Planet New Economy

Industrial

Long known as the world’s factory, China is looking to upgrade its production capabilities to better serve New Economy needs. Local businesses are aiming to add more manufacturing automation and, with the support of the government, are trying to leapfrog up the semiconductor chip value chain. Meanwhile, the country’s electric vehicle production could also become world-beating, courtesy of strong competition and supply chains. As it does all of that, the country will need to greenify its energy production, which promises to have large ramifications over the longer term. 


Greener vehicles

China accounts for about 50% of global electronic vehicle production, and over 80% of locally-sold EVs are produced by a host of local companies (whereas Tesla accounts for about 80% of US sales). Plus, China produces 60% of the world’s lithium batteries. The country is not a major EV exporter today, but the combination of a strong supply chain, robust innovation, diverse participants, a huge home market and assertive regulation gives it the chance to lead the global EV industry. However, Chinese EV companies that want to grow internationally may need to overcome some western customers’ brand perception concerns, and navigate differing attitudes between China and the West about vehicle intelligence and related data privacy issues

Battery changes

China is the world’s biggest processer of the lithium, nickel, magnesium and cobalt needed for EV batteries. The process is very energy intensive, and largely powered by dirty coal-fired electricity. However, battery manufacturers in Asia, Europe and the US are shifting supply chains for the metals away from China, which could cut demand, along with dirty energy usage. Meanwhile, China will likely begin to recycle lithium batteries as they reach the end of their 7-10 year lifespans. This could constitute 10%-20% of new battery creation by 2030

Ramping up rail

The Chinese central government wants to encourage more rail transportation, which uses 75% less greenhouse gas emissions than equivalent road usage, on average. Just 13% of freight was transported by rail in China in 2020, whereas 75% was moved via trucks. Beijing is keen to raise the former and reduce the latter, which should mean more investment into public transportation such as urban rail transit and intercity high-speed rail over the next decade

Rise of the robots

China’s declining working population (which has fallen by almost 45 million since its 2011 peak) has led to rising demand for manufacturing automation. This accelerated further as social distancing measures were introduced during the Covid-19 pandemic. Yet China still had less than 200 robots per 10,000 people in September 2020, versus close to 400 in Japan and over 800 in South Korea (according to the International Federation of Robotics and UBS CIO research). There is room to grow further. Increased automation will likely cost jobs over the shorter term, but could help to cut carbon emissions through energy efficiency

Hungry for chips

China will also continue to pour resources into semiconductor technology and capacity. The country is the world’s largest semiconductor consumer and has made significant progress over the past 15 years chip design, manufacture, assembly and testing. However, it still trails rivals the US, Taiwan and South Korea in several areas, including trailing edge foundry (or the manufacture of legacy microprocessors), memory, semiconductor manufacturing equipment and core intellectual property. The US’s export restrictions and the recent chip shortage have outlined how strategic semis are to China. As a result, Beijing appears intent on narrowing the gap, and local chip designers and makers are pushing to raise more funds; 32 chip companies went public on China’s A-share market in 2020, versus 18 in 2019, according to Wind. Expect to see far more private and public capital investment into chip design and manufacturing in the coming years

Energy shift

China’s energy production is notoriously dirty; approximately 85% of the country’s primary energy consumption was from fossil fuels in 2020. To hit its goal of carbon emission peaking in 2030 and neutrality by 2060, China must increase renewables and non-fossil from the primary energy mix from 15% today to 85% by 2060. This could imply annual investment of over Rmb2 trillion (USD313.4 billion) from 2020-2060 into hydropower, natural gas, solar, wind, nuclear, tide and biofuels. Plus, hydrogen will increasingly enter the mix. The cost of producing green hydrogen (which uses renewable sources to meet its considerable energy needs) could reduce by 75% by 2030, and transportation costs for compressed hydrogen may fall by 25%-30% over the same period. Expanding green hydrogen would also support solar and wind electricity

Fossil fuel shortfall

The very long-term prospects for oil and gas companies are challenging, but they may enjoy a period of relative strength over the coming decade, courtesy of the potential for global under-investment into new production and China upscaling natural gas usage instead of the more pollutive coal. Both factors could drive oil and gas prices up and improve profitability to the benefit of many oil and gas companies, including Chinese majors such as CNOOC and PetroChina