China's green tech giants link supply chains to Southeast Asia

04/10/2023 05:17 - 4 Views

Just a stone's throw from a seaside resort popular with tourists, a new industrial complex is expanding on Indonesia's Bintan island, which lies across a narrow strait from Singapore.


First came an alumina refinery complex, run by Bintan Alumina Indonesia and partly owned by China's Shandong Nanshan Aluminium. The next project is an aluminum smelter, scheduled to be launched at the end of the year, and an aluminum factory which by 2028 will reportedly supply the electric vehicle industry with aluminum ingots.


As the complex expands, local residents have expressed mixed feelings. Young people in Bintan can now work in an industry other than tourism and fishing. But there is an environmental price to be paid. Wastewater has begun to seep along the coast and the coal-fired power station fueling the complex spews soot into the air, a problem that will only grow once the smelter is up and running.


"The water is now murky most of the time," said Udin, a local villager in his late 50s, who regularly helps clean a beachfront hotel near the Bintan Alumina complex. He said his family is among hundreds that have relocated over the past several years from the area in which the alumina refinery complex now sits.


"People who have been running a homestay here, or renting snorkeling [equipment] ... are worried," the man, who only provided his nickname, told Nikkei Asia during a visit to the area in July.


The environmental cost of "green tech" metals production is a familiar story to many in Indonesia, which mines bauxite, copper and particularly nickel for ostensibly clean batteries and modules made in China. But being part of China's green tech supply chain is a win for Indonesia's government, which is anxious to attract foreign investment into the processing of metals in an effort to create jobs and become an advanced manufacturing economy.


It is also an opportunity for some Chinese aluminum producers facing stricter emissions regulations, power supply shortages and production capacity caps at home. These hurdles have driven them to seek more relaxed regulations in Indonesia and Malaysia, according to an analysis this year by credit rating agency S&P Global.


The surge of Chinese investment has touched many parts of the country. Just west of Bintan, on Batam island, a riot erupted in September as protesters clashed with police over a similar plan to relocate thousands of villagers from another nearby island, Rempang, as it is preparing to host Chinese top glassmaker Xinyi Glass. The company in July signed an agreement to invest up to $11.5 billion in Indonesia, including for solar panel production.


China's green tech industry sees growing opportunity in Southeast Asia. Xinyi and Shandong Nanshan are just two of a growing number of Chinese companies building capacity there.


From rare-earth mining in Myanmar and battery materials processing in Indonesia, to solar panel production in Malaysia and EV manufacturing in Thailand, Chinese companies are increasingly active in Southeast Asia's emerging low-carbon industries. They include big names such as electric car giant BYD, battery maker Contemporary Amperex Technology (CATL), solar panel producer JinkoSolar and wind turbine manufacturer Goldwind.


The influx of Chinese investment is largely welcomed by countries in the region, which are facing intensifying Western-led pressure to decarbonize their economies but lack funding from other sources. Some Southeast Asian countries' attempts to attract Western capital in the same sectors, meanwhile, have yielded comparatively little.


China's investments also give the countries of Southeast Asia a foothold in one of the world's most exciting emerging industries, and a chance to develop their own value chains in "clean" technology.


Chinese companies, for their part, see the region as a politically friendly place to locate production facilities abroad, particularly for environmental reasons, such as Bintan's alumina refinery. Bintan Alumina did not respond to Nikkei Asia’s requests for comment. Some Chinese-invested companies in Southeast Asia have also been able to take advantage more favorable trade relations with the West that are unavailable to companies in China due to political tensions.


However, mirroring the situation on Indonesia's Bintan and Rempang islands, these investments could be a mixed blessing for Southeast Asia, deepening the region's economic dependence on China as it grapples with Beijing's expanding political influence and aggressive territorial claims in the South China Sea.


Geopolitics is increasingly important as the U.S. tries to distance its high tech sector from China, creating its own supply chains for green technology that circumvent China's sphere of influence. This has trapped Southeast Asia in the middle of an intensifying superpower battle for technological supremacy, sometimes forcing countries to choose between Washington and Beijing. Many governments in the region, however, are attempting to woo investments from both sides.


Many Southeast Asian countries have their own disputes with China, particularly the latter's maritime claims in the South China Sea. Countries such as Brunei, Indonesia, Malaysia, the Philippines and Vietnam have overlapping claims with Beijing, which threw fuel on the fire recently by unveiling a new map that includes the controversial "nine-dash line," claiming almost the entire sea as Chinese.


In late September, fresh tensions arose between Beijing and Manila after the Philippine Coast Guard cut a floating barrier put in place by China to restrict fishing in the disputed Scarborough Shoal.


Emil Radhiansyah, international relations lecturer at Indonesia’s Paramadina University, thinks the rising economic dependence on China could also become a source of tension within the Association of Southeast Asia Nations, amidst the bloc’s already growing rift over the political crisis in Myanmar.


Radhiansyah cited the examples of Cambodia and Indonesia, which have largely refrained from directly criticizing China’s behavior in the South China Sea, as opposed to the Philippines’ strong reactions. “Several ASEAN countries have more intensive economic relations with China than others,” he told Nikkei. Green tech partnerships “could potentially be a new [source of] conflicting views among ASEAN countries.”


China's green tech supremacy and Western backlash


China's green tech supply chains face little competition. The country accounts for at least 60% of the world's manufacturing capacity for most mass-manufactured low-carbon technologies such as solar photovoltaics, wind power systems and EV batteries.


"China's massive domestic market scale and supply chain are in a league of their own and appear to be on a sustainable growth trajectory, making [the country] hard for other global players to displace," said Alex Whitworth, research director at energy consultancy Wood Mackenzie. "The race to dominate global solar markets this century is not over, but Chinese companies have a strong lead and are not slowing down."


In lithium-ion batteries, China is also "currently the most dominant actor across the entire [value chain]," Ahmed Mehdi and Tom Moerenhout, researchers at Columbia University's Center on Global Energy Policy, wrote in June.


The International Energy Agency (IEA) said in a January report that China also accounts for most of the announced manufacturing capacity expansion plans globally through 2030 for a number of green tech products -- including around 85% each for solar modules and wind turbine blades, and over 90% for anode and cathode materials in batteries.


If all the announced projects materialize, China alone will be able to supply the entire global market's solar modules in 2030 and 90% of the world's batteries, the agency said.


The IEA added that China's investment in the clean energy supply chain "has been instrumental in bringing down costs worldwide for key technologies, with multiple benefits for clean energy transitions." Chinese solar modules, for example, are up to 57% cheaper than those produced in the U.S. and the European Union, according to a May report by Wood Mackenzie.


This risk of dependence on China, however, was highlighted obliquely by energy and environment ministers from the G7, who earlier this year emphasized "the need to prevent economic and security risks caused by vulnerable supply chains, monopolization [and] lack of diversification of existing suppliers of critical minerals."


There are moves afoot to counter China's dominance, such as the Inflation Reduction Act (IRA) passed by U.S. Congress in August last year, which offers generous tax incentives to clean energy industries building their facilities in the U.S. -- but notably excludes China. The act added to the U.S. anti-dumping trade policy against solar products from China that has been in place for several years.


The EU, meanwhile, recently launched an investigation into whether to impose punitive tariffs to protect its electric vehicle manufacturers against Chinese EVs.


"Global markets are now flooded with cheaper electric cars," European Commission President Ursula von der Leyen said in her annual address to the bloc's parliament in September, according to Reuters. "And their price is kept artificially low by huge state subsidies."


Southeast Asia pivot


Against the backdrop of increased barriers to their products in Western markets, Chinese green tech companies are finding Southeast Asia a convenient hedge. Chris Qihan Zou, a U.S.-based China climate and energy researcher, sees at least three "driving forces" behind China's green tech pivot to Southeast Asia.


"[The] first one is, obviously, driven by natural resources needs of Chinese companies -- they want to dominate the upstream supply chain of many climate techs. So it's more of a bottom-up, not a top-down [approach]," Zou told Nikkei.


"The second one is that a lot of these companies ... have this desire to enter Southeast Asian EV markets," he said. "They're using Southeast Asia, which is a fast growing economy with very healthy population structure compared to China, as sort of a main market for Chinese climate-tech-related products, given that China-U.S. and China-Europe relations are going south right now."


Lastly, Zou sees China's growing "climate diplomacy" in Southeast Asia as also intended to avoid tariffs. He cited the U.S.' anti-dumping probe into Chinese solar panels and now the IRA that excludes "foreign entities of concern" from incentives.


"The exact definition of these 'foreign entities of concern' is still not yet finalized. It's still up in the air," he said. "So a lot of the [Chinese] companies [are] using Southeast Asia as an intermediary point ... to do the final processing of a lot of these products. So that when they're shipped to the U.S. they will be branded as Southeast Asian imports, not Chinese imports."


An executive at an Indonesian mining company seeking to partner with China in the EV-related supply chain said Chinese companies, which are required to form joint ventures with a local company if they want to invest in Indonesia, should let the local companies become the majority owner of such ventures. "Therefore, the joint venture can pass as an Indonesian company, not a Chinese company," the executive told Nikkei.


Ngeow Chow Bing, director of the Institute of China Studies at the University of Malaya, said Beijing is "very, very concerned" about the West's moves to "de-risk and decouple" their supply chain resilience from China. Thus, it is banking on developing green tech supply chains in its backyard.


"If these kinds of developments develop to the fullest extent ... China will feel very much isolated from the world economy," Ngeow told Nikkei. "China's only strength in the current rivalry with the U.S. is its economic linkages. It cannot afford to be isolated -- it must stay well connected, well linked in supply chains."


Chinese electric car makers, in particular, have moved aggressively into the region over the past couple of years. BYD, which is based in Shenzhen and has overtaken Tesla to become the world's top EV maker by sales, has investments throughout Southeast Asia, as do many Chinese carmakers. Solar panels and battery makers also have surged into the new market. Click here for more details on China's recent green tech projects in Southeast Asia. 


Caught in the middle


Like other parts of the world, emerging economies in Southeast Asia face increasing pressure to decarbonize, but most lack funding options, which is why China has quickly stepped into the vacuum.


The West, meanwhile, has been slow to enter the sector. Developed nations, led by the U.S. and the EU, last year announced separate pledges worth a combined $35.5 billion to help Indonesia and Vietnam phase out coal and accelerate its adoption of renewable energy. However, to date, no money has been disbursed under the so-called Just Energy Transition Partnerships.


This contrasts with the billions of dollars China has poured into green tech-related investments in Southeast Asian countries. "China's approach to climate diplomacy focuses more on the commercial aspect," Zou noted, unlike Western countries' approach of distributing grants, typically for small-scale projects.


The U.S. commitment to the region was called into question again recently, after President Joe Biden skipped the ASEAN summits in Jakarta in September. Meanwhile, Chinese Premier Li Qiang not only participated in the summit but forged stronger economic ties with bloc leaders with the signing of documents to upgrade the ASEAN-China free trade agreement, adding green economy and supply chain provisions in the pact.


The U.S. and the EU moves to protect their own green tech industries also risk alienating some Southeast Asian countries.


A case in point is Indonesia, the largest economy in the region. Indonesia's battery and EV ambitions have been placed in jeopardy by the IRA both because it lacks a free trade agreement with the U.S. and because most of its battery-related projects are backed by Chinese investment. Negotiations for a limited FTA with Washington have dragged on for months, with no clear end in sight.


"Actually both [the U.S. and Indonesian] governments understand that Indonesia is very critical for their EV ambition because we can supply their nickel, we can supply the cobalt," Septian Hario Seto, Indonesian deputy coordinating minister for maritime affairs and investment, told a conference in Jakarta in July.


"But ... apparently U.S. bureaucracy is far more complicated than [ours]. [And] to be honest, in my personal opinion, because the U.S. is going to have an election, I don't think they will put this as a priority."


Other Southeast Asian countries hosting Chinese solar companies are also feeling the pinch. The U.S. Department of Commerce in August said it will impose hefty tariffs on some solar products from Cambodia, Malaysia, Thailand and Vietnam after finding that they are essentially made by certain Chinese companies "shipping their solar products through" those countries "for minor processing in an attempt to avoid paying anti-dumping and countervailing duties."


The case highlights the precarious position of Southeast Asian countries seeking to be the hub for supply chains disrupted by U.S.-China tensions.


Cui Tiankai, a retired Chinese diplomat and the longest serving former Chinese ambassador to Washington, criticized the IRA during a recent visit to Jakarta: "Now they have a new term: 'de-risk.' But what is de-risk? I think the real risk is [U.S.] policy, it's not China."


"[The U.S. government] try to alter or even cut off the supply chain. This is very much against the logic of the economy, the logic of the market," Cui added. "It will hurt our joint efforts for new sources of energy to save the environment, to respond to climate change."

Source: Nikkei Asia

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