In 2021, China accounted for almost half of the global increase in renewable electricity, followed by the US, the EU and India. In 2022, solar power is expected to account for 60% of the increase in global renewable capacity.
China is the world’s largest producer of wind turbines and solar panels (80% of the world’s solar products, which is expected to increase to 95% within a few years). With nearly every sector turning towards sustainability, China has a predominant position. This is no surprise: solar manufacturing costs in China are 35% lower than Europe, 20% lower than the U.S., and 10% lower than India.
At the heart of this advantage is China’s mastery of supply chains—being vertically integrated across the entire value chain of renewable energy, from supplying and processing materials to manufacturing the photovoltaic panels. The country accounts for over 80% of the world's solar-grade polysilicon production, which is the main raw material used. As the global adoption of sustainable technology picks up pace, so too could dependence on the East Asian power.
To reduce our reliance on fossil fuels, going electric is seen as the next big step, and therefore exponentially increases demand for batteries. While Tesla dominates Americans’ brand consciousness, their Chinese battery maker Contemporary Amperex Technology Co. Ltd, also known as CATL, is the world’s biggest maker of batteries for electric vehicles and controls more than 20% of the EV market. They are seeking to further assert their dominance and expand outside of China by potentially opening a manufacturing plant in Mexico to supply North America with their batteries.
Proportionally, global battery demand for transportation is expected to increase from 69% in 2022 to 86% in 2030.This in turn means skyrocketing demand for EV batteries (mostly lithium-ion) and their core ingredients, chiefly lithium, nickel and cobalt.
The global lithium-ion battery market size is valued at USD48.19 billion [KJO1] (2022), and expected to reach USD182.53 billion by 2030, with expected CAGR at 18.1% from 2022 to 2030.
A deficit in the amount of these key materials would be disastrous for the EV industry, as batteries and EVs have become cheaper due to technological and production advancements, which is at risk of being set back by rising raw material costs. These minerals aren't particularly rare, but current global production would have to scale up at an incredible rate in order to meet industry ambitions. The pace of extraction/refinement is slow and setting up extraction and processing plants can take up to a decade.
China has a firm control on almost all the metals required – about 75% of the market. This is not because China has the largest deposit of these minerals globally, but because they dominate the processing of these minerals. For example, China processes almost all Australian raw lithium to lithium carbonate and lithium hydroxide. Similarly, Indonesia holds almost a quarter of global nickel reserves and previously, the raw material was predominantly processed in China. Since 2020 however, Indonesia’s government banned the export of unprocessed nickel ore in favor of developing their nickel-based industry and processing capabilities. Similar efforts are being pushed in Australia, whose miners have long balked at processing these minerals, and the U.S., which is heavily investing into processing infrastructure.
Even in areas where the US was a decisive first mover, China still maintains a stranglehold.
Chinese BYD was little-known outside of China until recently, when they announced that their vehicle sales for 2022 had surpassed Tesla’s, as the world’s largest EV manufacturer (although BYD make a combination of hybrid and electric vehicles, whereas Tesla’s are full electric – China counts both types as “zero emission”). BYD is partly owned by Warren Buffett's Berkshire Hathaway, having become one of their most lucrative investments thus far (they backed BYD in 2008 with USD232 million, and is now worth USD7 billion).
China has many of their own homegrown EV brands, including SAIC, NIO, Xpeng and more, but BYD is the largest completely Chinese EV maker, making it a benchmark to compare Tesla against as arguably the most well-known EV brand in the world. BYD’s success in China highlights their promising status as a player to watch out for.
BYD’s competitive advantages include being vertically integrated along the supply chain, with capabilities to manufacture battery cells and IGBT transistors – the two most expensive components in an EV. This has allowed them to be less dependent on external suppliers than its rivals, shielding the company from supply-chain disruptions throughout Covid-19.
They have also indicated their plans to turn competitors into customers by selling batteries, according to Lian Yubo, BYD’s executive vice president. This is similar to how Samsung sells chips, processors and screens to Apple, although their co-dependent relationship has been minimised in recent years. increasing the markets’ dependence on their products would form a more stable and profitable part of their business model, and effectively minimising risk.
Their wide product range has also enabled them a first mover advantage; cost-conscious transport and logistics companies have set routes and schedules that completely mitigate typical car-buyer concerns such as range and speed. Establishing these B2B relationships will let their utility EVs be adopted en masse, with potential for upselling other BYD products.
Going green doesn’t come without its fair share of issues either: namely labour rights violations in China and displacing the negative environmental impact to other regions. The global dependency on China for the resources that enable us towards a reduced-carbon future could mean that we are left without a choice.
For solar photovoltaics, human and labour rights activists have scrutinised China’s polysilicon mining and production that predominantly occurs in the western region of Xinjiang. Advocacy groups say that Xinjiang solar companies use forced labour from Uyghur Muslims, and in June the U.S. enacted The Uyghur Forced Labour Prevention Act that will ban all solar imports (and other goods) from Xinjiang, unless the importer can prove the products aren't tied to forced labour. These ethical concerns increasingly play out on a geopolitical scale, affecting the viability of continued dependence on China.
China has a strong position in renewable energy due to their scale and cost advantages across the supply chain for electric vehicles, batteries, and solar energy. However, having the world’s energy security dependent on a single country or supplier is always a cause for concern. This exposes green energy security to concentrated risks, such as facility fires and flooding. They are also highly vulnerable to trade policy risks including anti-dumping, countervailing and import duties against elements of the supply chain.
Russia’s invasion of Ukraine was a recent reminder of this, which caused a reassessment of Europe’s reliance on Russian gas. Since then, gas prices have skyrocketed, and supply chains have yet to be reshuffled. “Energy security” has returned to the fore of policy planning.
Renewable energy and EVs are definitely not going anywhere, and at the Sydney Energy Forum held in early July and co-hosted by the Australian Government with the International Energy Agency (IEA), they identified eight actions to be taken across the Indo-Pacific region, to address the key energy challenges and how to topple China’s monopoly in the global green energy market. The IEA called upon countries to diversify their sources of solar panels and increase their own manufacturing capacity to mitigate the supply chain, trade and geopolitical risks of being too dependent on Chinese solar.
1. We will be seeing a diversification in supply chains, like Indonesia growing their nickel processing industry. Governments around the world will be investing heavily into these industries, providing opportunities for investors. However, it wouldn’t be realistic to expect a quick or drastic increase in raw material supplies, processing and manufacture for photovoltaics or EVs from other countries, since China is already ahead by a mile. Chinese firms will likely remain as dominant players in the industry.
2. We will also see automotive companies investing in long-term projects or partnerships to secure their supply of key components (for batteries) and potentially vertically integrate their supply chain to improve margins. This has already been observed with companies like General Motors, Volkswagen and BMW purchasing minerals directly from mines or investing in them. It is a major change for these automakers who typically rely on suppliers to deliver the necessary components exactly when they are needed.
For us, we can see that there will be a seismic shift in each stage of the supply chain for renewable energy and EVs, which will be prevalent around the globe but especially in regions with high battery metal reserves and a high concentration of automakers.
Until next month,
Liyen Lim
Analyst at nØught labs