How United States and China compete to dominate energy transition

In a political twist in the summer of 2022, President Joe Biden secured one of the most important successes of his presidency, a prelude to holding the midterm elections. This is the agreement with the “rebel” Democratic Senator Joe Manchin for the approval of an important law, the Inflation Reduction Act. The reader who does not know the law in detail could guess that it is a provision aimed, precisely, to reduce inflation, but the issue of the law is another: the competition between China and the United States in the sphere of energy transition. To understand its rationale, we must start from its premise, from an inconspicuous but concrete movement in the last twenty years: the Chinese rise in the industrial supply chains that today we identify, in a broad sense, with clean energy.

Also in the summer of 2022, in the report on the global supply chain of the photovoltaic industry, the International Energy Agency describes the situation with an effective synthesis: “The world will almost completely rely on China for the supply of the key elements for the production of panels to 2025. Based on the production capacity under construction, China’s share of global polysilicon, rod and wafer production will soon reach nearly 95%. Today, the Chinese province of Xinjiang accounts for 40% of the world’s polysilicon production.”

This highlights a relevant element of Chinese development: competitiveness on elements that all the other players need to achieve ambitious green plans. The Europeans, for example, literally paid for Chinese industrial development with their subsidies, because their plans for years did not set goals for autonomous technological production. And measures to counter China’s industrial policy, for example through trade disputes, have always lagged behind economic reality. The photovoltaic supply chain, rather than by great technological discontinuities, has been characterized by the reduction in prices, and scale also weighs on Chinese competitiveness. The capability of the People’s Republic has also been repeated, with remarkable results, even in more complex supply chains, such as that of electric mobility.

In this context, on the one hand, the People’s Republic has leveraged its market strength, as in other sectors: its consumers and the growth of the middle class have made it, in this century, an increasingly important automotive market, capable of attracting foreign investors, even in places of special political interest to the Chinese government, including Xinjiang. On the other hand, Beijing has failed in the past to significantly narrow the gap with other automotive powers in terms of traditional systems. This has justified a large and ambitious investment in the electricity supply chain, with a crucial prerequisite: understanding the “material” structure of the transition.

If we consider lithium, cobalt and other raw materials useful for the energy transition, China has therefore acted on several levels. First step: Chinese companies, also through development banks, have secured capacity in the main mining powers, from Australia to South America. Contrary to what is commonly believed, it is not the internal availability of raw materials that generates the Chinese advantage. Second step: the crucial Chinese investment has been on technology and capacity in terms of refining and treatment. This is the step that must take place at home, also to accompany a chemical supply chain in which China has climbed international positions, both for the construction of the “chemical leviathan” Sinochem Holdings and for its presence in numerous niches. Third step: the large-scale industrialization of technologies developed by other Asian players (such as lithium-ion batteries) and the experimentation of some policies, for example relating to the adoption of electric cars, on a local scale, according to a classic mechanism Chinese “market of policies”, in which the various local governments also compete through the incentives for the creation of the best innovative ecosystems.

The success of companies such as BYD (present in both the battery supply chain and in the electric car) and Catl (world leader in batteries that has surpassed the Korean and Japanese masters) testifies to the strength of the Chinese position. China has no intention of stopping. Even in an age of economic slowdown, it will continue to leverage the strength of its market, which involves Tesla itself. In 2022, most of Elon Musk’s company cars were produced in Shanghai. In the near future, China will invest in research and development on new technologies, so as not to be surprised by the change. For example, the former minister of science and technology, Wan Gang, who also due to his technical experience in Germany was fundamental for the construction and implementation of the Chinese strategy, has often stressed the importance of investing in hydrogen.

Now, if the situation is the one photographed by companies such as Benchmark Mineral Intelligence, with Chinese dominance in the production of cathodes, anodes and batteries, what are the prospects? We must not forget that a legacy of the Chinese strategy is also the competitiveness of car companies, which will be able to flood the main markets, starting with Europe, with electric cars at very low prices. Are we therefore facing an endgame, with the inevitable Chinese victory?

The Inflation Reduction Act, from which we started, fits here. It represents an example of the phenomena that I have defined in my books as political capitalism and sanctions, to read the close relationship between the economy, national security and technology that characterizes our era. In order for companies and consumers to receive the generous subsidies from the US government, the law imposes a threshold of “local content”, with a very ambitious effect: the relocation of supply chains, for extraction, treatment and production, on US soil, American or countries with which the United States has a free trade agreement. Objective, clearly inserted in an anti-Chinese perspective but which also has repercussions on Europeans, given that the EU does not have such a treaty, and which has led to protests from the main leaders, starting with Macron. What will be the future of the competition triggered by the Inflation Reduction Act, after the long-term Chinese “spark” that we have described? A global race for subsidies? The creation of structured alliances on production? Different scenarios are possible, but the competition on the energy transition will remain between us. And it will remind us of the centrality of chemistry and the end of the illusions of a costless transition. To exist, one must extract, build, transform.