0:00

This is Dana Perkins and you're listening

0:02

to Switched on the B and EF podcast.

0:05

China is churning out clean energy

0:07

technology at a breakneck pace, driving

0:09

down costs on everything from solar panels

0:12

to lithium ion batteries, with supply

0:14

far exceeding domestic demand. Extremely

0:17

competitively priced equipment necessary

0:19

for the energy transition is available all

0:21

over the world. At the same time, many

0:24

countries are looking at onshoring and near

0:26

shoring production of the very same

0:28

things that China is producing. Many China

0:30

based clean tech manufacturers are experiencing

0:33

razor thin profit margins all the

0:35

while, six hundred and forty nine billion

0:37

dollars of new factories are set to

0:39

come online between twenty twenty four and twenty

0:42

twenty seven, which would bring prices even

0:44

lower. On today's show, I speak with bnaf's

0:47

head of Trade and Supply Chains and Twan Wagner

0:49

Jones. We talk about how China

0:51

and other parts of the world are addressing over supply

0:54

through policy, and whether the US's

0:56

Inflation Reduction Act and the European Union's

0:58

net zero Industry are going to be

1:01

enough to stimulate more local manufacturing.

1:04

BNF subscribers will be able to find

1:06

Antoine's research note titled China's

1:08

clean Tech overcapacity threatens

1:11

on Shoring Dreams at BNF dot

1:13

com or at BNF on the Bloomberg terminal.

1:15

Make sure to subscribe to switched on if you want a reminder

1:18

when we publish future episodes. And if

1:20

you like this show, if you give us a review on

1:22

Apple Podcasts or on Spotify, it's going

1:24

to make it easier for others to find us. Right

1:27

now, though, let's talk to Antoine about

1:29

overcapacity in the clean tech manufacturing

1:31

sector. Anton

1:41

thank you for joining today. We're going to be talking about

1:44

oversupply and some of the most important parts

1:46

of the energy transition AIDIA.

1:48

It's great to be back.

1:49

So there were this old three

1:52

of things that were considered Chinese

1:54

exports that were quite dominant in the industries

1:56

that they were in, which were household appliances, furniture,

1:59

and clothing. But now there's this new three. So

2:01

what are the new three and how long have these

2:03

been things that essentially China's

2:05

been dominating.

2:07

Yeah, in the early two thousands, China's

2:09

just joined the WTO and it's in

2:11

this big boom of export lead

2:13

growth, which is really leading to the economy

2:15

expanding at a rapid rate, and it's producing these

2:17

goods at low costs and exporting some of them to

2:19

the rest of the world in the sectors that you just mentioned.

2:22

Since there's been a bit of a shift and right

2:24

now the Chinese economy is in a very different

2:26

position, and we're seeing basically an implosion

2:28

of the housing sector, which is a real drag on

2:31

growth, and that's a situation that sort of persisted.

2:33

So the Chinese government's thinking about what are some of the

2:35

other levers that can be pulled on, and going back to this

2:37

idea of export lead growth and identifying

2:39

a few priority areas has been part

2:42

of the solution, and electric vehicles,

2:44

solar modules, and lithium ion

2:46

batteries are the three sectors that have been picked

2:48

out as especially full of potential

2:50

when it comes to being sectors that are

2:52

expanding rapidly and for their being growing

2:54

markets outside of China for those goods.

2:57

And what's really interesting is we've seen a shift recently

2:59

where this has been a priority that's been identified

3:01

by the Chinese government in terms of exporting

3:04

these different goods, but we're also starting

3:06

to see the likes of Bloomberg News Goldman

3:09

Sachs the Financial Times start

3:12

to draw comparisons looking

3:14

at those sectors and their contribution towards

3:16

Chinese GDP at a time where things are slowing

3:18

down a bit, and comparing it explicitly

3:20

with the real estate sector and its contribution

3:23

to GDP. So really a repositioning of

3:25

the energy transition, not just talking

3:27

about China's role in sectors

3:29

that could be labeled as strategic or key to

3:31

the energy transition, but also talking about the

3:33

macroeconomic weight of those different

3:35

sectors and their contribution to the Chinese economy,

3:37

which is a pretty new shift and one that's quite exciting.

3:40

Now.

3:40

We did a show not that long ago on battery

3:42

manufacturing in China and this set of

3:45

new facilities that are coming online called

3:47

gigafactories, which are at a scale never

3:49

seen before anywhere in the world. Can

3:51

you talk a little bit specifically about the

3:53

battery part of it and kind of what's

3:55

happening there.

3:56

Absolutely. So, what we do at BNF

3:59

is we track inment in lots of different sectors,

4:01

and we started doing the same for the

4:03

supply chain side of the energy transition

4:06

story. As of last year. We recently

4:08

re updated our numbers in a report, the

4:10

Energy Transition Investment Trends Report that was published

4:13

earlier this year, and we tracked about one

4:15

hundred and twenty five billion in supply

4:17

chain related investment over the last

4:19

year, and a big part of that was

4:22

from battery cell factories coming online.

4:24

So huge part of what's being invested what we

4:26

think will we be invested across all clean

4:28

energy factories are in the battery value chain

4:30

because of the fact that that specific supply

4:33

chain is so capital intensive. Now, when

4:35

we look at where stuff's coming online, that's where

4:37

things get really interesting. So when we look at

4:39

clean energy supply chain investments written large,

4:41

there's a lot of excitement about onshoring

4:44

and localizing things outside of China, But when

4:46

we look at where new factories are actually

4:48

coming online and still doing so, things

4:51

are still more than ninety percent concentrated

4:53

in one place, and that's China. So we're

4:55

seeing we're still seeing a lot of momentum

4:57

bekind new factories coming online in

4:59

one part of the wor world, and they're doing so at

5:01

a massive scale. In the past, a

5:03

lot of the reasons for why Chinese manufacturers

5:05

were starting to try and find footholds in certain

5:07

sectors was due to low labor

5:10

costs or significant public support.

5:12

But now we've reached a situation where

5:14

those battery manufacturers are at the technological

5:16

frontier of what's being done in that space,

5:18

where we've reached levels of scale and

5:21

sort of the accompanying networks of providers

5:23

in certain regions that just allow them to outcompete

5:26

basically any other sort of nascent battery

5:28

making industries outside of China.

5:30

And that's a real big part of why China

5:32

is so competitive is really down to scale at

5:35

this stage and down to investments

5:37

in supply chains that stretch back quite a

5:39

few years now.

5:40

So another one of the industries that China has been very

5:42

dominant in arguably for much longer than even

5:44

the battery space is the solar sector. Can

5:46

you talk about some of the history there and how

5:48

they have also used scale in order

5:51

to really be the largest manufacturer

5:53

in the world for solar modules.

5:55

So now we're going to talk about overcapacity, and

5:58

we're going to talk about it in a way in which is quite

6:00

specific to the two sectors we're talking about

6:02

just now, batteries and solar. What's really

6:04

interesting with solos we've seen sort of cyclical

6:07

over capacity be a feature of the market

6:09

stretching back for as long as China's been involved

6:11

in manufacturing at scale, so over the last

6:13

decade plus. But right now things

6:15

are a little bit different. So right now

6:17

we've actually got a situation where in twenty

6:19

twenty two, by the end of the year, China

6:22

had more than enough manufacturing capacity,

6:24

and whether it was in the upper bit

6:26

of the value chain in polosilicon

6:29

manufacturing or whether it's all the way down downstream

6:31

to module making, it had enough manufacturing

6:34

capacity within its own borders to supply the

6:36

whole of the world's demand. But what we

6:38

saw over the last year is a

6:40

pretty unexpected boom in

6:42

continued investments in new factories.

6:45

They're built so quickly in China that many of them came

6:47

online in twenty twenty three. And right

6:49

now, when we look at Chinese

6:51

manufacturing capacity and we compare it to global

6:54

demand, so China's nameplate manufacturing

6:56

capacity is more than twice what would be

6:58

required to meet global demand. And based

7:01

on what's been announced, and many Chinese manufacturers

7:03

don't announce manufacturing capacity investments

7:05

that far ahead of time, but just based on announcements

7:08

that will continue to be the case even as

7:10

demand grows according to our optimistic

7:12

scenario over the next two years. So

7:15

pretty shocking levels of over

7:17

capacity. That's the case for solar modules.

7:19

It's also the case for polysilicon, where

7:22

there's over one point one terrawatts

7:24

of polysilicon manufacturing online in China today,

7:26

and then if we're looking at our demand numbers

7:29

for the world, we're at somewhere

7:32

around six hundred and seventy giga

7:34

what's required for twenty twenty four, according

7:36

again to optimistic scenario, So just

7:38

to give you an idea of the scale of overcapacity

7:41

is really pretty shocking. And it's also

7:43

the case for battery manufacturing where similarly,

7:45

battery cell manufacturing capacity

7:47

in China is basically more than twice global

7:50

demand. That will remain the case going forwards based

7:52

on announced facilities, and it

7:54

means that China's able to pull off pretty

7:56

impressive feats like building enough lift

7:58

your mind battery cells love year to supply

8:00

all of the world's demand. So we're at

8:03

levels of continued over investment

8:06

in battery manufacturing, in solar

8:08

manufacturing, we're seeing that continue

8:10

and we actually track the numbers and we identified

8:12

about four hundred and sixty nine billion

8:15

dollars of overinvestment above

8:17

what would be required to meet demand

8:19

under our net zero scenario over

8:21

the next four years in battery manufacturing

8:24

and solar manufacturing.

8:25

Now you had said that Chinese manufacturing

8:27

facilities come online really fast. How

8:29

fast is really fast? Months? Years?

8:32

It depends on whether you're retrofitting an

8:34

existing facility. It depends on whether you're building

8:37

something a bit more involved when it comes to technology,

8:39

So polysilicon plants might take a couple of years.

8:41

They are a little bit more complicated to set up

8:43

and get running. A module factory is

8:45

a little bit less complicated, relatively speaking,

8:48

and can be put up in a few months if you're

8:50

retrofitting, if there's an existing production process

8:52

which is more aligned with the one that you're putting in

8:54

place, then it can be done relatively quickly, within

8:57

sort of I've heard three months, but six

9:00

months being something that's routinely cited

9:02

as the amount of lead time required to put

9:04

up a new module factory.

9:06

So then is it reasonable to say that this is

9:08

very intentional and that this isn't

9:11

a series of projects that were already in the pipeline

9:13

that then got completed, but the market wasn't

9:16

exactly ready for and the economics didn't match

9:18

what they projected their demand to be. But

9:21

these came online regardless of where

9:23

current demand was, almost reaching then

9:25

for future demand that maybe they

9:28

see coming, it's sort of if you have the

9:30

supply, then the demand will exist

9:32

because the economics will be so low. So they're

9:34

kind of creating the market where maybe

9:36

even closer to being paras aligned to thinking

9:39

about bringing down emissions and making

9:41

the renewable energy transition even faster

9:43

if you think about it.

9:44

Yeah, absolutely, That's one of the big messages

9:46

from a recent piece of research that we've

9:48

just published is looking at this overcapacity story,

9:51

and there's a number of different outcomes and conclusions

9:53

that you can draw from what's going on, and one is

9:55

that it's brought the cost of renewable

9:58

energy crashing down. It's brought the cost

10:00

of electric vehicles, of batteries,

10:02

of solar modules, for example, and even

10:04

within China, and this is a bit different to

10:06

the rest of the world's wind industry, the cost

10:08

of wind turbines falling

10:10

pretty rapidly, so we've seen, for example,

10:13

the spot market rate for a

10:15

Chinese solar module is now around

10:17

eleven dollars cents per what a year ago

10:19

it was double that, So it's really rapidly

10:21

falling, and that means the world gets to profit,

10:24

especially at a time when, for example, in the West,

10:26

like the energy transition has never been submitted

10:28

to the levels of political scrutiny that it's under,

10:30

whether that's in Europe, whether that's in North

10:33

America. And now we're at a time where

10:35

the economic case for the energy transition is

10:37

stronger than ever, and a big part of that is due

10:39

to the fact that we've got this massive surplus

10:42

glut in good quality, low

10:44

cost technology coming from China right now.

10:46

That is a positive story and it's one that should

10:48

lead to an acceleration of the energy transition. We've

10:50

even seen sort of reports of people now in Europe

10:53

putting up solar modules along fences,

10:55

for example, because you can do that now it's

10:57

cheap enough.

10:58

So a lot of the forecasts and scenarios that

11:00

we actually run show quite a bit of adoption.

11:02

And so these charts that kind of go up into the right

11:04

when it comes to demand, some of them at

11:07

a steeper curve, and some of them taper off

11:09

a little bit more depending on what's

11:11

actually happening in the economy. And one of

11:13

these areas where there has been some forecast

11:15

around some cooling demand in particular

11:17

coming from the companies themselves that are the producers,

11:20

is electric vehicles. So when we're talking about

11:22

electric vehicles, the number

11:25

of vehicles that are actually coming online from

11:27

China, are those actually then being

11:29

also exported or are those being focused

11:31

on their domestic market.

11:33

Yeah, great question. There's been the recent

11:35

story of the slowdown in growth in electric

11:37

vehicle sales. It's one driven by a number of different

11:40

factors, such as interest rates for example. There's

11:42

a question now is whether or not we're sort of at a historical

11:45

turning point where we're starting to see

11:47

very explicitly a lot of Chinese EV manufacturers

11:50

BYD being the most commonly cited one,

11:52

but there are many others turn their gaze beyond

11:54

China in a much more serious sense

11:56

than they were in the past when it comes to looking at growing

11:59

markets. Chinese market is becoming increasingly

12:01

oversaturated, it's incredibly competitive,

12:03

so there's a lot of looking abroad. So again,

12:06

BYD, the world's largest producer of

12:08

EV's also produces a lot of its own batteries,

12:11

has now been commissioning large carrier

12:13

ships that are specifically designed to carry vehicles,

12:16

and it's sort of leading the charge along with another couple

12:18

of EV manufacturers like Great War

12:20

Motive, for example, in trying

12:22

to sell more to emerging economies, set

12:24

up manufacturing there, but also sell

12:26

cars from out of China into Europe, and that's

12:29

something that we've seen recently, a bit of an emerging

12:31

trend where we saw about nine percent of

12:33

evs sold within the EU last year come

12:35

from Chinese headquartered manufacturers, and

12:37

that's a share that we expect to see growing and that's

12:39

in turn led to a bit of a pivot from the European

12:42

Commission, which is now a little bit concerned about

12:44

that penetration and is thinking about

12:46

whether or not to put in place new tariffs. So

12:48

there's currently an anti subsidy investigation

12:50

that's been launched by the European Commission looking

12:52

explicitly at whether or not there'd be an argument

12:54

that could be made that Chinese manufacturers

12:56

are benefiting from unfair subsidies and

12:58

that would provide the backing or

13:00

the cover to put in place new trade

13:03

measures which is something that the EUS shine away from

13:05

in the past. It's got pretty minimal tariffs

13:07

on most clean technology, especially when

13:09

you compare it to other regions of the world that are also

13:12

aligned with the EU in terms of trying to build

13:14

out local supply chains at local manufacturing,

13:17

like the US, like India, both of which

13:19

are much more comfortable with using protectionist

13:21

tools as part of their industrial strategy.

13:23

Arsenal.

13:24

So, we've seen battery prices fall and the levelized

13:27

cost of electricity for solar being below

13:29

what would be considering traditional

13:32

high carbon energy sources like coal,

13:34

for example, in most locations in the world.

13:36

But when it comes to electric vehicles, the argument

13:39

is often that electric vehicles are not yet at

13:41

price parity with internal combustion

13:43

engine vehicles and that we are moving

13:45

in that direction, but we're not there just yet.

13:47

So the question is are these Chinese

13:49

vehicles that are coming online in places like

13:52

Europe, are they getting closer faster?

13:55

Yes, they are. There's been a bit of a focus

13:57

in the West on when it comes to ev manufacturing,

13:59

with presenting large

14:02

SUVs for example, many of which are quite

14:04

pricey. So when you look at the average sort of price points

14:06

for electric vehicles sold in the US, for example,

14:08

you're around forty to fifty thousand dollars. Now,

14:10

the picture in China's very different, And just within

14:13

China you've got things like BYD's

14:15

cgull hatchback, which is a model

14:17

that's regularly cited now just because of the fact that it's

14:19

being sold at pretty shockingly low prices

14:21

of under ten thousand dollars per car.

14:23

Now, when BYD is sort of setting those cars

14:25

and exporting them abroad, we're typically seeing

14:28

prices around double that. But even if you're

14:30

stacking on top tariffs and shipping costs

14:32

and all these other things, you're still seeing cars

14:34

that are sold at extremely competitive rates.

14:37

So the outcome of that will

14:39

be that the tipping points that we'd

14:41

be seeing would be reached more quickly because

14:43

we're starting to see a wave of again,

14:45

good quality, cheaper cars come into

14:48

these markets where traditionally speaking exactly

14:50

that economic tipping point was holding back

14:52

adoption and leaving it as the preserve of countries

14:55

that are able to dole out extremely generous

14:57

upfront grants for buyers, or countries

14:59

that a richer and able to afford those cars. We

15:02

might see a bit of a change there, and it's something that will be quite

15:04

interesting. Again, there will be differences

15:06

based on region and based on how comfortable

15:09

different parts of the world are with employing measures

15:11

around market access. And for example,

15:13

the US seems like a bit of a less of a promising

15:16

market for Chinese auto manufacturers

15:18

than Europe. So byd and these

15:20

other companies are much less bullish when

15:22

it comes to their ability to set into the US market

15:25

as opposed to other parts of the world.

15:27

So you had mentioned subsidies, and

15:29

the thing that's really coming to my mind given

15:31

that we're recording here in Europe, is this parallel

15:33

maybe with the agriculture industry, where you see

15:35

governments intervening and actually asking

15:38

farmers not to produce in order to keep prices

15:40

at a certain place so that they're high enough in order

15:42

to support the farmers that are in this industry.

15:44

It seems like the reverse thing is happening

15:46

in China, where they're actively promoting

15:49

this global oversupply and domestic

15:51

oversupply in these industries. Can you

15:53

talk a little bit about the role of the Chinese

15:55

government in how solar batteries

15:57

and electric vehicles are really working From

16:00

the manufacturing side.

16:01

Yeah, there's a bit of a framing of intention,

16:04

and when you look at reporting around this, you often

16:06

see things like the Chinese government's planned

16:08

to dominate the solar industry. These are sectors

16:10

that have been identified as priority sectors

16:12

by the Chinese government, and there has been

16:14

sort of low cost credit, for example, that's

16:16

being provided by states financial institutions.

16:19

There are subsidies offered at a local level when it

16:21

comes to power or land, just as happens

16:23

in much of the rest of the world that's trying to pursue growth

16:26

via industrial strategy. But really something

16:28

that goes unsaid is the extent to which

16:30

this is the result of market forces,

16:33

and to quite a shocking extent. Actually,

16:35

when you look at the margins that we're seeing

16:37

in the solar industry, in the battery

16:39

making space, in ev manufacturing,

16:42

even among wind turbine makers within

16:44

China, margins have shrunk considerably

16:46

due to the fact that competition's gone from red

16:48

hot to white hot recently. It's an

16:51

incredibly tough space to operate

16:53

in and actually a lot of the overcapacity that we're seeing

16:55

is not so much the result of an intentional

16:57

policy to try and flood the world markets

16:59

with this kind of technology, it's more the result

17:02

of companies playing a big game of chicken,

17:04

and basically the first to blink in terms of

17:06

not constantly updating your manufacturing

17:08

facilities is instantly rendered irrelevant.

17:11

And what I mean by that is that we're seeing very

17:13

fast technology cycles. In solar for

17:15

example, we're seeing a shift to ND type

17:18

modules called top con modules, away

17:20

from PERK, which was the previous dominant

17:22

technology. That's happened in just a couple of years,

17:24

and that means that you're constantly having to invest

17:27

in new manufacturing capacity to stay

17:29

relevant. And we're also seeing that in the

17:31

battery making space, where we're seeing rapid

17:33

shifts from nickel heavy chemistries

17:35

to ones that are more iron based. And

17:38

again we're seeing the picture change extremely

17:40

dynamically from year to year, and that results

17:42

in the same sort of thing, massive investments

17:44

in just trying to stay relevant in the space.

17:47

And actually proof of this has a big dynamic

17:49

that we're seeing is the fact that these companies'

17:51

share prices have really not been doing great.

17:53

They've been underperforming the Shanghai Stock

17:55

Market index. That's been a persistent

17:57

trend that we've seen over the last few months and is

18:00

directly linked to this idea of massive overcapacity,

18:03

pressure on prices, pressure on margins,

18:05

and that is part of the reason why these manufacturers

18:08

are now looking abroad and looking to try and sell

18:10

their products outside of China because of the fact

18:12

that their home market is so oversaturated,

18:15

and that oversaturation is the result of relentless

18:17

extreme competition.

18:19

So let's talk a bit about how the rest of the world

18:22

is reacting. There's a growing

18:24

trend of Western countries actually

18:26

looking to nearshore and onshore

18:28

production. We've actually talked about this with

18:31

you on this show. So how has

18:33

that progressed? And, you know, without

18:36

giving away the punchline, you've talked about this

18:38

as we've gone through this show. Chinese manufacturing

18:40

has led to dramatically lower prices

18:42

in a lot of the areas that they actually

18:44

go into. So have these nearshore

18:47

and onshore manufacturing facilities

18:50

have they been able to get anywhere close to

18:52

being competitive?

18:53

So we can again talk back to those investment

18:55

numbers I mentioned earlier. So when we look at new

18:57

factories that are supposed to come online this year

19:00

outside of China, across solar manufacturing,

19:02

battery manufacturing, wind manufacturing, hydrogen

19:05

electrializer manufacturing. We see a quadrupling

19:08

of the levels that we saw last year this

19:10

year, and by the end of next year we

19:12

should be at eight times twenty twenty

19:14

three levels. So we're basically on the cusp

19:16

when we look at what's been announced of a

19:19

pretty big wave of not just

19:21

breaking ground or starting to make investments,

19:23

but factories actually coming online

19:25

for clean technologies across North

19:28

America and across Europe. That's a real

19:30

big shift, and that's really driven by a lot

19:32

of those policies that you mentioned, which are things like

19:34

the Inflation Reduction Act in the US, which

19:36

is incredibly generous when it comes to subsidies

19:38

for manufacturers, many of which are in the form of

19:41

production based tax credits, but also in

19:43

the form of the Federal loan program, for example.

19:45

And in Europe we're starting to see the Net Zero Industry

19:47

Act, which is still in a proposal stage,

19:50

but sets out these incredibly ambitious

19:52

targets for local manufacturing, and it's being

19:54

increasingly backed up by member

19:57

states starting to give company

19:59

specific support to certain firms

20:01

willing to manufacture in Europe, but also

20:03

in the form of countries trying to put

20:05

in place their own versions of the inflation reduction

20:08

acts, such as France, for example, which is very keen

20:10

to start to provide tax credits to manufacturers

20:12

setting up shop there. So this is a big

20:14

shift that we're seeing. The question is is that

20:16

competitive. The answer is no, not

20:18

from an economic perspective, but on shoring,

20:21

localizing supply chains was never really

20:23

about making the case that it was economically

20:26

competitive. There was always this idea,

20:28

at least among those who are honestly presenting

20:30

these ideas, that there would be a premium to

20:32

be paid as a result of this, but that that

20:34

would be worth the co benefits in

20:37

terms of resiliency, in terms of

20:39

local value creation, in terms of jobs.

20:41

And that's a calculus that has changed a

20:43

little bit due to the current overcapacity

20:46

situation and the current low prices that we're

20:48

seeing do mean that that economic

20:50

gap is greater than ever before, and

20:53

that manufacturing in Europe and manufacturing

20:55

in the US comes at a greater cost

20:57

compared to the current cheap technology that we could

21:00

be relying on then was the case in the past.

21:02

So it does reshuffle the cards a bit in

21:04

terms of the implied cost of

21:07

trying to make good on all of these onshoring plans,

21:09

and we're starting to see that trickle down

21:11

through decisions made by companies such

21:13

as meyer Burger, for example, which is a Swiss

21:16

company. It operates out of Germany, but it's

21:18

Europe's only real claim for solar

21:20

manufacturing to be happening at scale when it comes

21:22

to the downstream bits of the value chain, so cells

21:25

and modules. That company has recently said

21:27

that it's basically winding down its European operations

21:30

and shifting to the US where there's better access

21:32

to subsidies. And the real driving

21:34

force for that is the current crash in module

21:36

prices that we've seen that is directly resulting

21:39

from Chinese oversupply. And that's at a time

21:41

where the EU is saying we want to have forty

21:43

percent of our solar demand sourced

21:46

from locally made solar modules by

21:48

twenty thirty. If it's unable to

21:50

keep existing manufacturers from

21:52

decamping elsewhere, how is it going to

21:54

achieve those objectives is a big question that is

21:56

unanswered at present when it comes to the EU's

21:59

current policy making environment. There's

22:01

similar pressures on manufacturers in the US, where

22:03

even if you have more generous subsidies in

22:05

the form of the IRA's tax credits. You're still

22:07

seeing manufacturers like Cubic PV, which

22:09

had a big eight to ten gigawatts per year

22:12

plant for making PV wafers in

22:14

the US as basically announced it's canceling those plans

22:16

due to the overcapacity situation, rendering

22:19

its planned operations unfeasible

22:21

from an economic standpoint. So this is a real

22:23

pressure and it's really weighing on these onsuring

22:25

plans, and it's meaning that policymakers are going

22:27

to have to do one of two things, either give

22:30

up or double down and get serious,

22:32

but probably in a more focused and targeted

22:34

way than in the past, where there was a vague thought

22:37

that if you pursued localization it would

22:39

sort of work out, and in the EU it wouldn't involve

22:41

hard decisions around trade barriers

22:43

or around thinking more about how to restructure

22:46

subsidies. It would just sort of happened if

22:48

it was identified as a priority. That doesn't

22:50

seem realistic now, and it seems like

22:52

there's going to be real pressure on policymakers

22:54

to either do what the French government is doing

22:56

and go extremely hard in one direction and say

22:58

no, we're going to double down on this. We're going to put in place

23:01

market access barriers for Chinese companies

23:03

willing to sell evs into France or benefit

23:05

from ev subsidies in France, or

23:07

for example, go the way of Germany, where a

23:09

member of the coalition government is really not keen

23:12

on any kind of measures that could be deemed

23:14

to be sort of market interference or distortive

23:16

in nature, and where we're seeing real pushback

23:19

against the idea of putting in place concrete

23:21

measures for incentivizing local solar

23:23

manufacturing. So there's real hard discussions

23:26

that are already happening in these countries because of this

23:28

overall global situation that we've

23:30

got as a backdrop, And that's going to mean that

23:32

the next year is going to be really key to understanding

23:34

the extent to which all of this vague

23:36

talk of onshuring and localization is actually

23:39

going to bear out in reality.

23:40

So even for the countries that have decided that they are

23:42

not going to promote intervention,

23:45

you're clearly seeing the Chinese government intervening

23:47

in their market. And in the US, the Inflation Reduction

23:50

Act has often been referred to as a game

23:52

changer for many of the markets that they've

23:55

been helping to bolster like hydrogen. But

23:57

when we think about the Inflation Reduction Act, it's

23:59

not completely in them. You've definitely

24:01

already established that, but it has changed

24:03

it and changed the market for the US specifically.

24:06

What impact has that had on other countries

24:09

that perhaps aren't as proactive

24:11

about getting involved with pricing

24:13

and manufacturing and where and for how much?

24:15

So there's massive pressure by the IRA

24:18

pushing other parts of the world to pursue the same

24:20

sort of onshowing agenda. But that's why we've

24:22

seen so much of the policy making around

24:24

this be quite fuzzy and inexact, and

24:26

where many of the conversations have been happening have

24:28

avoided making these hard choices about doubling

24:31

down and what the actual objectives are is

24:33

exactly because of the fact that a lot of these policies

24:36

have been reactive by nature, have been

24:38

drawn up in a bit of a scramble to provide something

24:41

to compare what's being offered in the US

24:43

against. And the upshot is proposals

24:45

that have come out of the EU which are still at a

24:47

very early stage and still being brought into question.

24:50

There's still a lot of skepticism about the extent

24:52

to which these extremely ambitious onshowing

24:55

targets that are being put forward by the European

24:57

Commission, whether or not there to be taken

24:59

seriously. And that's a direct result of the fact

25:01

that the Iras really put pressure in a very

25:03

short timeframe on redrawing the map

25:05

when it comes to industrial strategies across the world.

25:08

So let's talk a little bit about the future

25:10

because one of the things that we're addressing

25:12

now is that there's a supply and demand imbalance

25:15

currently. But when we look into the future,

25:17

if we are to reach net zero

25:20

targets that have been stated all over

25:22

the world, there has to be a really

25:25

market increase in demand and a lot of these

25:27

industries, so does the demand essentially

25:29

catch up and is just an issue of timing?

25:31

And are we having a conversation regarding

25:33

timing which will more or less

25:36

sort itself out over the next

25:38

decade or so.

25:39

Yeah, there's the Jevam's paradox,

25:41

which is basically this idea that if something gets cheaper

25:43

or more efficient then it's useful, increased

25:45

demand will go up. That's probably something that we'll see.

25:47

That's something that we're already seeing for solo where deployment

25:50

is surging past forecasts and where

25:52

low prices are meaning a pretty rapid growth

25:54

across the board. We'll see that across all

25:56

of these different sexes. There's overcapacity now

25:59

it's providing extra low prices is

26:01

going to speed deployment and uptake,

26:03

and that's something that is quite clear. The cause of relationship

26:06

there is very simple. There's also another part of

26:08

the story as well, where because of the fact

26:10

that we're seeing extremely fast cycles when it comes

26:12

to technology and the needs to update

26:14

factories that I mentioned earlier, is that many of

26:16

these factories that are built now will be redundant

26:18

in a few years if they're not constantly invested

26:21

in. That's part of the cause for a lot of this overinvestment,

26:23

and we're already seeing a lot of planned over investment

26:25

going forward. But it's also relevant to the overall

26:28

picture because of this incredibly dynamic space

26:30

that we're seeing, whether it's with solar technology

26:32

and the shifts between different types of technology

26:34

that we're seeing there, or whether it's rapid advances

26:36

in new battery chemistries in the littumon

26:39

space. So those are also things to sort of bear

26:41

in mind. But overall. What's really

26:43

interesting, and again this is part of the work that we did

26:46

just looking at sort of energy transition investment

26:48

trends earlier this year, is that even

26:50

as we tracked one point three trillion

26:52

in energy transition spending last year,

26:55

that was maybe three or four times less

26:57

than what was actually needed according to our net

26:59

zero scenario, we're really seeing a big

27:01

shortfall. But that small share that we

27:03

saw in energy transition supply chains

27:05

investment was the one or one of the very

27:08

few areas where investment was on track,

27:10

whereas a part of the puzzle that we have solved.

27:12

And yes there are issues in terms of concentration

27:14

and resiliency of those supply chains written

27:17

large, and how aligned it is with different political

27:19

objectives that very enormously based

27:21

by region. But the fact is is one part

27:23

of the equation that has been solved for

27:25

and where we're not seeing a systematic shortfall

27:27

investment, which is sadly the case across

27:29

much of the world's energy transition. And that is something

27:31

to find solis in when.

27:33

We look at a lot of these different

27:35

government incentive schemes and trade

27:38

barriers. So the opposite of an incentive,

27:40

you've actually seen some of these be quite

27:43

porous. So for example, you see

27:45

some Chinese companies actually setting up manufacturing

27:48

in Mexico to work around

27:50

some of these barriers and to also

27:52

take advantage of this near shoring

27:54

push. Are we seeing that really common

27:57

and is it happening all over the world or

27:59

is it just in Mexico.

28:00

I expect we're going to see much more in the way of

28:03

protectionism when it comes to clean tech

28:05

over the next few years. Is something we're going to

28:07

be actively tracking in much more of a serious

28:09

way over the next few months. What we've

28:11

seen in the past is we've seen tariffs

28:13

on certain products coming directly from China,

28:16

leading to Chinese manufacturers basically

28:19

upping sticks and setting up factories

28:21

in regions where they have equally

28:24

low costs for manufacturing and where they're

28:26

able to sell into the US. And the big example there

28:28

is PV with Southeast Asia, where you've seen

28:30

an influx of the major Chinese manufacturers

28:32

into places like Malaysia and Vietnam

28:35

specifically to get around the US tariffs

28:37

on Chinese imports. That's been a bit of a game

28:39

of cat and mouse. There's been a bit of a ping pong match

28:41

with different sort of officials within the Commerce Department

28:44

in the US, lobbying sometimes successfully.

28:46

We've seen some relaxation of those rules

28:49

for restrictions on modules coming

28:51

from Southeast Asia. But it's a clear example

28:53

of the kind of reactions and strategies that we've seen

28:55

employed by companies affected by these policies.

28:58

The question is will that happen to other sectors. Now,

29:00

Mexico is an interesting example. We're about

29:02

to publish, well, we will have published

29:04

a note by the time this podcast comes out on specifically

29:07

addressing this issue. And what's the issue

29:09

in question is that US policymakers have

29:11

talked about exports, specifically of Chinese

29:14

electric vehicles manufactured in

29:16

Mexico being sold into the US, where

29:18

because of the USMCA favorable

29:20

trade terms between Mexico and the US, they're

29:23

avoiding the twenty seven point five percent tariffs

29:25

that are applied to Chinese EV's coming from

29:27

China into the United States. So it could be

29:29

sort of a back door where you could start to see

29:32

because of low Mexican manufacturing costs,

29:34

so factory workers in Mexico are actually paid

29:36

less than in China. Now it's pretty shocking

29:38

fact, but there's a real case to be made

29:40

for manufacturing in Mexico, and Chinese EV

29:43

manufacturers could profit from that and set into

29:45

the US. However, there's a few big

29:47

howevers. One is that there's

29:50

no real existing lithumind battery supply

29:52

chain in Mexico right now, so the current government

29:54

has been quite interventionist and hasn't had

29:56

the most relaxed approach to foreign or

29:59

private investment into the lithium ion

30:01

battery space. That's sort of held back a

30:03

lot of investments, whether or not it is on the

30:05

exploration side of things for mineral

30:08

extraction for lithium extraction, or

30:10

whether or not it's an actual setting up battery

30:12

factories and EV production lines.

30:15

It's acted as a bit of a drag on those investments

30:17

there. And we're seeing an election coming

30:19

up sort of midyear where the likely front

30:21

runner, Cloudy of Shinbaum, also stems

30:24

from the same sort of school of thoughts. So even though

30:26

we're hearing a lot as she's on the campaign

30:28

trail about opportunities for Mexico

30:30

to become a big hub for battery manufacturing and benefiting

30:33

from the US's focus on near assuring, a

30:35

lot of its supply chains. There's a

30:37

lack of clarity about whether or not she'll be willing

30:39

to put in place the reforms that would actually enable

30:41

that to happen because of how politically charged

30:43

they are within the current Mexico political

30:45

ecosystem. Now, the other thing is that there

30:47

are a couple of Chinese EV

30:50

manufacturers active in Mexico,

30:52

only two that we've tracked. Jac

30:55

is one of them, and it's pretty minor footprint

30:57

when you compare it in the grand scheme of things. We've seen

30:59

a lot of talk of BYD again of

31:01

a number of Chinese EV manufacturers

31:04

talking about setting up in Mexico, but we've not really

31:06

seen anything confirmed, nothing concrete

31:08

as of present. And actually, what's really interesting too

31:10

is that a lot of the fears or concerns

31:12

that are cited by US policy makers are around,

31:14

Okay, we've put in place these IRA subsidies that

31:17

also benefit North American EV

31:19

assembly and manufacturing writ large, Chinese

31:21

manufacturers could benefit from that. Well. Actually,

31:23

a lot of the fine print within those subsidies

31:26

and the thirty D EV or Clean

31:28

Vehicle Tax credit that provides a sort of

31:30

upfront purchase grant for EV buyers

31:33

in the US, which is incredibly important, receives

31:35

a lot of media attention that isn't available

31:37

in most cases if a Chinese company

31:39

is involved in the manufacturing process.

31:42

So already you're seeing an environment in Mexico

31:44

that isn't super favorable to setting up a battery

31:46

manufacturing hub anytime soon. You're

31:49

seeing a lack of real concrete

31:51

investments by Chinese manufacturers, and you're also

31:53

seeing an environment in the US where market

31:55

access for Chinese firms isn't a given. So

31:58

our conclusion is that those concerns are overblown

32:00

and overstated. But we are going to enter a

32:02

new era of tariffs potentially

32:04

in the US if Donald Trump wins.

32:06

We've heard talk of sixty percent tariffs

32:09

on everything coming into the US, and we've

32:11

also heard talk of one hundred percent tariffs,

32:13

is something that was recently mentioned by Donald Trump

32:15

at a speech on specifically Chinese

32:17

made vehicles coming from Mexico. So again,

32:20

Chinese manufacturers, they're not particularly looking

32:22

to sell into the US because the current environment

32:25

seems to be incredibly difficult.

32:27

But the big question is what happens to Europe.

32:29

Europe still remains incredibly open when

32:31

it comes to citing Chinese manufacturers

32:33

or East Asian manufacturers in general, tariffs

32:35

are still low. The big question there is will that

32:37

change, And that's when things will get quite

32:39

interesting when it comes to re examining how that

32:42

would play out in practice and whether or not

32:44

we could see circumvention implored as a strategy

32:46

and response.

32:47

We spend a lot of time talking about established

32:49

markets in the energy system. So we've talked

32:51

about the US and Europe and

32:53

China, but let's talk a little bit about some of the

32:55

markets that are growing in many respects because

32:57

of population growth. So I'm thinking of parts

32:59

about perhaps India, where

33:01

in other parts of the world there are growing economies,

33:04

both in terms of people and in terms of energy

33:06

access. What is happening there

33:08

and how does all of this global

33:11

economic interplay for these industries,

33:14

how does it impact them.

33:15

There's a big risk when all of these richer

33:17

countries try and outcompete each other by offering

33:19

subsidies and trying to push forward with this onshoring

33:22

agenda, that this sort of deprives much

33:24

of the developing world of an opportunity

33:27

to profit from those industries

33:29

and use them as a way in which develop their own economies.

33:31

That's a real concern, but it's something that's quite

33:34

interesting. It really depends again on where you're looking.

33:36

Southeast Asia is becoming a pretty big

33:38

hub for manufacturing clean technology,

33:40

and that's something where we've seen massive investments from Chinese

33:43

manufacturers, but also an increasing focus

33:45

when it comes to engagement from the US or

33:47

from the EU on having a role to play there

33:49

too. The situation in sub Hian Africa is very

33:51

different. We've seen a lot of excitement around potential

33:54

sort of battery manufacturing or even

33:56

exports of things like hydrogen for example,

33:58

from subs Hiana, but when it comes

34:01

to realizing projects to tapping into local

34:03

demand, things are much more complicated and difficult.

34:05

One country that's quite interesting is India. So since

34:08

twenty nineteen and even before, but really

34:10

twenty nineteen was the point where things intensified,

34:12

we've seen a real push from the Indian

34:14

government to onchore solar manufacturing.

34:17

Specifically, it's deployed all kinds of different

34:19

tools, from import tariffs, from approving

34:21

a certain list of manufacturers to take part in

34:24

bids. When it comes to soda auctions,

34:26

it also takes the form of local content requirements.

34:29

There's been a real battery of measures that's

34:31

been deployed for onshoring soda,

34:33

and it's gone well, it's not gone great.

34:35

There's been a degree of uncertainty

34:38

from investors and developers

34:40

complaining a lot about increased costs,

34:42

about the lower availability of modules

34:45

at a low prices, increased the

34:47

cost of doing business for developers in

34:49

India large it's been quite inflatory,

34:52

just in the same way as any of these sort of protectionist

34:54

measures would be. But we've really seen it as

34:56

a sort of sandbox for trying out these measures

34:58

in an environment that's very different to the US, that's

35:00

very different from Europe. What we have seen

35:03

is limited success in growing

35:05

out four years on from when

35:07

this started out in serious limited

35:09

success when it comes to growing out supply

35:11

chains up and down the solar value chain.

35:14

But we have seen some pretty big investments

35:16

in solar module manufacturing, and there's increasing

35:19

interest and detailed talk

35:21

about doing the same for manufacturing

35:23

cells and even going up towards wafers.

35:25

It's still early days, but it's still a really

35:28

interesting experiment that we're seeing and that would

35:30

be good to track, just because of the fact that local

35:32

demand is set to increase incredibly

35:34

rapidly, and we've already seen a real credible

35:36

commitment from the Indian government. When it comes to

35:38

clean energy, manufacturing in India is

35:41

held back by all kinds of structural factors. It accounts

35:43

for a smaller share of GDP that you might expect

35:45

given its developmental trajectory, but

35:47

there's still a big case to be made for

35:50

some of the fact that production costs could be quite

35:52

low, and it could serve as quite a useful base

35:54

when it comes to diversifact fighting

35:56

manufacturing away from relying

35:58

on China, for example. There's a lot of excitement

36:00

around cooperating with India, as there is

36:02

with places like Indonesia, for example, and playing

36:05

a more important role within those battery

36:07

or solar value chains. So it's

36:10

still relatively early days in a part

36:12

of the world where the amount of budgetary headroom

36:14

for achieving these kind of objectives is a lot more

36:16

limited than say the US. But I would

36:19

sort of continue to look at India quite closely

36:21

just because of the fact that the government is extremely

36:23

comfortable with taking quite an aggressive

36:26

stance on onsuring. It's been

36:28

doing so since much before, several

36:30

years before the IRA came into force.

36:33

And it's showing a level of determination that

36:35

sort of hints that it might not just do that for solar

36:37

it might also do that for say, battery

36:39

manufacturing when that starts to grow out

36:41

in a more serious way in India, which

36:43

we expect to be the case over the next few years.

36:46

Now, this is a story that is really equal

36:48

parts economics and policy.

36:50

So just recently, Janet Yellen, the US

36:53

Secretary of the Treasury, was in China

36:55

negotiating with the Chinese government. Can you

36:57

talk a little bit about what happened there.

36:59

Yeah, So this is a concern

37:01

that we've seen cited. If you go back in history,

37:04

we had semiconductors coming from Japan,

37:06

similar concerns about overcapacity cited

37:08

about government support in Japan leading to perceptions

37:11

around dumping on global markets, and that

37:13

was something that led to a policy response to some of the

37:15

US And when it comes to China specifically,

37:17

we've seen still be a sort of perennial concern

37:20

that's been brought up again and again and again. This time

37:22

again, these overcapacity concerns

37:24

have been brought up by Janet Yellen in the

37:27

Treasury Department. They've been brought up by Catherine

37:29

tie in the Commerce Department during a

37:31

recent trip to Brussels, where those

37:33

talk around Chinese overcapacity as a structural

37:36

issue echoes with many of the views

37:38

that are being cited in the European Commission and across

37:40

member states. So there's a general consensus that something

37:42

needs to be done. There's a desire to engage

37:44

with China about ways in which to resolve

37:47

this issue, and the Chinese government has identified

37:49

overcapacity as a concern, but

37:52

I think it's just it's still quite difficult for

37:54

it to act at a time when those

37:56

sectors are potential sources of growth,

37:59

when the Chinese government's ability to sort

38:01

of slow down investment even as it limits

38:03

IPOs for example, and tries to weigh

38:05

on the decisions to expand manufacturing

38:08

are surprisingly limited when a lot of the incentives

38:10

are given at a local level in China, and

38:12

at a time when things aren't as coordinated

38:15

as they might seem. Those sectors are priority

38:17

sexers that have been identified by the Chinese government,

38:19

But as I've mentioned, a lot of those investments,

38:21

a lot of that over capacity are the results

38:23

of market forces, are the results of firms

38:26

trying to outcompete each other, trying to outinnovate

38:28

each other, and that's why we're seeing completely

38:30

bonkers level of overinvestments in

38:33

solar and in batteries and across evs,

38:35

and that's unlikely to change in the short

38:37

term as a result of this kind of

38:39

engagement that we're seeing at present.

38:41

Antoine, thank you very much for joining today

38:43

and talking us through some of the really

38:46

important highlights of the incredibly complex

38:48

world of supply chains in global trade

38:50

as it relates to the energy transition.

38:53

It was a real pleasure. As always,

38:55

Thank you so much, Dana.

39:05

Today's episode of Switched On was produced

39:07

by Cam Gray with production assistance

39:09

from Kamala Shelling. Bloomberg NEIF

39:12

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39:24

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