Government support, economies of scale and constant innovation have helped propel China in key transition industries.
The “new three” has been a buzzword among Chinese officials and state media recently, as they highlight the strong performance of solar cells, lithium-ion batteries and electric vehicles (EVs) in driving China’s exports this year.
China accounts for more than 80% of the global solar cell exports, more than 50% of lithium-ion batteries and more than 20% of electric vehicles.
The main propellers behind the surging trio are consistent government support, an early start, strong and low-cost domestic supply chains, and a massive home market driving economies of scale, experts have told China Dialogue.
They also pointed to Chinese companies’ ability to continuously innovate.
But geopolitical tensions bring uncertainty to the global manufacturing future of the “new three”, some experts say. Trade restrictions placed on China by its major trading partners, particularly the US and Europe, could possibly affect its leading position, with some other countries showing a keenness to step in.
“In the short term, China will likely maintain its advantage in these sectors. I don’t think other countries will overtake China suddenly,” says Li Dan, executive secretary of the Renewable Energy Professional Committee of China Circular Economy Association.
She notes that this situation could potentially change only if other countries achieve major technological breakthroughs.
‘Very eye-catching’ performance
The concept of the “new three” – or xin san yang – speaks directly to China’s “old three” that were once the pillars of its exports: clothing, home appliances and furniture.
It remains unclear who coined the term, but one of the first Chinese officials to use it was Lv Daliang, spokesperson of the China General Administration of Customs. At a press conference in April, Lv highlighted the “very eye-catching” performance of the “new three” in first-quarter exports.
Combined exports of EVs, lithium-ion batteries and solar cells (the building blocks of solar panels) reached 264 billion yuan (US$36 billion) between January and March, a 66.9% year-on-year increase, Lv said. Altogether, they pulled up China’s overall export growth rate by two percentage points, he added.
EVs, which recorded a 122.3% year-on-year export increase in the period, led this growth. This was followed by lithium-ion batteries at 94.3% and solar cells at 23.6%, Lv explained.
This trend has continued further into the year. At a July press conference, Lv reported a 61.6% year-on-year jump for the three sectors in the first half of 2023.
China Dialogue speaks to Wu Wei, an assistant professor at Xiamen University’s China Institute for Studies in Energy Policy: “Because China has successfully seized the opportunity to develop its renewable energy industry, it now has substantial advantages in all three sectors globally.”
China achieved a near-monopoly in the global exports of solar cells last year, accounting for 83.8% of the total, according to data compiled by Natixis, a French corporate and investment bank.
The data shows that Chinese companies’ shares of lithium-ion battery and EV exports were less but still significant, standing at 52.3% and 23.4% respectively.
China’s share of global manufacturing at every stage of solar panel production exceeded 80% of the global total in 2022, according to Rystad Energy. The findings are presented in the Norway-based research and business intelligence company’s Solar Market Report 2023.
According to the report, China’s share in making polysilicon, wafers, solar cells and solar panels were, in order, 94%, 96%, 90% and 81%. Polysilicon is the key base material for the solar PV supply chain, while wafers (thin slices of semiconductors) are used to make integrated circuits in solar cells.
According to Aditya Lolla, China’s battery manufacturing capacity in 2022 was 0.9 terawatt-hours, which is roughly 77% of the global share. Lolla is the Asia programme lead for Ember, a UK-based energy think-tank.
Long time coming
Although the term “new three” is relatively fresh, the surge of the trio – all key to decarbonisation – has been a long time coming.
Beijing’s policy support stretches back to the mid-2000s and has stayed consistent, laying the foundation for today’s success; almost every expert that China Dialogue has spoken to emphasise this.
China introduced a renewable energy law back in 2005 to spur the exploration and usage of renewable energy. Two years later, the central government raised the energy industry to a national strategy in two key policies intended to spur the research into and manufacturing of renewable energy. The policies – the National Climate Change Programme and the Mid- to Long-Term Development Plan for Renewable Energy – elevated the industry’s purpose beyond just tackling pollution.
In 2008, the industry got a huge boost (albeit indirectly) from the government’s four-trillion-yuan (US$583 billion) stimulus plan to counter the global financial crisis. In the package, 210 billion yuan (or roughly 5%) was earmarked for energy-saving, emissions-reduction and ecological-engineering projects. This helped steer companies and investors towards renewables, according to a 2010 report published by WWF and China’s Research Institute of Resources and Environment Policies.
The report stated: “Large-scale new energy generation projects began one by one. Investments for the manufacturing of equipment for wind and solar power have been more active than ever before. In addition, applications in the new energy vehicle industry, such as the construction of commercial charging stations, have recently been tapped into in Shenzhen.”
By 2012, China had already “formed a sound manufacturing chain” for the solar photovoltaics (PV) industry. According to a government paper of that year, the country was producing more than 40% of the world’s solar cells.
This policy drive continued in 2015 with the launch of the “Made in China 2025” strategy. The initiative aimed to transform China’s manufacturing industry from labour-intensive to technology-intensive in 10 years. It had specific goals for the growth of domestic EV brands, and prompted a separate action plan to grow the manufacturing of power-generation equipment for solar, wind and other renewable energy sources.
The strategy was followed by two sectoral five-year plans, covering 2016-2025: the 13th and 14th five-year plans for intelligent manufacturing marked out new-energy vehicles and power-generating equipment as two of the key sectors for industrial upgrade.
Alex Wang, an expert on environmental law, tells China Dialogue that when he talked to people in China about those industrial pushes about 15 years ago, they would admit there was no clear sense of whether they would be successful.
“There was a logic to it and they were just trying it,” says Wang, who is now a UCLA School of Law professor and a faculty co-director of the US’s Emmett Institute on Climate Change and the Environment. “What’s sort of remarkable is how incredibly successful the policy has turned out to be right now, a decade or more later,” he adds.
Supply chains and home market
Multiple experts single out China’s early start and consistent policymaking for creating the country’s solid home-based supply chains for these sectors – these now represent China’s main edge over its competitors.
“From raw materials to the last components, [China’s solar sector] has an integrated industry chain,” says Li Dan, of the China Circular Economy Association. She also identifies China’s low labour costs as a bonus in the early phases of the manufacturing development.
The size of China’s domestic market, which is almost unrivalled worldwide, has also given its companies a major boost.
“The Chinese market is very big and policy incentives are very generous. This means China can not only produce a lot of [renewable energy devices], but also consume many of them internally,” says Li Shuo, a global policy advisor for Greenpeace East Asia.
“Production and consumption motivate each other in such a cycle: if the products you make can be sold, it will enhance your manufacturing competitiveness,” Shuo tells China Dialogue. He adds that, as well as for labour, Chinese companies’ costs on land-use and financing are helpfully low.
The economies of scale created by China’s huge home market were compounded by policies that encouraged, or in some cases required, the procurement of home-grown products. For example, the 12th five-year plan (2011-2015) for the solar PV industry required 80% of the equipment and accessories used for manufacturing solar cells to be “localised”.
Made in China 2025 stipulates that more than 70% of the one million-plus EVs and plug-in hybrids sold annually in China should be from home-grown brands by 2020. The targets for 2025 are more than 80% of the market share, or three million.
Shuo thinks the indigenous innovation of Chinese companies is often overlooked by people outside China: “This includes the upgrade and development of those technologies that Chinese industries are already leading globally, as well as the continuous improvement of manufacturing techniques.
“China is the forerunner in the world in these areas, and that also results in China being so competitive in these sectors on the world stage.”
Subsidies and innovation
For some experts, the rise of the “new three” owes much to government subsidies for manufacturers, power generators and consumers.
China Dialogue talks to Alicia García Herrero, a senior fellow at the Brussels-based think-tank Bruege: “China used to have competitors [in these sectors], but it subsidised these industries heavily and its competitors did not … or stopped subsidising them at least 10 years ago, in the case of solar panels in the European Union.”
García Herrero says that by the end of the 2010s, the EU was home to around 60% of global solar panel production. To spur production, European countries – especially Germany and Spain – had been heavily subsidising the use of solar energy by individuals.
But because of the financial crisis, European countries lifted solar energy subsidies. “Nobody wanted to install solar panels without subsidies [in Europe], so the market collapsed,” notes Herrero. “There were some European companies that were operating in China, like the Spanish [company] GAMESA. [Europe] lost a lot of market share in China.”
Around the same time, China started to step up its solar push. The “golden sun” initiative in 2009 was one of China’s early efforts to drive the industry. It provided subsidies for: installing solar PV on buildings, formulating technical standards, and promoting certain key technologies.
Once its golden sun had set, China subsidised solar power generators from 2013-2019 by paying them extra when they sold their electricity to the grid. Different levels of regional governments have also been granting subsidies to encourage the development of large solar bases or the installation of roof-top solar panels, to help hit renewable installation targets.
For the new-energy vehicle industry, whose development is intertwined with that of the battery industry, subsidies have also been in play.
In one of the earliest policies for the industry, published in 2009, the central government pledged to invest 10 billion yuan over the following three years. This supported car companies in achieving various technical and product upgrades, such as developing new-energy vehicles and their accessories.
In another notice that year, the ministries of finance and technology offered one-off purchase subsidies for new-energy vehicles to public sector companies in 13 cities. Purchase boosts were extended to individual customers in 2013, which included cash rewards, tax breaks and free number plates. Today, only the tax breaks are still in place on a national level, due to run until the end of 2027.
In García Herrero’s opinion however, the success of Chinese EV companies compared to their European rivals is down to something else: “European companies opted for making hybrid cars while China focused on making electric vehicles.”
Herrero also notes: “Europe allowed for subsidies to consumers of hybrids (not pure electric), which was a mistake because it hampered the transition to the development of the EV industry.”
The US has since started subsidising its home-grown clean energy industry, particularly EVs, with the Biden administration’s Inflation Reduction Act.
But Herrero says subsidies remain “a very tricky issue” in the EU because the bloc cannot centralise them: “You can see [EU] countries trying to give subsidies … But these are national subsidies, never as much as [those of] the US.”
Can China keep the lead?
Most experts believe China will maintain its advantage in the “new three” sectors for the foreseeable future. But many also highlight the uncertainty brought about by geopolitical relations.
Shuo says it will be “very hard” for western companies to overtake their Chinese competitors in the short term because they are unlikely to have the same favourable conditions – from consistent policy support to low production costs.
“I think this is an indisputable fact and something that [the US and European countries] are reluctant to accept,” he says.
But Shuo cautions that China’s prospects in these sectors have become “more of a political issue than an economic one”, particularly in the US and Europe. He cites existing or potential trade restrictions, such as the US ban on Chinese solar panels and the EU’s ongoing anti-dumping investigation against Chinese EVs.
There have been some suggestions that countries in other parts of Asia could seize the opportunity to boost their manufacturing.
Arsjad Rasjid, chairperson of the Association of Southeast Asian Nations (ASEAN) Business Advisory Council, told Al Jazeera in March that the ASEAN should be “the supply chain of the world”. The Indonesian businessman, who owns the energy company Indika Energy, added that “the new China is ASEAN”.
Ember’s Lolla believes there is more to the story. He tells China Dialogue it is probably not possible for other countries to catch up to China’s manufacturing capabilities for the “new three” sectors. Instead, he sees opportunity in developing domestic, clean-energy manufacturing ecosystems as global demand continues to grow.
“I put it this way: the pie itself is growing, so despite a near-monopoly of China, there is scope for other countries to build manufacturing capacities with a good policy environment and timely interventions,” Lolla says.
Further, new technologies could have the power to change the sectors’ dynamics.
“The idea that the US and Europe could compete [with China] on the existing technology seems almost impossible to imagine,” says Alex Wang. “Where I could imagine the US and Europe could catch up is on the research and … development of new technologies.”
Wang notes that American universities have been very strong on research and development. The problem for US companies and researchers trying to develop these technologies is a lack of money, caused by years of inconsistent policy signals.
“The Americans are very aware of that past dynamic and they are putting a lot of money into research and manufacturing investment,” Wang adds. “So, [in] the next round of technologies you could imagine, if [US companies] develop a completely new battery, chemistry or something like that, that could be a real advantage.”
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