AMERICA CAN'T GO GREEN WITHOUT CHINA, AND KOREA
Asia dominates production of solar panels and EV batteries
Joe Biden wants to rev up, in a big way, the U.S.’ transition to lower carbon. He also wants to reduce U.S. trade dependence on China and make essential goods at home. Those goals contradict each other.
Biden and his deputies offered many fine words around the president’s new emissions reductions targets last week and follow-up global summit on climate change. Words you didn’t hear were Jinko Solar (ticker: JKS), JA Solar (002459.China), or Trina Solar (688599.China). These are just some of the champions China has nurtured to dominate global production of solar panels, while the U.S. was busy debating whether climate change was real. Seven of the top 10 manufacturers of this essential renewable energy ingredient are Chinese, says Xiaojing Sun, who follows the sector for energy consultant Wood Mackenzie. One, Canadian Solar (CSIQ), produces mostly in China from a headquarters in Guelph, Ontario. The one genuine North American contender is California-based SunPower Corp. (SPWR).
Throw in names like Daqo Solar Energy (DQ), which provides them all with polysilicon, and Xinyi Solar Holdings (968.Hong Kong,) which leads in the specialty glass market, and you have an integrated solar equipment supply chain that all the dollars in the U.S. Treasury (or all the dollars Treasury can borrow) won’t readily duplicate. China’s domestic market continues to drive its solar complex. The country installed more than twice as much new solar capacity as the U.S. in 2019, 30 gigawatts to 13. And that was an off year for China, when it was slashing subsidies.
The landscape in electric vehicle batteries, the other key building block of the green future, is more to Washington’s liking, because Asian allies compete with China. Japan’s Panasonic (6752. Japan) was a pioneer here, and remains a key supplier to Tesla (TSLA). But it’s losing ground to tentacles of three South Korean chaebols: Samsung SDI (006400. Korea), LG Chem (051910. Korea) and SK Innovation (096770.Korea), A patent dispute between the latter two threatened to freeze U.S. EV production at Ford and Volkswagen earlier this year, before it was thankfully settled.
China is not sitting idle in the battery space either. Contemporary Amperex Technology, better known as (CATL 300750. China) battles LG Chem for the top global producer spot, supplying a burgeoning domestic EV industry (including Tesla’s Chinese plant) plus multinational giants from Toyota to BMW. The U.S. is more or less nowhere, unless and until Tesla delivers on promises to make its own batteries.
For emerging markets investors, holding the green high ground adds an exciting dimension to the asset class. It’s a tricky one to profit on, though. The Chinese pure-play solar stocks are volatile to say the least as markets shift views on just how vast their future growth might be. Jinko and JA Solar have both lost half their value this year, but still more than doubled over the past 12 months. The Korean names present an opposite problem: The battery units are trapped in sub-conglomerates with a lot of less-exciting businesses like laptop batteries (Samsung SDI) or natural gas (SK Innovation). LG Chem moved to untie the knot last fall, winning shareholder approval to separate EV batteries from a legacy petrochemicals unit. The IPO of the new battery company will be one to watch, at some point.
On the world stage, the Biden Administration faces a common contradiction between common sense and politics. Common sense means facing that the U.S. can’t catch up to Asia for the current technological generation. Biden could start by axing the various import tariffs Donald Trump slapped on Chinese solar equipment three years ago. These look almost criminally stupid against his successor’s green ambitions, and the objective urgency of the ecological moment. The levies increased the cost of solar installations between 30%-45% by various estimates. That translated to 10.5 lost gigawatts of power between 2018-2020, according to the Solar Energy Industries Association — a big number considering the U.S. has 76 GW of solar overall. Fox News would screech about going soft on China, but Biden should be man enough to take it.
In the best of futures, a common cause against climate change would buffer the U.S.-China superpower rivalry, sort of like the common commitment to nuclear arms control constrained the U.S.-Soviet Cold War. The stakes are not quite as high, certainly less immediate, but the interaction is much more complicated. America was not buying hundreds of billions of dollars worth of stuff from the USSR while simultaneously battling it for global supremacy.
In the best of futures, climate-related trade would be ring-fenced from broader disputes. Go for the jugular on semiconductors and AI, guys. But let the solar panels flow freely for the sake of Mother Earth, and all those U.S. jobs installing them on the other end. Alert investors might make a few bucks too.