An inconvenient truth is being evaded amid the hoopla and self-congratulation surrounding the U.S. Congress’ new $369 billion commitment to a lower-carbon future: America can’t go green without lots of inputs from China.
The Inflation Reduction Act, the mammoth legislation that includes the would-be green leap forward, allocates $30 billion in tax credits to seed renewable energy components on U.S. soil. That’s too little too late to challenge a Chinese program which goes back two decades.
Chinese firms like
Longi Green Energy Technology
(ticker: 601012.China),
Trina Solar
(688599.China) and
JinkoSolar
(688223. China) produce some 70% of all photovoltaic modules, solar power’s basic building block. The U.S. share: 3%. China accounts for 40% of the world’s finished solar installations, providing a fat domestic market for its powerhouse suppliers.
“The components that go into solar modules are entirely Chinese,” says Mubashira Bukhari Khwaja, an investment director at asset manager abrdn. “Matching that is impossible in the medium term.”
China’s
Contemporary Amperex Technology
,
better known as CATL (300750. China), is the dominant global producer of electric vehicle batteries, with twice the market share of its closest competitor, South Korea’s
LG Energy Solution
(373220. Korea). No U.S. company registers.
So stocks like these must be soaring as Washington and the European Union commit to massive renewable energy acceleration, right? Not exactly. Shares of world module champion Longi are down 13% this year. U.S.-based
First Solar
(FSLR), a relative fledgling trying to end-run the Chinese with “thin-film” solar cells, has climbed by 40%.
“Compared to U.S. stocks, the Chinese names are derating quite aggressively,” says Jonathan Waghorn, portfolio manager of SmartETFs’
Sustainable Energy II
exchange-traded fund (SOLR).
There are reasons for that. The U.S. remains determined, in principle, to build its green future without relying on what the new law calls “foreign entities of concern.”
President Joe Biden’s administration has eased up slightly on the punishing tariffs Donald Trump imposed on Chinese energy equipment. Biden doubled a quota for solar modules that can be imported duty free, and exempted Southeast Asian countries like Vietnam and Malaysia from most solar tariffs for two years. These look like rising offshore platforms for the Chinese companies.
But Biden also complicated Chinese solar imports with a regulation requiring them to have no content from Xinjiang, the Western province where Beijing is accused of running concentration camps for the native Uighur population.
The problem is that Xinjiang, thanks to its cheap electricity, produces about 40% of China’s polysilicon, raw material for all things solar. While Longi and other exporters are trying to diversify, proving clean product to U.S. officials remains a challenge. “Delays at Customs are quite long,” Khwaja notes. “So far we haven’t seen a pick-up in U.S. demand.”
Europe is a different story. Russia’s invasion of Ukraine made easing dependence on Russian natural gas the European Union’s top priority. Worries about human rights and Chinese polysilicon are taking a back seat for now. The REPower blueprint Brussels unveiled in May hikes already ambitious renewable energy targets by half. Chinese suppliers have rushed to oblige.
Longi leaned on Europe for a 44% leap in revenue and 30% jump in profit year-over-year in the first half of 2022, a recent press release boasted: “The company timely shifted the focus of sales to [non-U.S.] markets such as Europe,” it said.
Khwaja of abrdn sees opportunity in this complex outlook for the Chinese solar industry. Aside from Longi, she’s bullish on
Sungrow Power Supply
(300274. China), a leader in solar inverters, which convert the DC current emitted by panels to domestically usable AC, and top specialty glass provider
Xinyi Solar Holdings
(0968.Hong Kong).
Other investors are staying away. “Chinese solar faces too many uncertainties on the regulatory front, between U.S. tariffs and the Xinjiang ESG issues,” says Nuno Fernandes, co-manager of the emerging wealth strategy at GW&K Investment Management. “It’s hard to get excited.”
He is excited about CATL, seeing a clearer division of the giant EV pie ahead. U.S. auto makers may lean on the Koreans:
Honda Motor
(7267.Japan) and LG Energy just announced a $4.4 billion EV battery plant at a to-be-determined U.S. location.
CATL will crush it in its huge home market and at least hold its own elsewhere. It announced Europe’s biggest battery plant to-be, a €7.3 billion ($7.3 billion) facility in Hungary to supply
Mercedes-Benz Group
(MBG. Germany),
Volkswagen
(VOW.Germany), and
Bayerische Motoren Werke
(BMW. Germany).
CATL management met a tough operational challenge this year, Fernandes adds, pushing up prices to match soaring costs for key raw material lithium. That’s driven a bounceback in the shares, which plunged by a third from January to May. “They just had earnings, and the rebound in margins was incredible,” he says.
It’s complicated for investors to navigate these crosscurrents. Much more complicated still for leaders and society to balance two contradictory core commitments: slashing carbon output ASAP, and containing China in future technologies. “This is not a five-year problem,” SmartETFs’ Waghorn says. “It’s a 30- to 40-year problem.”
Ignoring it won’t make it easier, though.
