Chinese Manufacturing in Clean Tech
Chinese clean energy technology companies have been relatively quick to expand their foreign market share but production outside of China is still lagging. Europe is likely to be the preferred destination for Chinese battery, electric vehicle (EV), and wind companies but current investments are limited to the battery industry. Diversification of production would bolster the resilience of supply chains and economic development but is likely to proceed more quickly for batteries and more slowly for other technologies.
Evaluating the Internationalization of Clean Industries
Chinese manufacturing overseas is not a new phenomenon and is well documented in Africa and Southeast Asia. In some cases, Chinese factories serve local markets (including supplying Chinese infrastructure companies), while in others they exploit lower production costs to export internationally. However, there are still limited instances of Chinese companies opening high-value-added manufacturing plants overseas.
In the case of clean energy technology, there is little evidence of widespread internationalization of Chinese manufacturing outside the photovoltaic (PV) industry. Moreover, while some companies do assemble panels in Southeast Asia, the upstream supply chain remains largely concentrated in China. The battery and electric vehicle (EV) industries are more likely to move some production closer to their end markets, especially in growing markets such as the European Union, but this trend is still in its early stages and will depend on the growth of the market. The wind turbine industry is far less likely to relocate or diversify manufacturing or source components from outside of China due to the remarkable cost savings that come from relying on integrated Chinese supply chains.
In many cases, the incentives that would foster greater internationalization still seem to be lacking: Demand for Chinese products is still limited (EVs and wind turbines); there is no clear cost advantage (wind turbines). Investment in manufacturing outside of China is driven by trade tariffs (solar panels) and, in the case of batteries, a combination of cost considerations, demand, and host government incentives. For EVs and batteries, it is likely that political considerations, host country incentives, customization, and cost will contribute to an increase in manufacturing outside of China. These do not seem as likely to happen in the wind industry—at least for now.
Solar PV Modules
When it comes to the expansion of manufacturing in the clean energy technology industries, Chinese manufacturers of solar PV modules have been by far the most visible actors. Their expansion has predominantly taken place in Southeast Asia, especially Malaysia. Trade restrictions imposed by the United States on solar panels made in China were the leading driver of this trend. However, much of the supply chain remains firmly located in China, a fact that continues to drive controversy and nearly led to the imposition of tariffs on imports from several Southeast Asian countries.
Battery costs are highly dependent on international commodities like lithium, which means that while there are still significant cost advantages to producing in China, they are less significant compared to those for the wind industry. There is also a clear commercial advantage to being near EV manufacturers, and European governments (including local governments) have provided attractive incentives for manufacturers to invest. Another strong pull factor to localizing production in Europe is the growing demand for batteries in the region and the established relationship between Chinese battery manufacturers and EV makers in Germany, most notably CATL and Volkswagen.
While CATL is the most high-profile Chinese battery maker, with two factories set to start production soon in Europe, it is far from the only player. Several other Chinese firms have announced plans to open factories in Europe and several have already secured funding and local government support. For example, SVolt, a GWM spin-off company, has made news for planning two German production plants. CATL has also recently announced a deal to build a plant in the United States with Ford.
Chinese EV companies have trailed battery manufacturers when it comes to both international sales and production. However, there are several signs that companies are interested in localizing production or assembly closer to expected growth markets such as Europe, Brazil, and the United States if their sales increase. Here, pull factors include local government incentives and better access to local markets, as well as a perceived learning and upgrading opportunity from localizing in areas with a legacy of advanced automotive manufacturing such as Europe and the United States. The main push factor is likely the high levels of competition domestically
Volvo and Chinese automaker Geely have established two joint ventures focused on EVs, the most notable being Polestar—the most popular Chinese EV brand in Europe—but the vehicles are still made entirely in China. Nonetheless, this may be the best candidate for a Chinese brand that will start production in Europe and North America soon given Volvo’s established and successful factories in both regions.
In terms of cost, the companies that are leading the way in foreign markets are proposing their mid-to-high-end models and in some cases solely competing in the luxury segment. They are thus competing directly with higher-end European brands. The expansion of Chinese EVs in lower-income markets like Bangladesh or Indonesia is likely to develop differently and face different incentive structures.
Finally, Chinese wind turbine manufacturers have the largest cost advantage to stay within China and the least significant pull factor to internationalizing production. Cutthroat competition within China has led to falling manufacturing costs as well as a push to find new markets. So far, all signs suggest that Chinese firms will continue to export all components for turbines from their home country factories rather than localize production in local markets.
Europe would likely be the most attractive location should firms decide to open manufacturing plants, because companies may perceive Europe to be a learning opportunity for accessing advanced R&D and technological upgrading. As in the case of EVs, Chinese companies have already acquired a few European firms to license new technology more easily or opened R&D centers in Europe. Unlike the case of EVs, European firms are still considered to have a technological edge over their Chinese competitors. However, so far, no tangible plans have been announced for opening European plants, and recent inflationary trends in Europe will discourage any such investments for the foreseeable future.
Internationalization of Chinese Manufacturing in Clean Technology Companies
|Industry||Level of internationalization||Key characteristics||Predominant policies|
|Solar Photovoltaic Panels||Moderate||Localized assembly to avoid trade restrictions; limited demand for customized products||Trade restrictions, tariffs|
|Batteries||Moderate (high potential)||Batteries are heavy and costly to transport so there is always an advantage to producing close to the end market, and highly dependent on international commodities like lithium, so cost advantages to staying in China are significant but less than for other technologies; new battery plants in Europe due to growth in EV demand||Cost advantage to co-locating with EV producers; European market is generally attractive because of incentives and opportunities to access high-end manufacturing ecosystem|
|EV||Low (moderate potential)||Growing demand for EVs, especially in Europe; innovation competition is strong; high demand for customization of products||Aim to gain market share by enhancing quality and providing competitive prices; firms are chasing local government incentives to localize production in high growth markets like the EU, Brazil, and the US; firms can leverage previous acquisitions of foreign firms to access markets|
|Wind turbines||Low (low potential)||Large cost advantage to staying in China because of lower costs of production; manufacturers sometimes involved in project development (infrastructure) requiring more specialized local expertise; China remains by far the largest market||Export all components for turbines from home country factories; compete with Western companies by providing cheaper and sometimes less sophisticated equipment|
These trends are still under development, but they hold important implications. First, Chinese clean energy technology companies have been relatively quick to expand their foreign market share but production outside of China is still lagging. Second, it seems clear that there is no one pattern for the internationalization of manufacturing of Chinese firms in clean energy technology sectors. Despite having received comparable levels of government support in China, the decision to open manufacturing plants internationally is linked to industry-specific costs and incentives (including institutional incentives inside and outside of China).
Third, when companies do choose to localize production, Europe appears to be the preferred destination. This is due to a combination of factors: Demand for clean energy technologies including EVs and batteries is strong in Europe; European countries have generally been more welcoming of Chinese investment than the United States; the European Union has been supportive of expanding battery supply chains in Europe; and many Chinese EV and wind firms already have R&D centers in Europe. The latter could help companies tap into human capital resources and benefit from regional expertise in advanced manufacturing. Europe’s current economic woes and the introduction of incentives linked to local manufacturing requirements in the United States may shift some of this balance. Countries with lower costs and close to important markets that benefit from free trade agreements such as Mexico and Hungary are likely to be big winners in the automotive and battery segments.
Automation may further exacerbate localized production as low wages are no longer a significant comparative advantage for developing economies seeking to attract manufacturing. Providing financial incentives to attract investment may ultimately be more successful moving forward but may prove to be especially costly for emerging economies.
The diversification of production would be positive for bolstering the resilience of global supply chains and economic development. This is the case even when ownership of the production plants is Chinese, because integrated global chains can strengthen local players.
Localization, however, may not always be possible, cost-effective, or in the interest of the company. As a consequence, understanding the circumstances in which companies may be more likely to localize and what types of policies are conducive to this could be beneficial to countries seeking to diversify their supply chains.
Given how established these industries are within China it seems unlikely for now that the Chinese government would act to restrict companies seeking to open manufacturing facilities overseas. It may do so, however, if it fears that Chinese firms may diminish their investments in upgrading manufacturing domestically. After all, the Chinese state poured significant resources into developing and supporting these firms so they could help strengthen the Chinese economy. These companies’ international expansion appears for now to be viewed positively in Beijing, but support could change if these firms were to outsource production or water down their contribution to Chinese growth.
Ilaria Mazzocco is a senior fellow with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies (CSIS).
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