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Is there overcapacity or insufficient supply in China’s new energy?

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Yang Shuiqing

Robots weld bodyshells of cars at a workshop of Chinese electric vehicle (EV) maker Li Auto Inc. in Changzhou, east China's Jiangsu Province, January 10, 2024. /XinhuaRobots weld bodyshells of cars at a workshop of Chinese electric vehicle (EV) maker Li Auto Inc. in Changzhou, east China’s Jiangsu Province, January 10, 2024. /Xinhua

Editor’s note: Recently, some Westerners have been making noises about China’s “overcapacity,” accusing the country of “flooding” the global market with cheap products and “distorting” the market rules. Is there overcapacity in China? Is the export of Chinese products an attempt to digest obsolete capacity or to revive the global economy? Will anti-China policies protect or harm Western industries? CGTN has introduced a six-part series “Debunk China’s overcapacity fallacy” to analyze these matters. The first essay focuses on China’s productive capacity in new energy. Yang Shuiqing, a special commentator for CGTN, is a research fellow at the Institute of American Studies, Chinese Academy of Social Sciences. The article reflects the author’s opinions and not necessarily those of CGTN.

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As a developing country deeply intertwined in the global industrial chains, China has been providing the world with cost-efficient and high-quality products. But interestingly, the U.S.-led West has been enthusiastically hyping China’s so-called “overcapacity” in new energy vehicles (NEVs), lithium-ion batteries and photovoltaic products.

Is China’s productive capacity excessive as some Westerners hype or insufficient to meet global demands?

In economics, only when a productive capacity exceeds global market demands can it be called overcapacity. Take NEVs as an example. Despite “overcapacity” allegations, China’s supply capacity in NEVs still cannot meet global demands. Data speaks. According to the research firm EVTank, the global sales of NEVs reached 14.65 million units in 2023, a year-on-year increase of 35.4 percent. In the same year, China produced 9.587 million NEVs and sold 9.495 million units, up 35.8 percent and 37.9 percent respectively.

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Among the 9.495 million units sold, approximately 8.292 million NEVs were consumed in China – a 33.5 percent growth from 2022, and around 1.2 million units were exported overseas – up 77.2 percent year-on-year. This clearly demonstrates the balance between the production and sales in NEVs. In addition, most China-produced NEVs were consumed domestically, contradicting the Western allegation that Chinese cheap cars are “flooding” and “distorting” the global market.

According to Global Electric Vehicle Outlook 2023 released by the International Energy Agency (IEA), total EV sales are estimated to reach over 40 million units under the Stated Policies Scenario (STEPS), and over 45 million units under the Announced Pledged Scenario (APS). In this context, China’s productive capacity still lags far behind the world’s future demands. Even if China maintains an annual growth rate of 20 percent in production, it could only produce around 34 million NEVs by 2030, which is still below the global demand.

A NEV production line at the NIO Second Advanced Manufacturing Base in Hefei, east China's Anhui Province. /Xinhua

A NEV production line at the NIO Second Advanced Manufacturing Base in Hefei, east China’s Anhui Province. /Xinhua

Moreover, whether China can maintain an annual growth rate of 20 percent in NEV production is, to a large degree, dependent on its lithium-ion battery manufacturing. According to the Ministry of Industry and Information Technology, the total output of China’s lithium-ion batteries rose 25 percent year-on-year to over 940 gigawatt-hours (GWh) last year, accounting for approximately 70 percent of the global capacity.

But in the meantime, the IEA estimates that battery demand is set to “increase significantly” by 2030, reaching over 3 terawatt-hours (TWh) in the STEPS and about 3.5 TWh in the APS. To meet that demand, over 50 new gigafactories would be needed by 2030 in the STEPS, and close to 65 gigafactories in the APS.

It is also worth noting that key minerals are vital in lithium-ion battery manufacturing. An astounding 60 percent of lithium, 30 percent of cobalt, and 10 percent of nickel demands were directed to EV batteries in 2022, marking a substantial shift from five years earlier when these shares were 15 percent, 10 percent and 2 percent respectively. In this context, a shortage of high-quality supply is more likely to be a reality than overcapacity in the future.

The West also accuses China of “unfair” NEV subsidies. Admittedly, the Chinese government has offered some tax incentives to support start-up companies in the early days of NEV development. However, with the growth of China’s NEV firms, the government has gradually pulled back on these subsidies.

It is also worth noting that the Chinese government has been offering subsidies to foreign NEV companies as well. For instance, American firm Tesla received Chinese state subsidies for more than 100,000 vehicles sold in the country in 2020 for a combined amount of 2.123 billion yuan ($329 million).

NEV subsidies are not China-unique. For the goal of “carbon neutrality” and “carbon peak,” a number of countries have launched subsidy schemes for EVs and plug-in hybrids. Since 2016, Germany has been offering a purchase grant to new vehicles – 4000 euros ($4261) for non-hybrid electric cars and 3000 euros ($3196) for plug-in hybrids. The French government has offered buyers a cash incentive of between 5,000 euros ($5327) and 7,000 euros ($7457) to get more EVs on the road. Under the Inflation Reduction Act, the U.S. offers a tax credit worth up to $7,500 to those who buy NEVs, and $4,000 for used EVs.

In this context, China’s industrial policies have nothing to be hyped about. The Chinese government is committed to attracting foreign enterprises to build factories in China, enhancing the resilience of domestic industrial chains, boosting employment, and achieving the “dual carbon” target at an earlier date.

Western hype of China’s overcapacity is a pure lie. The rapid development of China’s NEV industry is a result of the country’s cost advantages and its effective integration of industrial chains. Instead of containing China, the U.S.-led Western countries should conform to economic laws and market rules. Cooperation with China is the best solution to sustained growth.

(If you want to contribute and have specific expertise, please contact us at [email protected]. Follow @thouse_opinions on Twitter to discover the latest commentaries in the CGTN Opinion Section.)

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