Speaker 1: This is Dana Perkins and you're listening to Switched on
Speaker 1: the B and EF podcast. Today we welcome back to
Speaker 1: the show the head of Trade and Supply Chains at BNAF,
Speaker 1: Antoine Wagner Jones. Last year, Antoine came on the show
Speaker 1: to discuss the complex world of global supply chains and
Speaker 1: how the then newly introduced Inflation Reduction Act was impacting them. Well,
Speaker 1: in a few months that have passed, the IRA has
Speaker 1: indeed caused a shift in clean tech production alignment in
Speaker 1: the US and in response, other countries, regions and trading
Speaker 1: blocks have been making moves of their own. So what
Speaker 1: is the current state of play, both in and outside
Speaker 1: of the US and what policies are countries introducing to
Speaker 1: ensure that they keep pace with their own clean energy transitions. Well,
Speaker 1: we're going to come to that, and on today's show
Speaker 1: we discuss with Antoine a range of topics. We talk
Speaker 1: about the potential fracturing of these traditional supply chains as
Speaker 1: countries attempt to onboard their clean tech production and the
Speaker 1: risks that this may pose for the global net zero targets.
Speaker 1: Also how countries and areas like the EU have reacted
Speaker 1: to the inflation reduction Act and then lastly, really can
Speaker 1: anyone challenge China's production capacity. If you like this podcast,
Speaker 1: make sure to subscribe on whatever player you're listening to
Speaker 1: it on today to receive updates on future episodes, and
Speaker 1: consider giving us a review on Apple Podcasts or Spotify.
Speaker 1: We've included several links to BNF research notes on supply
Speaker 1: chains in today's show notes, and BNF subscribers can access
Speaker 1: them at BNF on the Bloomberg terminal, at BNF dot com,
Speaker 1: or on our mobile app. As a reminder, bn EF
Speaker 1: does not provide investment or strategy advice, and our full
Speaker 1: disclaimer is at the end of the show. But right
Speaker 1: now I get to speak with Antoine about supply chains. Antwin,
Speaker 1: thank you very much for joining us today.
Speaker 2: Thanks Dana, great to be here.
Speaker 1: So we're here, We're back. We're talking about supply chains
Speaker 1: with you on the show, and this is actually a
Speaker 1: really great time. No, we scheduled this before we knew
Speaker 1: what was going to happen at the G seven, But
Speaker 1: at the G seven supply chains featured quite prominently. Can
Speaker 1: you tell us a little bit about what transpired?
Speaker 2: That's right, there was a convening of the G seven
Speaker 2: in Hiroshima in Japan, and three days ago on the
Speaker 2: twentieth of May, they issued a communicate, which means that
Speaker 2: it's a document that outlines their priorities. And what was
Speaker 2: striking was maybe two things. One was the extent to
Speaker 2: which supply chains featured and the importance of building out
Speaker 2: clean energy manufacturing. And that's something that we've seen piecemeal
Speaker 2: emerge across these big economies across the world since August
Speaker 2: of last year with the Inflation Reduction Act being passed
Speaker 2: by the US, and we also saw a desire to
Speaker 2: sort of reframe what's being seen as strategic based off
Speaker 2: with China and not talking about decoupling, but talking about
Speaker 2: de risking. And that's very important as well, because a
Speaker 2: lot of these moves towards reshaping clean energy supply chains
Speaker 2: are shaped in relationship with China, which dominates the production
Speaker 2: of clean energies today.
Speaker 1: And certainly we're here to talk about clean energy supply chains,
Speaker 1: but was it all supply chains or specifically clean energy
Speaker 1: supply chains that were discussed at the G seven.
Speaker 2: So energy featured in about a court of the total
Speaker 2: points that were put out in the various documents that
Speaker 2: were issued after the convening. And what's interesting is when
Speaker 2: they've talked about supply chains, when that was mentioned, it
Speaker 2: really was mentioned overwhelmingly with relation to either making supply
Speaker 2: chains more sustainable, so accounting for emissions as part of
Speaker 2: supply chains, or talking about the on shoring of clean
Speaker 2: energy supply chains that's implicitly things like batteries, things like
Speaker 2: solar panels, things like electorallyzers for making hydrogen.
Speaker 1: For a very long time, China has dominated in this
Speaker 1: clean energy equipment manufacturing space and has really driven a
Speaker 1: lot of the cast of clients in certain industries. And
Speaker 1: let's use solar as an example. Even though this conversation
Speaker 1: really has started to shift towards having more local supply
Speaker 1: chains around the world, is China still the dominant player.
Speaker 2: So China still dominates dominates in various areas, and that
Speaker 2: really ranges from the production of various pieces of equipment,
Speaker 2: so of solar modules, of the end piece of equipment
Speaker 2: like battery cells, but it also goes upstream from there,
Speaker 2: and that dominance is even more accentuated in sort of
Speaker 2: midstream building blocks to making solar modules for example, like
Speaker 2: ingots and wafers. And when it comes to batteries, anodes
Speaker 2: and cathodes, and then if you go even further up,
Speaker 2: there's also a lot of refining that's done for things
Speaker 2: like lithium, for things like cobalts, so metals that are
Speaker 2: used for making batteries in sort of the mainstream battery
Speaker 2: chemistries that we're seeing today, and those two are mostly
Speaker 2: located in China. And what we've been doing recently at
Speaker 2: BNF over the last few months is starting to track
Speaker 2: investments and starting to look at the amounts that's sort
Speaker 2: of represented that's flowing into new factories that are being
Speaker 2: brought online across the different sectors that we're looking at.
Speaker 2: And actually there's this dominance today of manufacturing concentrated within China,
Speaker 2: but when we look at new facilities new factories that
Speaker 2: are being brought online, that's equally striking. And actually what
Speaker 2: we're seeing in things like for SOL for example, upwards
Speaker 2: of ninety five percent of new capacity that's coming online
Speaker 2: that came online last year did so in China. When
Speaker 2: we look at the battery supply chain too, it was
Speaker 2: upwards of ninety percent of everything new that came online
Speaker 2: in terms of capacity came online in China. So that's
Speaker 2: not just a snapshot in time. It's not just a
Speaker 2: picture that we're seeing. Over the last few years, China's dominated,
Speaker 2: but that's starting to change. Even though we've got all
Speaker 2: of this talk of shifting supply chains and on shoring
Speaker 2: things to various countries and friendshuring and near suring, what
Speaker 2: we're not seeing is that translate into factories coming online
Speaker 2: just yet to really challenge that dominance of all that
Speaker 2: concentration of capacity in one country.
Speaker 1: And that conversation around enshuring near shoring moving. The supply
Speaker 1: change largely has to do with the West and then
Speaker 1: Australia and the beginning you reference the G seven transpiring.
Speaker 1: At the same time as the G seven, China had
Speaker 1: a meeting with a number of other countries in Asia,
Speaker 1: which also serve as an excellent block of countries that
Speaker 1: are also so installing renewable energy. Is the domestic market,
Speaker 1: both in China and then within the rest of the
Speaker 1: continent going to essentially grow to the point that even
Speaker 1: with the onshoring and near shoring taking place in other
Speaker 1: parts of the world, perhaps it doesn't wind down business
Speaker 1: activities within Asia.
Speaker 2: So definitely, domestic markets are really important when it comes
Speaker 2: to industrial strategy, and that's something that we're sort of
Speaker 2: seeing from a number of different angles. One of the
Speaker 2: reasons why China has been able to scale up the
Speaker 2: manufacturing of things like batteries, of things like soda, having
Speaker 2: these really efficient integrated value chains located within its borders
Speaker 2: is due to having this massive booming local market and
Speaker 2: then having that be the basis for developing this manufacturing
Speaker 2: base and then being able to export from that has
Speaker 2: been really key to to what we've seen play out
Speaker 2: over the last couple of decades. And then the presence
Speaker 2: of countries near China that are also seeing an increase
Speaker 2: in an uptake of renewable energy of storage of electric vehicles,
Speaker 2: whether they be two three wheelers or passenger vehicles, is
Speaker 2: also a big part of the picture, and that's something
Speaker 2: that we'll see manufacturing emerge in those countries too, and
Speaker 2: we are already seeing that. But is also a boon
Speaker 2: to sort of China being able to leverage its proximity
Speaker 2: to those markets in continuing to remain one of the
Speaker 2: big sources of exports in the region.
Speaker 1: So you noted that some of the projects haven't really
Speaker 1: started yet and that we haven't seen these manufacturing facilities
Speaker 1: really at the scale that they're being talked about, or
Speaker 1: perhaps are intended in the future. But certainly there are
Speaker 1: movements in various countries and parts of the world from
Speaker 1: a policy standpoint, that do very intentionally create an environment
Speaker 1: where we expect to see this happen in the future.
Speaker 1: So let's start with the US. Can you remind us
Speaker 1: briefly what it is that the Inflation Reduction Act is
Speaker 1: designed to do in reference to supply chains and manufacturing.
Speaker 2: Absolutely, when we talk about a lack of investment in
Speaker 2: new facilities, that's really in the West, in countries that
Speaker 2: profess to have this real emphasis on reshowing, on onshoring, manufacturing,
Speaker 2: supply chains for clean energy, and we haven't seen that
Speaker 2: translate into commissionings yet into being brought online at scale
Speaker 2: and anywhere near the scale that we're seeing in China.
Speaker 2: And we're continuing to see there. That might change, and
Speaker 2: that might change just because of what you mentioned just now,
Speaker 2: which is because of policies like the Inflation Reduction Act,
Speaker 2: which are all about deploying speeding the energy transition within
Speaker 2: the US, but are also framed and this is really
Speaker 2: important as an economic tool as a job creation bill,
Speaker 2: and as something that really doubles down on localizing the
Speaker 2: value add and having that accrue as part of the
Speaker 2: energy transition, having that value add a crew to the
Speaker 2: US to the domestic market. So what's resulted is this
Speaker 2: policy which not just subsidizes through the form of tax credits,
Speaker 2: the deployment of things like evs, of things like the
Speaker 2: production of hydrogen of ccs, but also is very keen
Speaker 2: on providing that same support to manufacturing facilities. So you've
Speaker 2: got tax credits again that are available for manufacturers not
Speaker 2: just of critical minerals for batteries, but also of various
Speaker 2: components for whether it's onshore or offshore wind, solar battery
Speaker 2: making itself really across the board, and it's very compar
Speaker 2: have been doing so. And then you've got some additional
Speaker 2: tools which are very much linked to this, such as
Speaker 2: with some of the investment tax credits which are available
Speaker 2: for deploying renewable energy projects. Ten percent for examples, is
Speaker 2: typically what it's set at. Additional subsidies which are provided
Speaker 2: when various domestic manufacturing requirements are met. So there's a
Speaker 2: whole suite of tools that are deployed as part of
Speaker 2: not just the Inflation Reduction Act, but also piece of
Speaker 2: legislation that are linked to it, such as the Infrastructure
Speaker 2: Bill that was passed earlier by the Biden administration. And
Speaker 2: that's a pretty powerful arsenal when it comes to really
Speaker 2: channelling investments into the US, and we've seen a pretty
Speaker 2: marked response as a result of that. What we're doing
Speaker 2: is tracking new EV new battery factory projects. We're doing
Speaker 2: so in other areas too, but just when we look
Speaker 2: at EV's and batteries, we see about sixty plus billion
Speaker 2: dollars of new announcements that have been made since August
Speaker 2: last year, and really directly as a result of the
Speaker 2: Inflation Reduction Act. So the IRA has really proven that
Speaker 2: it's managed to convince developers, investors finances to double their
Speaker 2: efforts towards funding facilities in the US for manufacturing clean
Speaker 2: energy technologies. And that's something that's really speeding up.
Speaker 1: And certainly this will drive this onshoring move in the
Speaker 1: United States. But what about the near shoring aspects? Does
Speaker 1: the array have a benefit for nearby countries and specifically
Speaker 1: I'm thinking about Mexico, which has started to emerge as
Speaker 1: a nearby manufacturing hub.
Speaker 2: So there are various bits of the IRA that do
Speaker 2: allow for near shoring. I think what's important to note
Speaker 2: is that this is actually quite limited when we talk
Speaker 2: about the IRA as a whole. There's a number of
Speaker 2: different production tax credits, investment tax credits that fund clean
Speaker 2: energy technologies, but there's only really one where this whole
Speaker 2: near shoring aspect is that relevant, and that's the Electric
Speaker 2: Vehicle Tax Credit. So that's five hundred dollars that you're
Speaker 2: ultimately eligible if you meet both criteria that are set
Speaker 2: for accessing this tax credit, and part of that can
Speaker 2: be met via sourcing critical materials from a number of geographies,
Speaker 2: including countries with which the US is a free trade
Speaker 2: agreement and that does include North America to Canada and Mexico.
Speaker 2: And the other is to assemble manufacture electric vehicles in
Speaker 2: North America, and that includes Mexico and Canada, and that
Speaker 2: does represent opportunities not just for free trade agreement countries,
Speaker 2: but also for of course the countries that are closest
Speaker 2: and that are most enmeshed in the vehicle supply chains
Speaker 2: that we have today in the US, and Mexico really
Speaker 2: has pride of place there as somewhere where it's actually
Speaker 2: quite cheap to manufacture. Labor costs are now cheaper than
Speaker 2: in China, Andres Manuel Lopez Obrador, the Mexican President, is
Speaker 2: very keen to make good on this. And even though
Speaker 2: he isn't very keen on building out renewable energy locally
Speaker 2: within his country, he is keen on building on these
Speaker 2: kind of opportunities available as a result of near shoring
Speaker 2: and the IRA having those provisions, So that changes things somewhat.
Speaker 2: And what we've also spotted as a trend that's emerged
Speaker 2: after the IRA is the fact that we've had a
Speaker 2: number of different governments, a number of different countries come
Speaker 2: to the US and ask to be included in various
Speaker 2: bits of this EV tax credit. So, for example, I
Speaker 2: mentioned that critical material require for materials that are mined
Speaker 2: or refined in a given region being used for an
Speaker 2: EV sold in the US, thereby making it eligible for
Speaker 2: about half of that tax credit. Well, that's a requirement
Speaker 2: that's been lobbied for by various regions, such as countries
Speaker 2: like Japan. So Japan successfully asked to sign a form
Speaker 2: of free trade agreement that allows for its raw materials
Speaker 2: to be considered as part of that tax credit Europe,
Speaker 2: the EU, the European Commission is quite keen to do
Speaker 2: something similar, but as a whole, that's only one small
Speaker 2: part of the overall package. And when it comes to
Speaker 2: a lot of those subsidies available for domestic manufacturers in
Speaker 2: the US, those are really focused just on the domestic market.
Speaker 2: They're not available to other countries, and a real focus
Speaker 2: of that's part of this policy, which is bringing manufacturing
Speaker 2: to the US as part of this energy transition that
Speaker 2: we expect to accelerate as a result of the IRA Well.
Speaker 1: So you reference that there are some very limited instances
Speaker 1: where countries are able to take advantage of the tax credits,
Speaker 1: but largely this is a domestic conversation, which then leads
Speaker 1: need who then ask what is the reaction on the
Speaker 1: part of other countries that perhaps were depending upon trade
Speaker 1: or even on another side of it in the EU
Speaker 1: where they were looking to become manufacturing homes of some
Speaker 1: of these industries. What has the reaction been over in Europe.
Speaker 2: So I feel like we're entering a bit of a
Speaker 2: new phase with the energy transition, where before it was
Speaker 2: all about carbon budgets domestically quantified you try and hit
Speaker 2: your goals, you'd clean up your power sector. The spillover
Speaker 2: effects would be pretty negligible. Besides providing opportunities for countries
Speaker 2: like China to emerge as exporters of clean technology, what
Speaker 2: we're seeing now is something very different, and we've entered
Speaker 2: a sort of era of policy competition where there's this
Speaker 2: perceived need to respond to things like the IRA, which
Speaker 2: a seemingly proven extremely attractive when we look at announced
Speaker 2: projects and the investment that's flowing to the US right now,
Speaker 2: and there are concerns by countries like the member states
Speaker 2: of the European Union, for example, that they might be
Speaker 2: left by the wayside. So the EU has targets for
Speaker 2: building out battery making. It's for the last few years
Speaker 2: formed big sort of sourcier and alliances and different projects
Speaker 2: of common European interests, for example, to promote battery making
Speaker 2: within its borders. But what the IRA provided was this
Speaker 2: extremely streamlined system of tax credits, which have no sort
Speaker 2: of federal budgetary limits to how they can be accessed,
Speaker 2: are extremely generous and basically blow anything that the European
Speaker 2: Union is offering out of the water. And that's something
Speaker 2: that's been really that's been a real concern and has
Speaker 2: been a point that a lot of clean energy lobby
Speaker 2: groups lobby the EU sort of change and revise. So
Speaker 2: what came of that was the Net Zero Industry Act,
Speaker 2: and that's a few weeks ago we saw the release
Speaker 2: of this plan, which really has as a central purpose
Speaker 2: to respond to the IRA and prove that EU means business,
Speaker 2: that it's serious, that it has the tools to encourage
Speaker 2: the onshoring of manufacturing for clean energy technologies. It does
Speaker 2: a few things, and unlike the IRA, it actually goes
Speaker 2: a bit further and sets actual targets that are quantifiable
Speaker 2: in many cases for building out the manufacture of things
Speaker 2: like heat pumps, solar technologies, win turbines, batteries. All of
Speaker 2: those different things have different targets that are set. So
Speaker 2: for batteries that U wants to meet eighty five percent
Speaker 2: of domestic demand by twenty thirty, that's about five hundred
Speaker 2: and fifty gigg what hours of capacity. That's quite a lot.
Speaker 2: And having its sight set on that is very clear
Speaker 2: and sets the direction of travel. Now, whether you fall
Speaker 2: short is by not really having the same system of
Speaker 2: subsidies that the US has We've mentioned how streamlined the
Speaker 2: tax credits are. Even though there's all this guidance coming
Speaker 2: out from the US Treasury about how to interpret various
Speaker 2: bits of them, they're generally there's really good awareness of
Speaker 2: how they can be accessed and the process for doing so.
Speaker 2: It's relatively simple. Now when it comes to the EU,
Speaker 2: what you've got is pretty comparable levels of available funding
Speaker 2: across the board for clean energy, but a lot of
Speaker 2: that isn't going to manufacturing. It's going to things like
Speaker 2: R and D. It's going to things like deploying technologies,
Speaker 2: and that's a bit of a weakness. Now the U
Speaker 2: wants to sort of rejig some of those pots of
Speaker 2: money and have them flow towards manufacturing. But again there's
Speaker 2: this issue, which is when the US try to do
Speaker 2: this in the past, it's struggled with the level of
Speaker 2: administrative complexity of some of these schemes. So there's the
Speaker 2: Innovation Fund, which is one of the main funding schemes
Speaker 2: that's available for the energy transition writ large, that's something
Speaker 2: that's funded by carbon credit revenues levied across the EU,
Speaker 2: and it's actually incredibly difficult and competitive to access that.
Speaker 2: Lots of money. So we saw a success rate of
Speaker 2: about two percent for one of the funding rounds for
Speaker 2: large projects under the Innovation Fund. That's a lot of
Speaker 2: time that's wasted by companies putting together proposals applying for
Speaker 2: that funding. So what you've got in the EU is
Speaker 2: a really broken up system of various funds, of various
Speaker 2: pots of money. There's not a great deal of awareness
Speaker 2: about how to access them. A lot of them aren't
Speaker 2: funding manufacturing and doing so. When you do figure out
Speaker 2: where the money is and how to access it is
Speaker 2: very competitive. So it is not the sort of basis
Speaker 2: for giving US a vote of confidence in European industry
Speaker 2: and seeing it as a real competitor with the IRA.
Speaker 2: And we've continued to see post this Net Zero Industry Acts,
Speaker 2: which again sets those impressive targets, is still a proposal,
Speaker 2: will be enacted over the next couple of is. We've
Speaker 2: seen a response, some enthusiasm, but still there's this general
Speaker 2: narrative that when it comes to competing on these subsidies,
Speaker 2: the US is far ahead, and a number of different
Speaker 2: European battery makers such as North Vault, Freyer, even Tesla
Speaker 2: has said that they'll pivot towards the US, which they
Speaker 2: see as far more attractive in terms of the incentives
Speaker 2: that are being offered and away from the EU, and
Speaker 2: that's a trend that we might receive speed up over
Speaker 2: the next few months.
Speaker 1: Well, let's rewind a little bit and let's just go
Speaker 1: back to those targets that you mentioned in the EU specifically,
Speaker 1: And the reason I want to focus on that is
Speaker 1: one that the space that we work in has no
Speaker 1: shortage of targets, but certainly the underpinning mechanisms are something
Speaker 1: that need to be figured out. These parts of money,
Speaker 1: this complexity around how to actually go about accessing them.
Speaker 1: In the EU, are there dedicated funds that are against
Speaker 1: each of these targets or is it still yet to
Speaker 1: be determined how those targets will be met? And the
Speaker 1: targets just create a statement of intention.
Speaker 2: It's a statement of intention. There's a number of funds
Speaker 2: that are available, the Modernization Fund, the innovation fund I mentioned,
Speaker 2: there's this mooted creation of a sovereignty fund that's to
Speaker 2: speed things. But again, many of those funds are not
Speaker 2: focusing on manufacturing, and some of them aren't even just
Speaker 2: focused on the energy transition. So there's this new fund
Speaker 2: that will be created that will be coming up with
Speaker 2: the words sovereignty slap to its title, and what that'll
Speaker 2: be funding is not just keen energy, but things like semiconductors,
Speaker 2: which are also incredibly capital intensive when it comes to
Speaker 2: building out factories for making advanced chips. So there's there's
Speaker 2: a lack of clarity of purpose, there's an opacity of
Speaker 2: available schemes, and that means that the EU just seems
Speaker 2: less nimble, it seems less reactive, it seems less attractive
Speaker 2: when you're a manufacturer that has a bit of a
Speaker 2: global footprint and some flexibility about where it can set
Speaker 2: up shop.
Speaker 1: So let's continue moving around the world. One of our
Speaker 1: recent shows focused on India, which is now the most
Speaker 1: populous country, and there is a conversation to be had
Speaker 1: regarding whether or not they are going to emerge also
Speaker 1: as a manufacturing center for some of these industries. So
Speaker 1: how has the IRA impacted India's strategy and even more
Speaker 1: broad how do you see India fitting into this renewable energy,
Speaker 1: clean energy manufacturing space.
Speaker 2: So India's sort of pursuing its own strategy and it's
Speaker 2: been doing so unlike many other countries pretty consistently for
Speaker 2: the last couple of years. There's been this stated ambition
Speaker 2: to build out with a real focus on solar manufacturing,
Speaker 2: local PV technology production, and there's been a number of
Speaker 2: tools that have been developed doing so what's really interesting
Speaker 2: is seeing how that's playing out. So there's this various
Speaker 2: prongs to this Indian strategy to building out domestic clean
Speaker 2: tech manufacturing. One of them is by limiting manufacturers and
Speaker 2: really barring a whole number of example Chinese solar product
Speaker 2: manufacturers from being able to compete in auctions where a
Speaker 2: lot of the subsidy pots of money are available. There's
Speaker 2: also a pretty hefty tariff for around forty percent that's
Speaker 2: also levied on various solar product imports. There are also
Speaker 2: various local content requirements in different subsidy schemes. There are
Speaker 2: a number of different measures. But what's happened as a
Speaker 2: result that is pushing up the costs of building out
Speaker 2: solo projects in India at a time when the government
Speaker 2: is implementing an incredibly ambitious plan to speed up a
Speaker 2: new energy deployment and a shortage of domestically available modules.
Speaker 2: So a lot of these measures were coming in manufacturers
Speaker 2: were aware of it. They stockpiled a lot of equipment
Speaker 2: in preparation for this coming, but right now there is
Speaker 2: a lack of available modules, which again is having this
Speaker 2: inflationary impact on project costs, so is not going terribly well.
Speaker 2: It is a very determined bid to build out manufacturing
Speaker 2: in a country that has growing demand, but it does
Speaker 2: show that when you're really going for broke, it can
Speaker 2: be difficult to pull off this on shoring play. And
Speaker 2: it's interesting because it sort of stands in contrast with
Speaker 2: the EU, where the EU, in terms of what's proposed
Speaker 2: now and that may change and become more ambitious, we're
Speaker 2: not seeing an awful lot of conviction behind those measures
Speaker 2: and those targets and what's backing them, whereas in India
Speaker 2: we may have seen policymakers go somewhat too far and
Speaker 2: actually suffer the consequences of that, which are in free
Speaker 2: project costs and actually having those different policies present a
Speaker 2: barrier to getting the energy transition right. And there's a
Speaker 2: lesson to be drawn there, and that's finding an equilibrium
Speaker 2: between trying to head your bets against concentration of manufacturing
Speaker 2: capacity globally, making sure that value from the energy transition,
Speaker 2: accrus locally, having political buy in, creating jobs. All of
Speaker 2: those things need to be balanced with this real need,
Speaker 2: which is to keep things economically attractive. And when we're
Speaker 2: scaling the energy transition at a rapid pace right now,
Speaker 2: adding additional cost as a result of trying to do
Speaker 2: things locally of making things less efficient is something that
Speaker 2: should be taken really seriously and quantified. And that's part
Speaker 2: of what we're trying to do at BNF is to
Speaker 2: work out the impact of various levels of local content,
Speaker 2: of various onshoing policies to undeployment, but also on overall
Speaker 2: costs when we look at the energy transition as a whole.
Speaker 1: So with India, it seems like it's both regarding manufacturing
Speaker 1: but also regarding supplying their domestic market. So then let's
Speaker 1: pivot to a country that is looking to manufacture with
Speaker 1: the intention to export, and that would be batteries and
Speaker 1: Indonesia they have been looking at this as a space
Speaker 1: that they could potentially be going into in that value chain.
Speaker 1: What are your views regarding Indonesia or potentially other countries
Speaker 1: that are emerging as battery manufacturing hubs.
Speaker 2: So a lot of middle or low income countries are
Speaker 2: really conscious of this shift and of the opportunity that
Speaker 2: it holds. So we've seen not just India, but many
Speaker 2: other countries, and Indonesia is really one of them. And
Speaker 2: Indonesia is interesting because a lot of the battery grade
Speaker 2: nickel that's produced, that's used for a lot of the
Speaker 2: mainstream NMC batteries that have made up a large share
Speaker 2: of lithiumind batteries deployed in electric vehicles over the last
Speaker 2: few years. A lot of that is mined in Indonesia.
Speaker 2: So initially the government tried to do a few things.
Speaker 2: It restricted exports. What it wanted was for more of
Speaker 2: that nickel to be refined to be processed within its borders.
Speaker 2: That's one move, but there's also real focus on trying
Speaker 2: to attract battery makers to set up facilities for various
Speaker 2: parts of the battery value chain, but notably battery cell facilities.
Speaker 2: For again, having those big capital intensive projects built within Indonesia,
Speaker 2: hiring Indonesians and producing value locally. That's difficult to pull
Speaker 2: off because of a number of different factors, and one
Speaker 2: of them is low local demand. So Indonesia is a
Speaker 2: market where we do see two to three wheelers electrifying
Speaker 2: quite rapidly in the shortter, midterm, but in terms of
Speaker 2: overall having that local demand to scale that manufacturing base
Speaker 2: is maybe not the best suited in terms of locations.
Speaker 2: The cost of finance is a bit higher than elsewhere,
Speaker 2: and what we're not seeing is a massive amount of
Speaker 2: interest comparable to what we've seen in the US, for
Speaker 2: example post diarray. So there's some real hurdles. What's interesting
Speaker 2: is that when you see countries like the US, regions
Speaker 2: like the EU recognizing that there's this tension, that there's
Speaker 2: these policies that could be seen as distortive in terms
Speaker 2: of subsidies being provided not just by the US but
Speaker 2: by other rich countries too, and that might mean that
Speaker 2: many of these poorer countries lose out. So trying to
Speaker 2: sort of where that circle can be done in a
Speaker 2: number of different ways, and what the US is doing,
Speaker 2: for example, the Biden administration has been very vocal about
Speaker 2: trying to help and support countries to move up the
Speaker 2: value chain and to build out, for example, smelting facilities
Speaker 2: or refineries for battery metals across regions like Southeast Asia
Speaker 2: sub Saharan Africa, and that's a very important move of
Speaker 2: some real value when it comes to sort of convincing
Speaker 2: the world that this isn't just about building out local jobs,
Speaker 2: which it is to some extent, but also about spreading
Speaker 2: the benefits as widely as possible. And maybe we should
Speaker 2: be seeing a bit more emphasis on that in many
Speaker 2: of the policies that are being announced today.
Speaker 1: Other than the countries that I've brought up, are there
Speaker 1: other countries of note that you're watching closely well.
Speaker 2: We're looking at countries that have a potential to scale
Speaker 2: things up quite rapidly and to make a difference. Japan
Speaker 2: is one. It has a battery industry strategy where it's
Speaker 2: aiming to build out one hundred and fifty hours of
Speaker 2: battery cell manufacturing by twenty thirty. There's subsidies being deployed there.
Speaker 2: South Korea is dispersing billions of dollars in support to
Speaker 2: various battery manufacturers locally and within its borders. Canada is
Speaker 2: finalizing its twenty twenty three budgets, and part of that
Speaker 2: is going to replicate, to some extent tax incentives that
Speaker 2: you have as part of the IRA providing a thirty
Speaker 2: percent manufacturing tax credit to clean energy manufacturers, which is
Speaker 2: really consequential and quite big. And you've got a lot
Speaker 2: of smaller countries like the UK, for example, where we're
Speaker 2: recording from actually being a bit lost and having an
Speaker 2: advantage in areas like offshore wind and maybe in ccs
Speaker 2: certain niches, but really struggling to convince when it comes
Speaker 2: to putting the money on the table and competing with
Speaker 2: the likes of the US. And there is some clarity
Speaker 2: from leaders, whether it's in Canada or the UK, that
Speaker 2: those incentives are going to be available, but they're not
Speaker 2: going to be matching what's available in the US, and
Speaker 2: that's something that's already been made quite clear by several
Speaker 2: governments and is quite interesting to see. Even as this
Speaker 2: competition heats up, there is a degree of realism that
Speaker 2: not everyone's pockets are as deep as the United States.
Speaker 1: Now other bottlenecks that we need to think of, and
Speaker 1: I'm specifically thinking the example of battery metals and how
Speaker 1: this is truly no matter where you manage action them,
Speaker 1: they're reliant on global supply chains. So are there really
Speaker 1: tight markets that we need to keep an eye on,
Speaker 1: such as copper in the battery space that are ones
Speaker 1: to watch when we think about how we're changing supply chains.
Speaker 2: So absolutely there's a number of metals that are what
Speaker 2: transition metals you could call them, that are going to
Speaker 2: be really important as scaling things, decarbonizing the economy. Copper
Speaker 2: is very important making cables among other things. We're going
Speaker 2: to be needing vast quantities of that through twenty fifty,
Speaker 2: and about a third of actual spending on transition metals
Speaker 2: is going to be concentrated within copper, and we expect
Speaker 2: that to be a tight market over the next decade plus.
Speaker 2: We also expect the sort of the deficit when we
Speaker 2: look at announced mining facilities. When we look at other
Speaker 2: metals that are key to making batteries, lithium and cobalt
Speaker 2: feature heavily, and those are also metals where when we
Speaker 2: look at what's been announced in terms of production facilities,
Speaker 2: or when we look at what's been announced in terms
Speaker 2: of mines, we do actually see a deficit emerging over
Speaker 2: the next couple of decades. So there's tightness in different markets,
Speaker 2: and we'll see whether the booming demand for those different
Speaker 2: medals could change things, whether the changes in battery chemistries
Speaker 2: could adapt as well, that's something that we've seen happen
Speaker 2: quite rapidly with various lithium ion batteries that don't use nickel,
Speaker 2: that don't use cobalts, that are ferrist based in their chemistries,
Speaker 2: that have emerged and seen uptake incredibly rapidly and far
Speaker 2: beyond what was expected. But there's also this additional question,
Speaker 2: which is when the US says, for example, that it
Speaker 2: wants to focus on sourcing critical minerals from a number
Speaker 2: of limited number of countries with which it has a
Speaker 2: pre trade agreement, for example, that narrows the pull down
Speaker 2: and meeting those critical materials requirements could be quite difficult
Speaker 2: in an inner global scenario where supply demand balances are
Speaker 2: quite tight.
Speaker 1: Is there enough labor, in skilled labor, specifically in various
Speaker 1: parts of the world to actually work in all of
Speaker 1: these on shore near shored manufacturing locations.
Speaker 2: The skilled shortage is one that's brought up a lot,
Speaker 2: and it's a real barrier towards for the energy transition
Speaker 2: from a number of perspectives, whether it's installing heat pumps
Speaker 2: or rooftop solar, but manufacturing is really area where we're
Speaker 2: not seeing the skills base in places like the US,
Speaker 2: where a lot of the focus in terms of vocational
Speaker 2: training or of the educational system has not been in
Speaker 2: those hard manufacturing skills. So there is a real concern
Speaker 2: that there's a need to train up the skill force
Speaker 2: very quickly to match the number of facilities that are
Speaker 2: coming online. And for example, right now we're seeing lots
Speaker 2: of investments in the US by East Asian battery manufacturers
Speaker 2: and a lot of them are relying to some extent
Speaker 2: on engineering expertise from Korea, and that leads to another question,
Speaker 2: which is openness towards investments from various geographies and the
Speaker 2: exchange of that know how and the US has made
Speaker 2: it quite difficult for Chinese manufacturers to set up shop
Speaker 2: where we've seen some scrutiny applied to joint venture between
Speaker 2: Ford and CAATL for taking advantage of some of those
Speaker 2: EV battery tax credits in the US. That project saw
Speaker 2: scrutiny far beyond what we've seen for other projects that
Speaker 2: don't involve Chinese manufacturers. There are concerns around foreign Entities
Speaker 2: of concern list, which is something that again might limit
Speaker 2: the availability of subsidies provided to manufacturers from countries such
Speaker 2: as China. So that lack of openness, those concerns around
Speaker 2: what investments will qualify for various subsidies is a bit
Speaker 2: of a question mark and could impleade the flow of
Speaker 2: information from where knowledge about battery making is that is
Speaker 2: most sophisticated, that being in many cases in China. Same
Speaker 2: goes for solar technologies, for example, two regions that are
Speaker 2: trying to catch up. Europe is adopting a bit of
Speaker 2: a different perspective, a bit of a different strategy with this,
Speaker 2: and is comparatively quite open towards receiving a lot of
Speaker 2: those investments. Last year, the biggest battery self facility coming
Speaker 2: online in the EU was Chinese. It was c ATL,
Speaker 2: the world's biggest battery maker. So there's some differences there
Speaker 2: that are really worth highlighting. Labor shortages are a problem
Speaker 2: across the world, across the geographies where we're seeing clean
Speaker 2: energy manufacturing be aerial focus. But there's this flow of
Speaker 2: knowledge and know how which also needs to happen and
Speaker 2: could be impeded if openness isn't prioritized.
Speaker 1: And so we've talked about upstream, so we've talked about commodities,
Speaker 1: and we've talked onstream and the manufacturing end of things.
Speaker 1: But how about midstream, how about all of the different components.
Speaker 1: Where does that fall. Is it being seen as one
Speaker 1: of the industries that are actually also being near shored
Speaker 1: or on short or is that going to be largely
Speaker 1: unchanged And we're really thinking about just downstream manufacturing and assembly.
Speaker 2: So a lot of the focus investments has been in
Speaker 2: downstream segments like solar modules, battery cell factories, or we
Speaker 2: haven't seen as much of in announced projects and even
Speaker 2: far less in projects that are coming online across the West,
Speaker 2: for example, is in that midstream segment, and what that
Speaker 2: means is looking at the really important building blocks for
Speaker 2: building a solar module, which include things like ingots and wafers.
Speaker 2: When it comes to batteries, that includes things like cathodes
Speaker 2: and anodes. And those are segments where manufacturing is even
Speaker 2: more concentrated in China and where we're really not seeing
Speaker 2: the same level of investment and announcements for building out
Speaker 2: that capacity in regions like Europe. In regions like North America,
Speaker 2: that's been recognized as a bit of a vulnerability, and
Speaker 2: that's also something where we've seen a number of trade
Speaker 2: barriers be erected for things like the use or trade
Speaker 2: of US semiconductors and personnel in China, for example. But
Speaker 2: that midstream is an area where China can react, and
Speaker 2: we've seen suggestions from Chinese ministries that there might be
Speaker 2: restrictions on the exports of various piece of equipment for
Speaker 2: manufacturing some of those midstream components, most notably solar ingots
Speaker 2: and wafers. So there's been a real focus on the downstream.
Speaker 2: What we haven't seen as an approach that aims to
Speaker 2: build out the value chain in a really comprehensive way
Speaker 2: and attributing equal weight to all those different segments. And
Speaker 2: it can make sense to start with the end product
Speaker 2: and work your way up, But given the speed at
Speaker 2: which these manufacturing bases are being built out at it
Speaker 2: seems like some degree of focus of refocusing and taking
Speaker 2: a bit more of a comprehensive approach towards building out
Speaker 2: supply chains might be worth considering now.
Speaker 1: Certainly, the cost declines that we've seen in a number
Speaker 1: of these industries, and solar is a perfect example, have
Speaker 1: come from doing this at scale and having these manufacturing
Speaker 1: hubs that have created cheaper and cheaper products. Are we
Speaker 1: now seeing one a lack of transfer of technology and
Speaker 1: really learning rates across countries as this becomes more fragmented.
Speaker 1: And then the follow on question I'm going to add
Speaker 1: to that is what does this do for us in
Speaker 1: terms of reaching net zero targets?
Speaker 2: So what could happen is if the US, Canada, You're
Speaker 2: all the various regions India are successful in building out
Speaker 2: keen energy manufacturing, then you do see a fragmentation. You
Speaker 2: see a regionalization of supply chains, you see a doubling
Speaker 2: up of investments in a way in which is less
Speaker 2: efficient than what otherwise would be the case. One of
Speaker 2: the things that has allowed for China to be so
Speaker 2: effective in bringing down the cost of producing technologies is
Speaker 2: learning by doing. It's dense pools of labor, it's a
Speaker 2: low cost of finance, but it's also scale. And when
Speaker 2: we look at various segments of the solar value chain,
Speaker 2: it's typical that Chinese facilities factories are about four times
Speaker 2: bigger in terms of their yearly production capacity than outside
Speaker 2: of China. That has a really big impact on cost.
Speaker 2: And when you're breaking things up and you're just looking
Speaker 2: at things from that scale angle, then things become less
Speaker 2: efficient and you're adding cost even if you aren't doing
Speaker 2: things in parts of the world where it's going to
Speaker 2: be far more expensive, like Europe, for example. So that's
Speaker 2: a big question is how to balance these different priorities
Speaker 2: and how to recognize that building things out is good
Speaker 2: from a political perspective when it comes to selling the
Speaker 2: energy transition and its co benefits. What is less good
Speaker 2: at is for maximizing economic efficiency and minimizing the overall bill.
Speaker 2: And we're looking at an energy transition that's running into
Speaker 2: where we saw a trillion of investment last year across
Speaker 2: the energy transition. If we want to be getting on
Speaker 2: tracked net zero, we need to be seeing an average of
Speaker 2: about four trillion every year going towards twenty thirty. Now
Speaker 2: that figure could be inflated quite a bit if we're
Speaker 2: starting to break things up and we're manufacturing more closer
Speaker 2: to demand centers. So trying to strike that balance is
Speaker 2: really important, and we're not seeing a real mature discussion
Speaker 2: about taking those costs into account, factoring them in, passing
Speaker 2: them through in various ways to end consumers or developers,
Speaker 2: and really optimizing things to make things work and diversifying
Speaker 2: those supply chains. Which really is a focus with all
Speaker 2: of these industrial strategies that are coming out in recent months.
Speaker 1: One of the things that you brought up really early on,
Speaker 1: and this is my final question, essentially, it has to
Speaker 1: do with the when. So you reference the fact that
Speaker 1: we have seen a lot of intention and movement towards
Speaker 1: changing these supply chains, but we haven't seen a lot
Speaker 1: of installation as if yet and that makes a lot
Speaker 1: of sense because these new projects are not going to
Speaker 1: happen over a quarter or even half a year. They're
Speaker 1: going to take a while to get online. So that
Speaker 1: then brings me to you know, we love to talk
Speaker 1: about goals and certain years stand out as benchmarks. So
Speaker 1: do we think twenty thirty, twenty thirty five, twenty forty,
Speaker 1: when are we going to start to see essentially a
Speaker 1: material change in terms of supply chains and where they exist?
Speaker 1: And now when are we going to know really where
Speaker 1: the new hubs are.
Speaker 2: So it does take a few years to set up
Speaker 2: manufacturing facilities. Right now, there's a shortage of equipment for
Speaker 2: battery making facilities that's slowing things down. There's a tight
Speaker 2: labor market that we mentioned. There are various reasons why
Speaker 2: permitting things in countries that want to speed things up,
Speaker 2: like Europe or the US, takes a bit of time,
Speaker 2: So that means that you're looking at may sometimes a
Speaker 2: couple of years for setting up a battery manufacturing facility,
Speaker 2: for example. And we've seen a slew of announcements and
Speaker 2: we continue to see that number grow. But as I said,
Speaker 2: we're also seeing the same thing happen in China with
Speaker 2: a vast volume of new facilities that are still coming online.
Speaker 2: I think twenty thirty is a good point to stop
Speaker 2: and see where we're at. A lot of the manufacturing
Speaker 2: incentives under the IRA expire or start to phase out
Speaker 2: in twenty thirty and expire in twenty thirty two. When
Speaker 2: it comes to the EU, that's when it's set a
Speaker 2: lot of its manufacturing targets for It's a year where
Speaker 2: we should be hitting our stride when it comes to
Speaker 2: investments for the energy transition, and things would have scaled
Speaker 2: up if things are going right, dramatically beyond what we're
Speaker 2: at today in terms of investment, and it would be
Speaker 2: a good time to look at trade flows, to look
Speaker 2: at where manufacturing capacity is. And what I'd expect is
Speaker 2: we'd see several percentage points increase in the share of
Speaker 2: that's represented by Europe that's represented by the US when
Speaker 2: it comes to total manufacturing capacity for things like batteries,
Speaker 2: for things like solar But I still expect APAX share
Speaker 2: and China share more specificty to remain dominant. But it's
Speaker 2: not about replacing that overnight. It's about maybe hedging your
Speaker 2: bets and diversifying things somewhat. It's about creating that political
Speaker 2: buy and by attracting some investments, and that in of
Speaker 2: itself is really important. So I don't see a dramatic
Speaker 2: shift in the picture, but I think twenty thirty will
Speaker 2: be a time to see whether these industrial strategies, whether
Speaker 2: these different policies are having their effect, whether there's been
Speaker 2: any success in setting up domestic manufacturing without needing to
Speaker 2: keep them alive via vast subsidies, and whether or not
Speaker 2: this is a course of action to double down on,
Speaker 2: or whether given the geopolitical scenarios we could imagine in
Speaker 2: the future, which are numerous, but whether at that time
Speaker 2: it might be advisable to scale that back and try
Speaker 2: to maximize the energy transitions over all efficiency to minimize costs.
Speaker 2: So I see the next few years leading up to
Speaker 2: twenty a really important time in which to sort of
Speaker 2: gauge the impact of these strategies and to take measure
Speaker 2: of how successful they are.
Speaker 1: So we'll keep watching the companies and certainly the policies
Speaker 1: that are dramatically changing global supply chains. Thank you for
Speaker 1: joining us today.
Speaker 2: Thank you, Dana. It's great to be here again.
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