Global clean tech at a crossroads: China’s overcapacity challenges western onshoring ambitions

By Ali Imran Naqvi
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The GCL SI Hefei gigafactory in China.
China’s overcapacity threatens to flood the market over the next three years. Image: GCL SI

The march towards sustainable energy has hit a fork in the road. On one path lies China’s towering presence in clean technology—a testament to strategic vision and industrious pace, marked by record-setting factory investments and an unyielding grasp on the lion’s share of clean tech markets. On the other, there’s a burgeoning will within the West and beyond to repatriate production, driven by the dual engines of geopolitical anxiety and economic aspiration.

Yet, the stark numbers emerging from the latest reports cast a long shadow on these onshoring ambitions. With China’s annual manufacturing capacity for solar modules and battery cells poised to far exceed global demands, we stand before an edifice of overcapacity. China’s overwhelming surge is not just a ripple but a tidal wave, with over US$450 billion in surplus factory investment threatening to flood the market over the next three years, according to Bloomberg.

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This surplus, deemed overcapacity, could be viewed through a bifocal lens: a bane of diversification efforts, yet a boon to the energy transition, making clean-tech solutions more affordable. But this silver lining is streaked with complexity—cheap prices may fuel global demand, but they also compress margins, challenging manufacturers worldwide, including those in China.

For Western economies, this spells a tactical dilemma. The European Union and the US, despite their legislative endeavours like the EU’s Net-Zero Industry Act (NZIA) and the US Inflation Reduction Act (IRA), find themselves wrestling with the conundrum of cost versus autonomy. While localisation promises resilience and job creation, it comes at a premium in a world already saturated with Chinese exports priced at basement levels. It forces a strategic question: How can these regions foster clean tech growth without succumbing to the gravitational pull of Chinese pricing?

India, too, is charting its course through these tumultuous waters. The subcontinent’s solar ambitions are both bolstered and buffeted by the currents of international trade, particularly with its neighbour to the northeast.

India’s Approved List of Models and Manufacturers (ALMM) policy stands as a testament to its intent to support domestic solar manufacturers and insulate them from the flood of cheap Chinese imports. Yet, this policy also presents a speed bump, moderating the nation’s advance toward aggressive solar capacity expansion. The conundrum here is stark: The ALMM, while a shield for local industry, also adds friction to the glide path of India’s solar infrastructure rollout, potentially making projects more expensive and time consuming.

In an intricate dance of policy and pragmatism, India paused the ALMM requirement in March 2023, acknowledging the acute shortage of domestically produced solar modules. This pause was meant to keep the momentum of solar deployment, allowing projects to proceed with cheaper imported modules until a looming April 2024 deadline. Yet, this relief was transient, with imports spiking in anticipation of future scarcity, setting the stage for a market fluctuation that could oscillate between abundance and drought, influenced heavily by policy shifts.

Solar’s role in India’s climate pledges cannot be overstated, with the nation’s installed generation capacity required to grow nearly fourfold in just six years. The balancing act between fostering a self-sufficient solar sector and meeting aggressive climate goals reflects the broader global challenge of clean tech industrial policy. The nation’s experience with ALMM serves as a microcosm of the global dynamic, illustrating the complexities of navigating growth, sustainability, and industrial policy amidst a rapidly evolving clean-tech ecosystem.

Localisation is not just about economics; it’s a nod to the intrinsic value of self-sufficiency and the long-term benefits of diversified supply chains. The West’s pursuit of onshoring is underpinned by a desire to reinstate control over essential sectors, ensuring that the green energy transition does not exchange one form of dependency for another. But can policymakers navigate the economic tightrope without tripping over their own ambitions?

The figures are telling: with an eightfold increase in planned clean tech factory investment outside China by 2025, the commitment is clear. But so is the warning—overcapacity looms large, potentially dampening the viability of these ambitious projects.

China’s bet on clean tech for export-led growth also signals a shift in global economic winds. As the country emerges as the leading exporter of solar, batteries, and electric vehicles (EVs)—dubbed the “new three” of economic pillars—it positions itself not only as a manufacturing powerhouse but also as an indispensable node in the global clean energy supply chain.

In this new era of energy politics, overcapacity is a double-edged sword. It drives prices down, democratising access to clean tech, but it also intensifies competition to a level that could see a winnowing of players. For Chinese manufacturers, the squeeze on prices and a domestic market that’s not keeping pace with production capabilities mean challenging times ahead. Yet, their predicament also highlights the volatility and vulnerability intrinsic to industries riding the crest of innovation waves.

Ultimately, the Western narrative of onshoring clean tech production grapples with the economic calculus of competing against a titan that has already set the market’s pace. It’s an uphill battle—one that requires not just investment but also strategic cunning and perhaps a redefinition of success in a sector where the rules are being written by the sheer scale of China’s ambition.

Thus, as we delve deeper into the green revolution, the question becomes not just one of how we produce sustainable energy solutions, but also of how we sustain the industries that produce them. In a world where the winds of trade blow with increasing unpredictability, resilience may well be the most valuable currency. The gamble is green, the stakes are high, and the wheel turns in the shadow of a clean tech leviathan.

Ali Imran Naqvi is CEO of Gensol Engineering, a solar engineering, procurement and construction (EPC) company based in India.

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