 2: looking at our demand numbers for the world, we're at
Speaker 2: somewhere around six hundred and seventy giga what's required for
Speaker 2: twenty twenty four, according again to optimistic scenario, So just
Speaker 2: to give you an idea of the scale of overcapacity
Speaker 2: is really pretty shocking. And it's also the case for
Speaker 2: battery manufacturing where similarly, battery cell manufacturing capacity in China
Speaker 2: is basically more than twice global demand. That will remain
Speaker 2: the case going forwards based on announced facilities, and it
Speaker 2: means that China's able to pull off pretty impressive feats
Speaker 2: like building enough lift your mind battery cells love year
Speaker 2: to supply all of the world's demand. So we're at
Speaker 2: levels of continued over investment in battery manufacturing, in solar manufacturing,
Speaker 2: we're seeing that continue and we actually track the numbers
Speaker 2: and we identified about four hundred and sixty nine billion
Speaker 2: dollars of overinvestment above what would be required to meet
Speaker 2: demand under our net zero scenario over the next four
Speaker 2: years in battery manufacturing and solar manufacturing.
Speaker 1: Now you had said that Chinese manufacturing facilities come online
Speaker 1: really fast. How fast is really fast? Months? Years?
Speaker 2: It depends on whether you're retrofitting an existing facility. It
Speaker 2: depends on whether you're building something a bit more involved
Speaker 2: when it comes to technology, So polysilicon plants might take
Speaker 2: a couple of years. They are a little bit more
Speaker 2: complicated to set up and get running. A module factory
Speaker 2: is a little bit less complicated, relatively speaking, and can
Speaker 2: be put up in a few months if you're retrofitting,
Speaker 2: if there's an existing production process which is more aligned
Speaker 2: with the one that you're putting in place, then it
Speaker 2: can be done relatively quickly, within sort of I've heard
Speaker 2: three months, but six months being something that's routinely cited
Speaker 2: as the amount of lead time required to put up
Speaker 2: a new module factory.
Speaker 1: So then is it reasonable to say that this is
Speaker 1: very intentional and that this isn't a series of projects
Speaker 1: that were already in the pipeline that then got completed,
Speaker 1: but the market wasn't exactly ready for and the economics
Speaker 1: didn't match what they projected their demand to be. But
Speaker 1: these came online regardless of where current demand was, almost
Speaker 1: reaching then for future demand that maybe they see coming,
Speaker 1: it's sort of if you have the supply, then the
Speaker 1: demand will exist because the economics will be so low.
Speaker 1: So they're kind of creating the market where maybe even
Speaker 1: closer to being paras aligned to thinking about bringing down
Speaker 1: emissions and making the renewable energy transition even faster if
Speaker 1: you think about it.
Speaker 2: Yeah, absolutely, That's one of the big messages from a
Speaker 2: recent piece of research that we've just published is looking
Speaker 2: at this overcapacity story, and there's a number of different
Speaker 2: outcomes and conclusions that you can draw from what's going on,
Speaker 2: and one is that it's brought the cost of renewable
Speaker 2: energy crashing down. It's brought the cost of electric vehicles,
Speaker 2: of batteries, of solar modules, for example, and even within China,
Speaker 2: and this is a bit different to the rest of
Speaker 2: the world's wind industry, the cost of wind turbines falling
Speaker 2: pretty rapidly, so we've seen, for example, the spot market
Speaker 2: rate for a Chinese solar module is now around eleven
Speaker 2: dollars cents per what a year ago it was double that,
Speaker 2: So it's really rapidly falling, and that means the world
Speaker 2: gets to profit, especially at a time when, for example,
Speaker 2: in the West, like the energy transition has never been
Speaker 2: submitted to the levels of political scrutiny that it's under,
Speaker 2: whether that's in Europe, whether that's in North America. And
Speaker 2: now we're at a time where the economic case for
Speaker 2: the energy transition is stronger than ever, and a big
Speaker 2: part of that is due to the fact that we've
Speaker 2: got this massive surplus glut in good quality, low cost
Speaker 2: technology coming from China right now. That is a positive
Speaker 2: story and it's one that should lead to an acceleration
Speaker 2: of the energy transition. We've even seen sort of reports
Speaker 2: of people now in Europe putting up solar modules along fences,
Speaker 2: for example, because you can do that now it's cheap enough.
Speaker 1: So a lot of the forecasts and scenarios that we
Speaker 1: actually run show quite a bit of adoption. And so
Speaker 1: these charts that kind of go up into the right
Speaker 1: when it comes to demand, some of them at a
Speaker 1: steeper curve, and some of them taper off a little
Speaker 1: bit more depending on what's actually happening in the economy.
Speaker 1: And one of these areas where there has been some
Speaker 1: forecast around some cooling demand in particular coming from the
Speaker 1: companies themselves that are the producers, is electric vehicles. So
Speaker 1: when we're talking about electric vehicles, the number of vehicles
Speaker 1: that are actually coming online from China, are those actually
Speaker 1: then being also exported or are those being focused on
Speaker 1: their domestic market.
Speaker 2: Yeah, great question. There's been the recent story of the
Speaker 2: slowdown in growth in electric vehicle sales. It's one driven
Speaker 2: by a number of different factors, such as interest rates
Speaker 2: for example. There's a question now is whether or not
Speaker 2: we're sort of at a historical turning point where we're
Speaker 2: starting to see very explicitly a lot of Chinese EV
Speaker 2: manufacturers BYD being the most commonly cited one, but there
Speaker 2: are many others turn their gaze beyond China in a
Speaker 2: much more serious sense than they were in the past
Speaker 2: when it comes to looking at growing markets. Chinese market
Speaker 2: is becoming increasingly oversaturated, it's incredibly competitive, so there's a
Speaker 2: lot of looking abroad. So again, BYD, the world's largest
Speaker 2: producer of EV's also produces a lot of its own batteries,
Speaker 2: has now been commissioning large carrier ships that are specifically
Speaker 2: designed to carry vehicles, and it's sort of leading the
Speaker 2: charge along with another couple of EV manufacturers like Great
Speaker 2: War Motive, for example, in trying to sell more to
Speaker 2: emerging economies, set up manufacturing there, but also sell cars
Speaker 2: from out of China into Europe, and that's something that
Speaker 2: we've seen recently, a bit of an emerging trend where
Speaker 2: we saw about nine percent of evs sold within the
Speaker 2: EU last year come from Chinese headquartered manufacturers, and that's
Speaker 2: a share that we expect to see growing and that's
Speaker 2: in turn led to a bit of a pivot from
Speaker 2: the European Commission, which is now a little bit concerned
Speaker 2: about that penetration and is thinking about whether or not
Speaker 2: to put in place new tariffs. So there's currently an
Speaker 2: anti subsidy investigation that's been launched by the European Commission
Speaker 2: looking explicitly at whether or not there'd be an argument
Speaker 2: that could be made that Chinese manufacturers are benefiting from
Speaker 2: unfair subsidies and that would provide the backing or the
Speaker 2: cover to put in place new trade measures which is
Speaker 2: something that the EUS shine away from in the past.
Speaker 2: It's got pretty minimal tariffs on most clean technology, especially
Speaker 2: when you compare it to other regions of the world
Speaker 2: that are also aligned with the EU in terms of
Speaker 2: trying to build out local supply chains at local manufacturing,
Speaker 2: like the US, like India, both of which are much
Speaker 2: more comfortable with using protectionist tools as part of their
Speaker 2: industrial strategy. Arsenal.
Speaker 1: So, we've seen battery prices fall and the levelized cost
Speaker 1: of electricity for solar being below what would be considering
Speaker 1: traditional high carbon energy sources like coal, for example, in
Speaker 1: most locations in the world. But when it comes to
Speaker 1: electric vehicles, the argument is often that electric vehicles are
Speaker 1: not yet at price parity with internal combustion engine vehicles
Speaker 1: and that we are moving in that direction, but we're
Speaker 1: not there just yet. So the question is are these
Speaker 1: Chinese vehicles that are coming online in places like Europe,
Speaker 1: are they getting closer faster?
Speaker 2: Yes, they are. There's been a bit of a focus
Speaker 2: in the West on when it comes to ev manufacturing,
Speaker 2: with presenting large SUVs for example, many of which are
Speaker 2: quite pricey. So when you look at the average sort
Speaker 2: of price points for electric vehicles sold in the US,
Speaker 2: for example, you're around forty to fifty thousand dollars. Now,
Speaker 2: the picture in China's very different, And just within China
Speaker 2: you've got things like BYD's cgull hatchback, which is a
Speaker 2: model that's regularly cited now just because of the fact
Speaker 2: that it's being sold at pretty shockingly low prices of
Speaker 2: under ten thousand dollars per car. Now, when BYD is
Speaker 2: sort of setting those cars and exporting them abroad, we're
Speaker 2: typically seeing prices around double that. But even if you're
Speaker 2: stacking on top tariffs and shipping costs and all these
Speaker 2: other things, you're still seeing cars that are sold at
Speaker 2: extremely competitive rates. So the outcome of that will be
Speaker 2: that the tipping points that we'd be seeing would be
Speaker 2: reached more quickly because we're starting to see a wave
Speaker 2: of again, good quality, cheaper cars come into these markets
Speaker 2: where traditionally speaking exactly that economic tipping point was holding
Speaker 2: back adoption and leaving it as the preserve of countries
Speaker 2: that are able to dole out extremely generous upfront grants
Speaker 2: for buyers, or countries that a richer and able to
Speaker 2: afford those cars. We might see a bit of a
Speaker 2: change there, and it's something that will be quite interesting. Again,
Speaker 2: there will be differences based on region and based on
Speaker 2: how comfortable different parts of the world are with employing
Speaker 2: measures around market access. And for example, the US seems
Speaker 2: like a bit of a less of a promising market
Speaker 2: for Chinese auto manufacturers than Europe. So byd and these
Speaker 2: other companies are much less bullish when it comes to
Speaker 2: their ability to set into the US market as opposed
Speaker 2: to other parts of the world.
Speaker 1: So you had mentioned subsidies, and the thing that's really
Speaker 1: coming to my mind given that we're recording here in Europe,
Speaker 1: is this parallel maybe with the agriculture industry, where you
Speaker 1: see governments intervening and actually asking farmers not to produce
Speaker 1: in order to keep prices at a certain place so
Speaker 1: that they're high enough in order to support the farmers
Speaker 1: that are in this industry. It seems like the reverse
Speaker 1: thing is happening in China, where they're actively promoting this
Speaker 1: global oversupply and domestic oversupply in these industries. Can you
Speaker 1: talk a little bit about the role of the Chinese
Speaker 1: government in how solar batteries and electric vehicles are really
Speaker 1: working From the manufacturing side.
Speaker 2: Yeah, there's a bit of a framing of intention, and
Speaker 2: when you look at reporting around this, you often see
Speaker 2: things like the Chinese government's planned to dominate the solar industry.
Speaker 2: These are sectors that have been identified as priority sectors
Speaker 2: by the Chinese government, and there has been sort of
Speaker 2: low cost credit, for example, that's being provided by states
Speaker 2: financial institutions. There are subsidies offered at a local level
Speaker 2: when it comes to power or land, just as happens
Speaker 2: in much of the rest of the world that's trying
Speaker 2: to pursue growth via industrial strategy. But really something that
Speaker 2: goes unsaid is the extent to which this is the
Speaker 2: result of market forces, and to quite a shocking extent. Actually,
Speaker 2: when you look at the margins that we're seeing in
Speaker 2: the solar industry, in the battery making space, in ev manufacturing,
Speaker 2: even among wind turbine makers within China, margins have shrunk
Speaker 2: considerably due to the fact that competition's gone from red
Speaker 2: hot to white hot recently. It's an incredibly tough space
Speaker 2: to operate in and actually a lot of the overcapacity
Speaker 2: that we're seeing is not so much the result of
Speaker 2: an intentional policy to try and flood the world markets
Speaker 2: with this kind of technology, it's more the result of
Speaker 2: companies playing a big game of chicken, and basically the
Speaker 2: first to blink in terms of not constantly updating your
Speaker 2: manufacturing facilities is instantly rendered irrelevant. And what I mean
Speaker 2: by that is that we're seeing very fast technology cycles.
Speaker 2: In solar for example, we're seeing a shift to ND
Speaker 2: type modules called top con modules, away from PERK, which
Speaker 2: was the previous dominant technology. That's happened in just a
Speaker 2: couple of years, and that means that you're constantly having
Speaker 2: to invest in new manufacturing capacity to stay relevant. And
Speaker 2: we're also seeing that in the battery making space, where
Speaker 2: we're seeing rapid shifts from nickel heavy chemistries to ones
Speaker 2: that are more iron based. And again we're seeing the
Speaker 2: picture change extremely dynamically from year to year, and that
Speaker 2: results in the same sort of thing, massive investments in
Speaker 2: just trying to stay relevant in the space. And actually
Speaker 2: proof of this has a big dynamic that we're seeing
Speaker 2: is the fact that these companies' share prices have really
Speaker 2: not been doing great. They've been underperforming the Shanghai Stock
Speaker 2: Market index. That's been a persistent trend that we've seen
Speaker 2: over the last few months and is directly linked to
Speaker 2: this idea of massive overcapacity, pressure on prices, pressure on margins,
Speaker 2: and that is part of the reason why these manufacturers
Speaker 2: are now looking abroad and looking to try and sell
Speaker 2: their products outside of China because of the fact that
Speaker 2: their home market is so oversaturated, and that oversaturation is
Speaker 2: the result of relentless extreme competition.
Speaker 1: So let's talk a bit about how the rest of
Speaker 1: the world is reacting. There's a growing trend of Western
Speaker 1: countries actually looking to nearshore and onshore production. We've actually
Speaker 1: talked about this with you on this show. So how
Speaker 1: has that progressed? And, you know, without giving away the punchline,
Speaker 1: you've talked about this as we've gone through this show.
Speaker 1: Chinese manufacturing has led to dramatically lower prices in a
Speaker 1: lot of the areas that they actually go into. So
Speaker 1: have these nearshore and onshore manufacturing facilities have they been
Speaker 1: able to get anywhere close to being competitive?
Speaker 2: So we can again talk back to those investment numbers
Speaker 2: I mentioned earlier. So when we look at new factories
Speaker 2: that are supposed to come online this year outside of China,
Speaker 2: across solar manufacturing, battery manufacturing, wind manufacturing, hydrogen electrializer manufacturing.
Speaker 2: We see a quadrupling of the levels that we saw
Speaker 2: last year this year, and by the end of next
Speaker 2: year we should be at eight times twenty twenty three levels.
Speaker 2: So we're basically on the cusp when we look at
Speaker 2: what's been announced of a pretty big wave of not
Speaker 2: just breaking ground or starting to make investments, but factories
Speaker 2: actually coming online for clean technologies across North America and
Speaker 2: across Europe. That's a real big shift, and that's really
Speaker 2: driven by a lot of those policies that you mentioned,
Speaker 2: which are things like the Inflation Reduction Act in the US,
Speaker 2: which is incredibly generous when it comes to subsidies for manufacturers,
Speaker 2: many of which are in the form of production based
Speaker 2: tax credits, but also in the form of the Federal
Speaker 2: loan program, for example. And in Europe we're starting to
Speaker 2: see the Net Zero Industry Act, which is still in
Speaker 2: a proposal stage, but sets out these incredibly ambitious targets
Speaker 2: for local manufacturing, and it's being increasingly backed up by
Speaker 2: member states starting to give company specific support to certain
Speaker 2: firms willing to manufacture in Europe, but also in the
Speaker 2: form of countries trying to put in place their own
Speaker 2: versions of the inflation reduction acts, such as France, for example,
Speaker 2: which is very keen to start to provide tax credits
Speaker 2: to manufacturers setting up shop there. So this is a
Speaker 2: big shift that we're seeing. The question is is that competitive.
Speaker 2: The answer is no, not from an economic perspective, but
Speaker 2: on shoring, localizing supply chains was never really about making
Speaker 2: the case that it was economically competitive. There was always
Speaker 2: this idea, at least among those who are honestly presenting
Speaker 2: these ideas, that there would be a premium to be
Speaker 2: paid as a result of this, but that that would
Speaker 2: be worth the co benefits in terms of resiliency, in
Speaker 2: terms of local value creation, in terms of jobs. And
Speaker 2: that's a calculus that has changed a little bit due
Speaker 2: to the current overcapacity situation and the current low prices
Speaker 2: that we're seeing do mean that that economic gap is
Speaker 2: greater than ever before, and that manufacturing in Europe and
Speaker 2: manufacturing in the US comes at a greater cost compared
Speaker 2: to the current cheap technology that we could be relying
Speaker 2: on then was the case in the past. So it
Speaker 2: does reshuffle the cards a bit in terms of the
Speaker 2: implied cost of trying to make good on all of
Speaker 2: these onshoring plans, and we're starting to see that trickle
Speaker 2: down through decisions made by companies such as meyer Burger,
Speaker 2: for example, which is a Swiss company. It operates out
Speaker 2: of Germany, but it's Europe's only real claim for solar
Speaker 2: manufacturing to be happening at scale when it comes to
Speaker 2: the downstream bits of the value chain, so cells and modules.
Speaker 2: That company has recently said that it's basically winding down
Speaker 2: its European operations and shifting to the US where there's
Speaker 2: better access to subsidies. And the real driving force for
Speaker 2: that is the current crash in module prices that we've
Speaker 2: seen that is directly resulting from Chinese oversupply. And that's
Speaker 2: at a time where the EU is saying we want
Speaker 2: to have forty percent of our solar demand sourced from
Speaker 2: locally made solar modules by twenty thirty. If it's unable
Speaker 2: to keep existing manufacturers from decamping elsewhere, how is it
Speaker 2: going to achieve those objectives is a big question that
Speaker 2: is unanswered at present when it comes to the EU's
Speaker 2: current policy making environment. There's similar pressures on manufacturers in
Speaker 2: the US, where even if you have more generous subsidies
Speaker 2: in the form of the IRA's tax credits. You're still
Speaker 2: seeing manufacturers like Cubic PV, which had a big eight
Speaker 2: to ten gigawatts per year plant for making PV wafers
Speaker 2: in the US as basically announced it's canceling those plans
Speaker 2: due to the overcapacity situation, rendering its planned operations unfeasible
Speaker 2: from an economic standpoint. So this is a real pressure
Speaker 2: and it's really weighing on these onsuring plans, and it's
Speaker 2: meaning that policymakers are going to have to do one
Speaker 2: of two things, either give up or double down and
Speaker 2: get serious, but probably in a more focused and targeted
Speaker 2: way than in the past, where there was a vague
Speaker 2: thought that if you pursued localization it would sort of
Speaker 2: work out, and in the EU it wouldn't involve hard
Speaker 2: decisions around trade barriers or around thinking more about how
Speaker 2: to restructure subsidies. It would just sort of happened if
Speaker 2: it was identified as a priority. That doesn't seem realistic now,
Speaker 2: and it seems like there's going to be real pressure
Speaker 2: on policymakers to either do what the French government is
Speaker 2: doing and go extremely hard in one direction and say no,
Speaker 2: we're going to double down on this. We're going to
Speaker 2: put in place market access barriers for Chinese companies willing
Speaker 2: to sell evs into France or benefit from ev subsidies
Speaker 2: in France, or for example, go the way of Germany,
Speaker 2: where a member of the coalition government is really not
Speaker 2: keen on any kind of measures that could be deemed
Speaker 2: to be sort of market interference or distortive in nature,
Speaker 2: and where we're seeing real pushback against the idea of
Speaker 2: putting in place concrete measures for incentivizing local solar manufacturing.
Speaker 2: So there's real hard discussions that are already happening in
Speaker 2: these countries because of this overall global situation that we've
Speaker 2: got as a backdrop, And that's going to mean that
Speaker 2: the next year is going to be really key to
Speaker 2: understanding the extent to which all of this vague talk
Speaker 2: of onshuring and localization is actually going to bear out
Speaker 2: in reality.
Speaker 1: So even for the countries that have decided that they
Speaker 1: are not going to promote intervention, you're clearly seeing the
Speaker 1: Chinese government intervening in their market. And in the US,
Speaker 1: the Inflation Reduction Act has often been referred to as
Speaker 1: a game changer for many of the markets that they've
Speaker 1: been helping to bolster like hydrogen. But when we think
Speaker 1: about the Inflation Reduction Act, it's not completely in them.
Speaker 1: You've definitely already established that, but it has changed it
Speaker 1: and changed the market for the US specifically. What impact
Speaker 1: has that had on other countries that perhaps aren't as
Speaker 1: proactive about getting involved with pricing and manufacturing and where
Speaker 1: and for how much?
Speaker 2: So there's massive pressure by the IRA pushing other parts
Speaker 2: of the world to pursue the same sort of onshowing agenda.
Speaker 2: But that's why we've seen so much of the policy
Speaker 2: making around this be quite fuzzy and inexact, and where
Speaker 2: many of the conversations have been happening have avoided making
Speaker 2: these hard choices about doubling down and what the actual
Speaker 2: objectives are is exactly because of the fact that a
Speaker 2: lot of these policies have been reactive by nature, have
Speaker 2: been drawn up in a bit of a scramble to
Speaker 2: provide something to compare what's being offered in the US against.
Speaker 2: And the upshot is proposals that have come out of
Speaker 2: the EU which are still at a very early stage
Speaker 2: and still being brought into question. There's still a lot
Speaker 2: of skepticism about the extent to which these extremely ambitious
Speaker 2: onshowing targets that are being put forward by the European Commission,
Speaker 2: whether or not there to be taken seriously. And that's
Speaker 2: a direct result of the fact that the Iras really
Speaker 2: put pressure in a very short timeframe on redrawing the
Speaker 2: map when it comes to industrial strategies across the world.
Speaker 1: So let's talk a little bit about the future because
Speaker 1: one of the things that we're addressing now is that
Speaker 1: there's a supply and demand imbalance currently. But when we
Speaker 1: look into the future, if we are to reach net
Speaker 1: zero targets that have been stated all over the world,
Speaker 1: there has to be a really market increase in demand
Speaker 1: and a lot of these industries, so does the demand
Speaker 1: essentially catch up and is just an issue of timing?
Speaker 1: And are we having a conversation regarding timing which will
Speaker 1: more or less sort itself out over the next decade
Speaker 1: or so.
Speaker 2: Yeah, there's the Jevam's paradox, which is basically this idea
Speaker 2: that if something gets cheaper or more efficient then it's useful,
Speaker 2: increased demand will go up. That's probably something that we'll see.
Speaker 2: That's something that we're already seeing for solo where deployment
Speaker 2: is surging past forecasts and where low prices are meaning
Speaker 2: a pretty rapid growth across the board. We'll see that
Speaker 2: across all of these different sexes. There's overcapacity now it's
Speaker 2: providing extra low prices is going to speed deployment and uptake,
Speaker 2: and that's something that is quite clear. The cause of
Speaker 2: relationship there is very simple. There's also another part of
Speaker 2: the story as well, where because of the fact that
Speaker 2: we're seeing extremely fast cycles when it comes to technology
Speaker 2: and the needs to update factories that I mentioned earlier,
Speaker 2: is that many of these factories that are built now
Speaker 2: will be redundant in a few years if they're not
Speaker 2: constantly invested in. That's part of the cause for a
Speaker 2: lot of this overinvestment, and we're already seeing a lot
Speaker 2: of planned over investment going forward. But it's also relevant
Speaker 2: to the overall picture because of this incredibly dynamic space
Speaker 2: that we're seeing, whether it's with solar technology and the
Speaker 2: shifts between different types of technology that we're seeing there,
Speaker 2: or whether it's rapid advances in new battery chemistries in
Speaker 2: the littumon space. So those are also things to sort
Speaker 2: of bear in mind. But overall. What's really interesting, and
Speaker 2: again this is part of the work that we did
Speaker 2: just looking at sort of energy transition investment trends earlier
Speaker 2: this year, is that even as we tracked one point
Speaker 2: three trillion in energy transition spending last year, that was
Speaker 2: maybe three or four times less than what was actually
Speaker 2: needed according to our net zero scenario, we're really seeing
Speaker 2: a big shortfall. But that small share that we saw
Speaker 2: in energy transition supply chains investment was the one or
Speaker 2: one of the very few areas where investment was on track,
Speaker 2: whereas a part of the puzzle that we have solved.
Speaker 2: And yes there are issues in terms of concentration and
Speaker 2: resiliency of those supply chains written large, and how aligned
Speaker 2: it is with different political objectives that very enormously based
Speaker 2: by region. But the fact is is one part of
Speaker 2: the equation that has been solved for and where we're
Speaker 2: not seeing a systematic shortfall investment, which is sadly the
Speaker 2: case across much of the world's energy transition. And that
Speaker 2: is something to find solis in when.
Speaker 1: We look at a lot of these different government incentive
Speaker 1: schemes and trade barriers. So the opposite of an incentive,
Speaker 1: you've actually seen some of these be quite porous. So
Speaker 1: for example, you see some Chinese companies actually setting up
Speaker 1: manufacturing in Mexico to work around some of these barriers
Speaker 1: and to also take advantage of this near shoring push.
Speaker 1: Are we seeing that really common and is it happening
Speaker 1: all over the world or is it just in Mexico.
Speaker 2: I expect we're going to see much more in the
Speaker 2: way of protectionism when it comes to clean tech over
Speaker 2: the next few years. Is something we're going to be
Speaker 2: actively tracking in much more of a serious way over
Speaker 2: the next few months. What we've seen in the past
Speaker 2: is we've seen tariffs on certain products coming directly from China,
Speaker 2: leading to Chinese manufacturers basically upping sticks and setting up
Speaker 2: factories in regions where they have equally low costs for
Speaker 2: manufacturing and where they're able to sell into the US.
Speaker 2: And the big example there is PV with Southeast Asia,
Speaker 2: where you've seen an influx of the major Chinese manufacturers
Speaker 2: into places like Malaysia and Vietnam specifically to get around
Speaker 2: the US tariffs on Chinese imports. That's been a bit
Speaker 2: of a game of cat and mouse. There's been a
Speaker 2: bit of a ping pong match with different sort of
Speaker 2: officials within the Commerce Department in the US, lobbying sometimes successfully.
Speaker 2: We've seen some relaxation of those rules for restrictions on
Speaker 2: modules coming from Southeast Asia. But it's a clear example
Speaker 2: of the kind of reactions and strategies that we've seen
Speaker 2: employed by companies affected by these policies. The question is
Speaker 2: will that happen to other sectors. Now, Mexico is an
Speaker 2: interesting example. We're about to publish, well, we will have
Speaker 2: published a note by the time this podcast comes out
Speaker 2: on specifically addressing this issue. And what's the issue in
Speaker 2: question is that US policymakers have talked about exports, specifically
Speaker 2: of Chinese electric vehicles manufactured in Mexico being sold into
Speaker 2: the US, where because of the USMCA favorable trade terms
Speaker 2: between Mexico and the US, they're avoiding the twenty seven
Speaker 2: point five percent tariffs that are applied to Chinese EV's
Speaker 2: coming from China into the United States. So it could
Speaker 2: be sort of a back door where you could start
Speaker 2: to see because of low Mexican manufacturing costs, so factory
Speaker 2: workers in Mexico are actually paid less than in China.
Speaker 2: Now it's pretty shocking fact, but there's a real case
Speaker 2: to be made for manufacturing in Mexico, and Chinese EV
Speaker 2: manufacturers could profit from that and set into the US. However,
Speaker 2: there's a few big howevers. One is that there's no
Speaker 2: real existing lithumind battery supply chain in Mexico right now,
Speaker 2: so the current government has been quite interventionist and hasn't
Speaker 2: had the most relaxed approach to foreign or private investment
Speaker 2: into the lithium ion battery space. That's sort of held
Speaker 2: back a lot of investments, whether or not it is
Speaker 2: on the exploration side of things for mineral extraction for
Speaker 2: lithium extraction, or whether or not it's an actual setting
Speaker 2: up battery factories and EV production lines. It's acted as
Speaker 2: a bit of a drag on those investments there. And
Speaker 2: we're seeing an election coming up sort of midyear where
Speaker 2: the likely front runner, Cloudy of Shinbaum, also stems from
Speaker 2: the same sort of school of thoughts. So even though
Speaker 2: we're hearing a lot as she's on the campaign trail
Speaker 2: about opportunities for Mexico to become a big hub for
Speaker 2: battery manufacturing and benefiting from the US's focus on near assuring,
Speaker 2: a lot of its supply chains. There's a lack of
Speaker 2: clarity about whether or not she'll be willing to put
Speaker 2: in place the reforms that would actually enable that to
Speaker 2: happen because of how politically charged they are within the
Speaker 2: current Mexico political ecosystem. Now, the other thing is that
Speaker 2: there are a couple of Chinese EV manufacturers active in Mexico,
Speaker 2: only two that we've tracked. Jac is one of them,
Speaker 2: and it's pretty minor footprint when you compare it in
Speaker 2: the grand scheme of things. We've seen a lot of
Speaker 2: talk of BYD again of a number of Chinese EV
Speaker 2: manufacturers talking about setting up in Mexico, but we've not
Speaker 2: really seen anything confirmed, nothing concrete as of present. And actually,
Speaker 2: what's really interesting too is that a lot of the
Speaker 2: fears or concerns that are cited by US policy makers
Speaker 2: are around, Okay, we've put in place these IRA subsidies
Speaker 2: that also benefit North American EV assembly and manufacturing writ large,
Speaker 2: Chinese manufacturers could benefit from that. Well. Actually, a lot
Speaker 2: of the fine print within those subsidies and the thirty
Speaker 2: D EV or Clean Vehicle Tax credit that provides a
Speaker 2: sort of upfront purchase grant for EV buyers in the US,
Speaker 2: which is incredibly important, receives a lot of media attention
Speaker 2: that isn't available in most cases if a Chinese company
Speaker 2: is involved in the manufacturing process. So already you're seeing
Speaker 2: an environment in Mexico that isn't super favorable to setting
Speaker 2: up a battery manufacturing hub anytime soon. You're seeing a
Speaker 2: lack of real concrete investments by Chinese manufacturers, and you're
Speaker 2: also seeing an environment in the US where market access
Speaker 2: for Chinese firms isn't a given. So our conclusion is
Speaker 2: that those concerns are overblown and overstated. But we are
Speaker 2: going to enter a new era of tariffs potentially in
Speaker 2: the US if Donald Trump wins. We've heard talk of
Speaker 2: sixty percent tariffs on everything coming into the US, and
Speaker 2: we've also heard talk of one hundred percent tariffs, is
Speaker 2: something that was recently mentioned by Donald Trump at a
Speaker 2: speech on specifically Chinese made vehicles coming from Mexico. So again,
Speaker 2: Chinese manufacturers, they're not particularly looking to sell into the
Speaker 2: US because the current environment seems to be incredibly difficult.
Speaker 2: But the big question is what happens to Europe. Europe
Speaker 2: still remains incredibly open when it comes to citing Chinese
Speaker 2: manufacturers or East Asian manufacturers in general, tariffs are still low.
Speaker 2: The big question there is will that change, And that's
Speaker 2: when things will get quite interesting when it comes to
Speaker 2: re examining how that would play out in practice and
Speaker 2: whether or not we could see circumvention implored as a
Speaker 2: strategy and response.
Speaker 1: We spend a lot of time talking about established markets
Speaker 1: in the energy system. So we've talked about the US
Speaker 1: and Europe and China, but let's talk a little bit
Speaker 1: about some of the markets that are growing in many
Speaker 1: respects because of population growth. So I'm thinking of parts
Speaker 1: about perhaps India, where in other parts of the world
Speaker 1: there are growing economies, both in terms of people and
Speaker 1: in terms of energy access. What is happening there and
Speaker 1: how does all of this global economic interplay for these industries,
Speaker 1: how does it impact them.
Speaker 2: There's a big risk when all of these richer countries
Speaker 2: try and outcompete each other by offering subsidies and trying
Speaker 2: to push forward with this onshoring agenda, that this sort
Speaker 2: of deprives much of the developing world of an opportunity
Speaker 2: to profit from those industries and use them as a
Speaker 2: way in which develop their own economies. That's a real concern,
Speaker 2: but it's something that's quite interesting. It really depends again
Speaker 2: on where you're looking. Southeast Asia is becoming a pretty
Speaker 2: big hub for manufacturing clean technology, and that's something where
Speaker 2: we've seen massive investments from Chinese manufacturers, but also an
Speaker 2: increasing focus when it comes to engagement from the US
Speaker 2: or from the EU on having a role to play
Speaker 2: there too. The situation in sub Hian Africa is very different.
Speaker 2: We've seen a lot of excitement around potential sort of
Speaker 2: battery manufacturing or even exports of things like hydrogen for example,
Speaker 2: from subs Hiana, but when it comes to realizing projects
Speaker 2: to tapping into local demand, things are much more complicated
Speaker 2: and difficult. One country that's quite interesting is India. So
Speaker 2: since twenty nineteen and even before, but really twenty nineteen
Speaker 2: was the point where things intensified, we've seen a real
Speaker 2: push from the Indian government to onchore solar manufacturing. Specifically,
Speaker 2: it's deployed all kinds of different tools, from import tariffs,
Speaker 2: from approving a certain list of manufacturers to take part
Speaker 2: in bids. When it comes to soda auctions, it also
Speaker 2: takes the form of local content requirements. There's been a
Speaker 2: real battery of measures that's been deployed for onshoring soda,
Speaker 2: and it's gone well, it's not gone great. There's been
Speaker 2: a degree of uncertainty from investors and developers complaining a
Speaker 2: lot about increased costs, about the lower availability of modules
Speaker 2: at a low prices, increased the cost of doing business
Speaker 2: for developers in India large it's been quite inflatory, just
Speaker 2: in the same way as any of these sort of
Speaker 2: protectionist measures would be. But we've really seen it as
Speaker 2: a sort of sandbox for trying out these measures in
Speaker 2: an environment that's very different to the US, that's very
Speaker 2: different from Europe. What we have seen is limited success
Speaker 2: in growing out four years on from when this started
Speaker 2: out in serious limited success when it comes to growing
Speaker 2: out supply chains up and down the solar value chain.
Speaker 2: But we have seen some pretty big investments in solar
Speaker 2: module manufacturing, and there's increasing interest and detailed talk about
Speaker 2: doing the same for manufacturing cells and even going up
Speaker 2: towards wafers. It's still early days, but it's still a
Speaker 2: really interesting experiment that we're seeing and that would be
Speaker 2: good to track, just because of the fact that local
Speaker 2: demand is set to increase incredibly rapidly, and we've already
Speaker 2: seen a real credible commitment from the Indian government. When
Speaker 2: it comes to clean energy, manufacturing in India is held
Speaker 2: back by all kinds of structural factors. It accounts for
Speaker 2: a smaller share of GDP that you might expect given
Speaker 2: its developmental trajectory, but there's still a big case to
Speaker 2: be made for some of the fact that production costs
Speaker 2: could be quite low, and it could serve as quite
Speaker 2: a useful base when it comes to diversifact fighting manufacturing
Speaker 2: away from relying on China, for example. There's a lot
Speaker 2: of excitement around cooperating with India, as there is with
Speaker 2: places like Indonesia, for example, and playing a more important
Speaker 2: role within those battery or solar value chains. So it's
Speaker 2: still relatively early days in a part of the world
Speaker 2: where the amount of budgetary headroom for achieving these kind
Speaker 2: of objectives is a lot more limited than say the US.
Speaker 2: But I would sort of continue to look at India
Speaker 2: quite closely just because of the fact that the government
Speaker 2: is extremely comfortable with taking quite an aggressive stance on onsuring.
Speaker 2: It's been doing so since much before, several years before
Speaker 2: the IRA came into force. And it's showing a level
Speaker 2: of determination that sort of hints that it might not
Speaker 2: just do that for solar it might also do that
Speaker 2: for say, battery manufacturing when that starts to grow out
Speaker 2: in a more serious way in India, which we expect
Speaker 2: to be the case over the next few years.
Speaker 1: Now, this is a story that is really equal parts
Speaker 1: economics and policy. So just recently, Janet Yellen, the US
Speaker 1: Secretary of the Treasury, was in China negotiating with the
Speaker 1: Chinese government. Can you talk a little bit about what
Speaker 1: happened there.
Speaker 2: Yeah, So this is a concern that we've seen cited.
Speaker 2: If you go back in history, we had semiconductors coming
Speaker 2: from Japan, similar concerns about overcapacity cited about government support
Speaker 2: in Japan leading to perceptions around dumping on global markets,
Speaker 2: and that was something that led to a policy response
Speaker 2: to some of the US And when it comes to
Speaker 2: China specifically, we've seen still be a sort of perennial
Speaker 2: concern that's been brought up again and again and again.
Speaker 2: This time again, these overcapacity concerns have been brought up
Speaker 2: by Janet Yellen in the Treasury Department. They've been brought
Speaker 2: up by Catherine tie in the Commerce Department during a
Speaker 2: recent trip to Brussels, where those talk around Chinese overcapacity
Speaker 2: as a structural issue echoes with many of the views
Speaker 2: that are being cited in the European Commission and across
Speaker 2: member states. So there's a general consensus that something needs
Speaker 2: to be done. There's a desire to engage with China
Speaker 2: about ways in which to resolve this issue, and the
Speaker 2: Chinese government has identified overcapacity as a concern, but I
Speaker 2: think it's just it's still quite difficult for it to
Speaker 2: act at a time when those sectors are potential sources
Speaker 2: of growth, when the Chinese government's ability to sort of
Speaker 2: slow down investment even as it limits IPOs for example,
Speaker 2: and tries to weigh on the decisions to expand manufacturing
Speaker 2: are surprisingly limited when a lot of the incentives are
Speaker 2: given at a local level in China, and at a
Speaker 2: time when things aren't as coordinated as they might seem.
Speaker 2: Those sectors are priority sexers that have been identified by
Speaker 2: the Chinese government, But as I've mentioned, a lot of
Speaker 2: those investments, a lot of that over capacity are the
Speaker 2: results of market forces, are the results of firms trying
Speaker 2: to outcompete each other, trying to outinnovate each other, and
Speaker 2: that's why we're seeing completely bonkers level of overinvestments in
Speaker 2: solar and in batteries and across evs, and that's unlikely
Speaker 2: to change in the short term as a result of
Speaker 2: this kind of engagement that we're seeing at present.
Speaker 1: Antoine, thank you very much for joining today and talking
Speaker 1: us through some of the really important highlights of the
Speaker 1: incredibly complex world of supply chains in global trade as
Speaker 1: it relates to the energy transition.
Speaker 2: It was a real pleasure. As always, Thank you so much, Dana.
Speaker 1: Today's episode of Switched On was produced by Cam Gray
Speaker 1: with production assistance from Kamala Shelling. Bloomberg NEIF is a
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