China's Clean Technologies | Opportunities

The surge in clean technology manufacturing (e.g. renewables, low-carbon transport, and energy storage) from China is good for the world’s climate problems. How, though, does it affect global supply and demand?

An overcapacity of clean technology businesses and supply chains is creating difficulties around the world. But what sectors are being affected by the surge? And what are the opportunities for companies focused on these new technologies?

What is the issue?

China dominates the clean technology manufacturing industry, producing 60-95% of most solar, wind and battery components. It’s critical to the world’s sustainable energy transition. China's renewable energy and electric vehicle (EV) roll-out has been massive. The increase in manufacturing capabilities has been even more impressive, resulting in a global oversupply for some clean technologies.

The Chinese government views clean technology manufacturing as a new growth engine, with the potential to offset the property sector slowdown. This is supported by high-level targets to reduce emissions and generous local government subsidies to attract investments. But demand isn't keeping pace with supply and the mismatch globally is expected to widen. For example, planned solar manufacturing capacity is already above what would be required to meet global demand in the net-zero scenario by 2030 (see Chart 1). If all battery plants are built in 2024, CRU Group forecasts that battery capacity will be double the demand from China this year.

Chart 1: Widening gap between solar supply and demand

Source: IEA, 2023

Western countries have struggled to compete with cost-competitive products from China and this has led to government intervention from the US, Europe, India and the UK to protect national companies. The US increased its tariff rate on lithium-ion batteries from 7.5% to 25% and for EVs from 25% to 100% in May this year. The EU also announced in June that its tariffs are increasing by 17% to 38% for EVs coming from China.

What does this mean for the key clean technology companies?

Alongside inflation, higher interest rates and supply chain bottlenecks, overcapacity has brought down prices and hurt profitability. This contributed to the drop in the S&P Global Clean Energy Index in 2023 (Chart 2).

Chart 2: Macroeconomic factors and overcapacity have affected clean energy companies

Source: S&P, May 2024

Oversupply is affecting companies in China and in Western economies. Earlier this year, for example, the US solar manufacturer CubicPV cancelled its plan to develop a 10 gigawatt silicon wafer factory.

But oversupply is just one risk factor for clean energy companies in 2024 and 2025. Other risks are listed below.

Solar

Solar is most affected by oversupply, mainly because of the scale of the roll-out in China.
Chinese solar cell and module exports have surged but their total value has declined. This is a result of competition driving down the revenue per cell, which encourages selling at a lower margin.
Some companies are cutting jobs and/or cancelling plans for new factories, such as Longi and Lingda.

EVs and batteries

Chinese companies tend to control more of the end-to-end production supply chain than their Western peers. This puts them in a better position to absorb the oversupply shock.
EVs and batteries are easier to export, thanks to low logistic constraints.
Western governments are keeping a close eye on the demand for Chinese EVs, given fears that it may affect Western suppliers and hurt the labour market.
The slowdown in EV purchases is adding short-term pressure to the EV and battery market.

Wind

Wind manufacturers and developers have been more affected by macro-economic factors. Western businesses have been more affected than Chinese companies.
Competition between Chinese and Western companies is limited for now because of project development barriers, including high transport costs. This, though, could intensify as both compete for growth in other emerging markets.
Cheap solar could make the wind industry less competitive.

What about the opportunities?

Oversupply has led to price reductions. This is speeding up various phases of the energy transition in different geographies.

Phase 1 – Move to cleaner electricity generation
ReNew (one of the largest wind and solar producers in India) has won multiple auctions in 2023 and 2024. It could take advantage of low-input products – such as modules, cells, and wafers – to build cheaper solar panels and generate power at a lower price.
Phase 2 – Electrification of new sectors like transportation and heat
Most EVs in China are already cheaper than their average combustion engine equivalent, which is bolstering adoption rates for EVs. A similar trajectory is anticipated across other markets in the future.
Phase 3 – Infrastructure to support the transition, increased energy efficiency and optimisation
Companies like Nari Technology, a technology leader in grid secondary equipment and software, will benefit from the need to upgrade and expand the grid system to cope with the surge in electricity supply. Similarly, developing the EV charging infrastructure is essential for facilitating the transition to EVs. Businesses producing clean technology components, such as the semiconductor industry, are also set to benefit from this shift.

Final thoughts…

The clean technology market has had a turbulent few years. The oversupply from Chinese manufacturing has had a part to play, especially for the more affected sectors in Western economies. This oversupply is expected to continue over the medium term and should be carefully considered by investors. There is a risk of worsening profitability for Chinese clean technology manufacturers, and for Western companies, if governments don’t take enough action to address the oversupply.

But oversupply can also bring sizeable opportunities. Clean technologies have never been as competitive, which could significantly accelerate the pace of decarbonisation. This could provide an upside for multiple businesses including power producers, electrification technologies, and the infrastructure that supports decarbonisation.

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.