GLOBALIZATION
NEEDS REINVIGORATION
PART 9
2022 JULY ISSUE
By : Andrew Sia
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From the Desk of the Publisher
In this article our key read is related to the production of the car battery. We pointed out the minerals and their refining after being unearthed, and the final assembling which along the supply chain would need the technique and the expertise. Although the raw materials are spread in the four corners of the world, they are tightly gripped in the hand of China.
The U.S. came to know about the extremely uneasy situation and the Biden administration issued the Infrastructure Act, the CHIPS Act and the Inflation Reduction Act in the trillions of dollars to be invested over the next ten years.
The Europeans felt that they are being confronted by the competition from China and on the other hand the massive subsidy race from the main ally, the United States.
Somehow, I feel the world will need to come together and bury their hatchet. It is important to come into terms for collaboration and put our world back in order especially after the calamity of the century pandemic where a lot of lives have lost and we are now in deep inflation.
The question is if the world will listen.
Globalization Needs Reinvigoration a/k/a Reglobalization
It took four decades to come to where we are today and the supply chain is like the blood veins that go through the body system. In the last five years, we have seen the Trump administration began to apply import tariffs for Chinese goods. With the Biden administration came into the office, it expanded into export controls of advanced U.S. technology, and in between the period, pandemic started in 2020 and caused severe disruption throughout the supply chains and the lockdowns where goods were blocked in one part of the world and couldn’t reach to the market. It also caused lockdown in countries where productions were grounded and shortage was created. The war in Ukraine caused by Russia’s invasion caused trade sanctions and they further blocked the shipments and sealed off the war zone.
Once the globalization was meant for developing business, it resulted in the conflict of geopolitical situation nowadays. We have seen very quickly it took the effect on world trade for its overall economic activities and from the peak of 61% in 2008 receded to 57% when the U.S. started a global recession. But this was still greater that the 1970s when the world trade was at 31%, and it grew into 36% in 1980s followed by 40% in 1990s.
In these days, multinational companies have invested heavily in global supply chains and any major shifting would disrupt costs, create inflation, lost productivity and all these would lead to the loss of profits. In recent years where technology and artificial intelligence have been applied and it would be suicidal to see all these have been taken away and put in place with something with many unknowns and uncertainties.
China has the lion’s share of the U.S. import market and dropped from its 22% in 2017 to less than 17% in 2022. Those lost shares are now with the other Asian economies—most notably Vietnam, whose exports rose from less than $10 billion in 2007 to $120 billion in 2022. The Philippines, Taiwan, Thailand, India and Malaysia have also enjoyed the rapid export growth to the U.S.
Mexico’s annual exports to the U.S. have roughly doubled since 2008 to more than $400 billion.
On the other hand, China has increased both its imports and exports to the Southeast Asian countries, as well as with Russia where all the European countries have shifted away.
The U.S. foreign direct investments in China and Hong Kong accounted for 24% of all the U.S. foreign direct investment in 2008. At that time Singapore was only 21%. By 2021, Singapore has also become a hub for investment in places like Vietnam, Thailand and Malaysia, accounted for 38%, while China and Hong Kong only accounted for 26%.
To boost manufacturing in advanced economies, some people tended to call in reshoring. It is actually not workable as many of these economies have evolved into a service-oriented mode and to reverse it would mean more costly and also a stressful exercise for the labor force.
Take the example of Vietnam, with its 100 million population, young, eager to learn and ready to be trained, is benefiting from taking part of those manufacturing business from China. Its government is ready to negotiating with human-right groups and give freedom to speech, religion and unionizing. Although it is a socialist country, Its government wants to be neutral in global politics. And instead of tapping into natural-gas reserves along their long coastline in the South China Sea where China has claimed its right in the territory, they have chosen to import liquid natural gas from the U.S.
Vietnam as a Sourcing Hub
In recent years, we have seen the developed market, especially the U.S. has turned to Vietnam for manufacturing as an effort to move away from their dependence on China. It has been the hottest country for their outsourcing in the Far East.
Vietnam has a large and relatively young population and it is contributing a sizable labor force. Over the years Vietnam has been significantly progressed into a more industrial and service-based economy. And because of this, the country has attracted a lot of foreign investment, especially in manufacturing and has been a favorite country for outsourcing. Its lower labor cost and ample of labors than the neighboring countries has attracted the foreign investment.
The government has also taken steps to improve the quality of education and skill training to meet the labor market. Vocational training programs have developed a skilled workforce to meet the demands from the various sectors.
However, attentions should be taken as the labor may dry up because of the demand. It is advisable to go to the more rural areas to set up manufacturing there to bring the employment to the people can always be beneficial to both parties.
We made a comparison with countries from the ASEAN, and we focused to those who have the potential of running manufacturing. When choosing the countries for manufacturing or for outsourcing, it is also important to observe the political stability.
China and the Global Economy for the Rest of 2023
The weak figure of Chinese exports have damper the global trade which is going to soften this year’s figures. Central banks in the U.S. and Europe have raised interest rates to tame inflation and more consumers switch only to basic necessity spending even we are now coming out from the pandemic-induced restrictions.
For China the overseas shipments in May were down 7.5% from a year before, although in April it was up for 8.5%. It is the first contraction in three months.
Its import for May was down 4.5% from a year earlier, but it was an improvement from a drop of 7.9% in April year-on-year.
Overall, China’s trade surplus narrowed to $65.8 billion for the month of May.
It is so different when China was under the zero COVID era when the orders from the Western countries filled up the factories for electronics, furniture and other goods. At that time the Chinese officials made great efforts to ensure that the factories were open, although they kept the residents confined to their homes.
In May, China was not the only country who have slowdown, in fact other Asian countries also reported their export figures had dropped. For example, exports from South Korea fell 15.2% in May compared with a year earlier. Exports from Vietnam were down by 6% on the year and this demonstrated a soft market for semiconductors, computers and other electronic products.
This softening in global trade followed by a robust period in 2021 and 2022. Governments have tightening government fiscal support and a shift towards services spending have soften the demand for the goods.
The Organization for the Economic Cooperation and Development (OECD) mentioned that it has expected global trade flow to rise 1.6% this year, from the 5% expansion last year. This Paris based organization expects further the global economy to grow by 2.7% compared with 3.3% in 2022.
The World Bank also said that they have to cut their growth forecast to 2.4% for 2024 than their earlier estimation of 2.7%.
Slowing of the export is adding downward pressure on China’s growth rate this year, although it sets its growth target for 5% for the year. Obviously its abandon of its zero COVID didn’t boost its consumers as the domestic spending has remained weak. The investments are holding back when the export demand isn’t there. This has affected on its retail sales, industrial production and property activities.
Economists are expecting for more supportive measures from the meeting of the Politburo, the Communist Party’s top decision-making to take place at the end of July. Still, several international investment banks, Nomura and Barclays, have their full-year growth for China at 5.3% from an estimate of 5.5% earlier on.
Looking back at the world market, It has already been mentioned that the shipping season can be very volatile. The merchants remain very cautious with issuing new orders as they are looking at how to clear out the excess inventory. The freight carriers are waiting for orders to ship and it doesn’t look optimistic.
Geopolitical Tension in the Arctic Region
Both China and Russia have increased their influence over the region and its abundant natural resources.
The seven western members of the Arctic Council—Canada, Denmark, Finland, Iceland, Norway, Russia Sweden and the United States—was established on September 19, 1996 after signing the Ottawa Declaration, have stopped the co-operation with Russia on everything from protecting the environment to discussing the rights of the indigenous people after Russia’s full-scale in Ukraine last year. Currently Norway is the chair of the Arctic Council.
Concerns of the Arctic region without any consensus for climate change and it would be free for everyone to use as shipping routes. They also share concerns that Russia and China may form their own “Arctic Council”.
Russia is said to hold dialogues to complain from keeping away from the Arctic Council.
Relationships between Russia and China over the Arctic have been tense. But since the start of the war in Ukraine, Russia and China are holding talks and creating a joint organization for developing the Northern Sea Route has been putting on the table.
The rapidly warming of the region has exposed the abundant resources, from oil and gas to rare earths are all of the sudden an attraction.
In recent years, Russia has increased its military presence in the Arctic. This has drawn the alert from Denmark and Norway already in building their defense installations.
China has been one of the several non-Arctic countries, has remained in the Arctic Council as an observer. In 2018, it launched its “Polar Silk Road” and tried to increase its influence. Its attempt to build airports in Greenland was stopped in 2019 after the U.S. urged Copenhagen to abandon the plan.
Russia makes 40% of the Arctic, but the Arctic Council can’t turn a blind eye on Russia especially it is staging a war in Ukraine. It is hard for them to do anything at this point of time.
Challenges of the Car Batteries for the US and EU
The U.S. and Europe are very behind in the manufacturing of the batteries for the EV. Right now, it is China who is ahead of everyone. It is already admitted that whoever can make batteries for the electric vehicles will gain economic and geopolitical advantages.
China is so far ahead that it controls the mining of rare minerals, they have engineers who have the expertise and they have huge factories for production.
It is said that by 2030, China will still be so much ahead with more than twice as many batteries as every country combined. We are now showing how China controls each and every raw materials for the lithium battery production.
Electric vehicles use about six times more rare minerals than conventional cars because of the battery. China gets the minerals and they dictate the prices because of their ownership or influence at the sources around the world. Its poor mining deposits of the essential ingredients forced them to adopt a long-term strategy to secure a cheap and steady supply. Chinese companies, with the support of the state, acquired stakes in mining companies on five continents.
We deal with the car battery as the following:
Mining – Cobalt 41%, Lithium 28%, Nickel 6%, Graphite 78%, Manganese 5%
China owns most of the cobalt mines in Congo, who has the majority of the world’s supply of this rare material that is needed for the most common type of battery. China controls 41% of the world’s cobalt mining, and most of lithium.
Global supplies for nickel, manganese and graphite are much larger, but the battery use is only a fraction. China’s steady supply of these materials gives it an advantage. Not to forget that China’s investment in Indonesia will make it become the largest supplier of nickel in 2027.
Graphite is mostly mined in China.
Refining – Manganese 95%, Cobalt 73%, Graphite 70%, Lithium 67%. Nickel 63%
Disregard where the minerals are being mined, almost everything is shipped to China for refining into battery-grade materials. Once the mineral ores are taking from the ground, they are usually pulverized and then treated with heat and chemicals to isolate the mineral compounds. Take cobalt for instance, about 860 pounds of rock for each pound of cobalt to be refined into cobalt powder.
During the refine process, it takes huge amount of heat. It requires three to four times of energy to make steel and copper for instance. For lithium, it needs to be heated, steamed and dried. With the support of the Chinese government, the processors have lower energy cost.
Refining also causes pollution and Chinese refineries benefit from less stringent environmental regulations. The process of nickel also generates toxic waste and sustainable methods to process the materials would also add up the costs.
The world has very little refinery facilities.
Components – Cathodes 77%, Anodes 92%
One of the reasons why China succeed in being the world’s largest battery producer is because the way they have learned to make battery components effectively and at low cost.
The most important component of the battery is the cathode, which is the battery’s positive terminal. It is the most difficult to make and it is also very energy intensive. It makes 73% of the NMC cathodes.
Until lately, the most common cathode is using a combination of nickel, manganese and cobalt, also known as NMC cathodes. This allows a lot of electricity to be stored in a small space and enables an electric vehicle to drive for a longer range.
China has invested a cheaper alternative that is now taking half of the cathodes market. It is using lithium, iron (ferrous) and phosphate, also known as LFP. Instead of nickel, manganese and cobalt, it is using the widely available iron and phosphate. It is an opportunity to bypass the bottlenecks in the mineral supply.
China is producing 99% of the world’s LFP.
The U.S. is producing only 1% of the world’s cathodes that are in NMC.
China also make the battery’s other half of the component, the anodes. It is the battery’s negative terminal.
China dominates the production of anodes.
China also sells the most separators. It is a layer goes between the cathode and anode to prevent short-circuiting.
Then there is the electrolytes, made out of lithium salt and solvent, are needed for conductivity. The world’s top four electrolyte producers are in China.
Assembly – Battery Cells 66%
China has the most electric cars on the road and nearly all of them are using Chinese-made batteries.
Battery assembly is complex and technical. First of all, cathode and anode materials are attached to a thin metal sheet, about one-fifth the thickness of a human hair. This is then stacked with separators moistened with electrolytes and rolled up. The entire process must carry out in a room that minimize air particles and moisture.
Conclusion
China can build battery factories at half the cost in the Western world. China has spent $130 billion on research and the government gives out contracts and consumer subsidies. The electric car buyers get tax rebates, cheaper vehicle registration, preferential parking and access to an extensive charging network.
Already the experts in the Western world are admitting that it is almost impossible to become self-reliant in the battery supply chain. Perhaps the way to stay in business in electric vehicle is to form partnership with Chinese manufacturers to expand in the industry.
U.S. and E.U. Economy Policy Going Forward
Before I’ll continue to write about this, I would like to requote for what was published in our April issue about the U.S. economy policy. It was quoted as the following:
Reshaping the U.S. Economy for the Next Ten Years – The U.S. is on its way to pass three bills, on infrastructure, semiconductor chips and greenery for a total of $2 trillion available to shape its economy.
The Infrastructure Act will be $1.2 trillion for roads, bridges, cables and a new green grid;
The Chips Act which promotes making semiconductors in the U.S. for $280 billion;
The Inflation Reduction Act which contains $400 billion in subsidies for green tech over the ten years, and this figure can become $800 billion eventually.
European leaders are crying that the U.S. is going to hurt the allies and luring away the new investments in electric vehicles and the related microchips and batteries. Some of them are already trying to expand their productions and the incentive that the U.S. is offering has postponed their action in reviving their home industry. The struggle over Northvolt’s plan is an example of the intense and the European officers are saying that it is counterproductive competition between the U.S. and Europe.
Northvolt is one of the few homegrown battery companies in Germany which is receiving hundreds of millions of Euro to build a factory near Hamburg. It is postponing its plan and try to consider the offer to invest in the U.S. instead. The Inflation Reduction Act has siphoned some investments in Europe and force the Europeans to come up with their own incentives.
This is in a very difficult situation now for the Western world as on one hand they have to come up with actions to fight climate change and on the other hand they have to deal with the severe competition from China which is also creating a geopolitical challenge. And now with the initiatives from the U.S. labelled as the Infrastructure Act, the CHIP Act and the Inflation Reduction Act, which has put Europe in a very weak position.
European Commission is already saying that the U.S. has provoked a massive subsidy race and calling for the world to jointly invest in a green transition and not compete against one another. But Biden is arguing that the U.S. and European policies are complementary for one another.
The U.S. are considering to build battery factories and process lithium and other materials can help the Western world. The investment in the electric vehicles from both the government subsidies and private investment can lower the prices for the car buyers and put more emission-free vehicles on the road. Talks of allowing cars made from European batteries, materials and components to qualify for the U.S. credits.
Meanwhile, European Commission proposed their Critical Raw Materials Act to ensure supplies of lithium, nickel, and other battery materials to be processed in EU for 40% of the raw material content to be within its own borders.
Already the future of European auto industry is at stake. German cars like Mercedes-Benz, BMW and Volkswagen have already lost market share in China to those local Chinese automakers like BYD and SAIC, who are also entering into the European market already. SAIC is under the British MG, has already 5% of the European electric vehicle market, putting it ahead of Toyota and Ford in this fast-growing car segment.
Automotive Cells Company, a joint venture between Stellantis, Mercedes-Benz and TotalEnergies inaugurated a factory in France aiming for 300,000 electric batteries by the end of 2024. This JV also plans to invest a total of $7.8 billion in Europe to open factories in Germany and Italy with $1.4 billion in public aid.
Volkswagen plans to produce battery cells for up to 500,000 electrical vehicles a year in Salzgitter, some 25 miles away from its headquarters. Volkswagen is waiting for the government from Ontario, Canada to come up with the incentives that can match those from the U.S. for a factory there.
Europe is a market for electric vehicles. About 14% of new cars sold in the EU this year in the first three months were battery operated. This urged the EU to move quicker to boost their battery production.
The Chinese battery companies have largely avoided the U.S. for fear of a political backlash. But Chinese battery companies have announced the investment of $17.5 billion in EU since 2018. On one hand, the European car industry tried to avoid too dependent on China, as we have already observed that it is dominating the battery supply chain. And lately with the political tension between the Western world with China, this has put the German carmakers in a delicate position. They tried not to overly dependent on supplies from China, but they also don’t want to displease the Chinese government.
BMW, Volkswagen and Volvo plan to buy batteries from a factory in Arnstadt, Germany run by CATL, a Chinese company that is the world’s largest maker of batteries for electric vehicles.
Northvolt can offer another option for the electric car industry in Europe and also set the standard for the production to be conducted in the most environmentally responsible manner. Its first full-scale factory is located in Sweden, 125 miles from the Arctic Circle chosen for the abundant hydropower. For its plant in Hamburg is on hold and awaiting for subsidies from the German government. Its plan for the U.S. is waiting for the subsidies from the U.S. government as well. But it looks promising for both expansion plans.
A Glimpse of What is Inside the Electric Vehicle
All-electrical vehicle is also referring to battery electric vehicle has an electric motor instead of an internal combustion engine. It uses a large traction battery pack to power the electric motor and must be plugged in to a wall outlet or charging equipment, also known as electric vehicle supply equipment (EVSE). Because it runs on electricity, the vehicle emits no exhaust from a tail pipe and does not contain the typical fuel components, such as the fuel pump, fuel line or fuel tank.