MARKET REPORT
SHORT READ PART 3
2023 APRIL ISSUE
Written by : Andrew Sia
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From the Desk of the Publisher
In this report we continue to report about the advanced chip making which has developed into a trade war between the Western world with China. But under the U.S. government’s initiatives, the Inflation Reduction Act, the Chips Act and the Infrastructure Act with the total of $2 trillion to be spent in the next ten years have put the world into a very competitive situation. It doesn’t only segregate China, but it also create conflicts with its allies. We can refer it to the European Union members as well as its “Chip 4 Alliances”, led by the U.S. with Japan, South Korea and Taiwan.
But on the other hand, we can see a lot of collaboration, if the U.S. and China can put down their differences, in areas like the solar projects, the rare earth mining and the complex processing of its minerals.
It is very unfortunate to see the world is building up a lot of conflicts when it can create a lot of opportunities for the win-win situation together.
Contents:
Biden Plans to End the Covid
China Can’t Lead on Tech Race
China’s Global Mega-Projects Are Falling Apart
Rare Earths Found in Sweden
EU’s Answer to the U.S.’s Inflation Reduction Act
Global Debt Crisis
Exxon Withdrawn from Using Algae for Biofuel
China’s Demographic’s Ageing Problem
Solomon Islands Caught in the Midst of a Strategic Location
Renewable Energy Development Thwarted by Disruptions
China’s Export-Control Plan is Threatening to Disrupt the U.S. Solar Goal
South Korean Companies Are Investing in the U.S. for Solar Project
Reshaping the U.S. Economy for the Next Ten Years
The World of the Semiconductor
Biden Plans to End the Covid – NBC News, January 30 2023
The Biden administration plans to end national and public health emergencies tied to the coronavirus which has been around us since 2020, almost after three years when the pandemic started. The existing emergency would be extended until May 11 and then it will expire. This notice is to give states, health care providers and hospitals enough time to adjust to the change.
Covid-19 is no longer a disruptive threat than it was once. The World Health Organization, which declared the pandemic in 2020, said that the Covid-19 pandemic is probably at a transitional point.
Thousands of people in the U.S. continue to die from the coronavirus virus every week, but the figure has dropped significantly over the past two years. And according to data from the Centers for Disease and Prevention, last week 3,756 people died because of the Covid, compared with roughly 22,500 people in the last week of January 2021 and about 17,000 people in the same period last year.
China Can’t Lead on Tech Race
We noticed that this time the U.S. has passed its Chips Act put in nearly $200 billion in private investment in manufacturing projects, while early on, China announced their investment of ¥1 trillion (about $148 billion) into the industry.
China has stopped this race as its government revealed the antigraft probes that investigated many of the industry’s top figures, Ding Wenwu, general manager of the China Integrated Circuit Industry Investment Fund who was managing the $45 billion fund. This “Big Fund” was the Chinese government’s official vehicle for managing its colossal investments in the chip industry. Through this fund, it was invested in a host of companies, including China’s largest chip-makers, Semiconductor Manufacturing International Corp. and Yangtze Memory Technologies Co., both have been sanctioned by the U.S. government.
With this retreat, China is quietly admitting its defect from its whole-government approach to develop advanced technologies that can compete internationally.
The U.S. also ban on exporting advanced chipmaking technologies to China and leading companies like the ones in the Netherlands and Japan from exporting to China.
China has the ambitious approach, especially in the arena of the advance technologies, but its approach through its communist system has stifled innovation. In China, all major funding is controlled and distributed by the Communist Party. For any top scientists, they must be in the party system to advance their career and to receive funding. They can make money on the side as they can steer funding to their associates.
When China announced the ¥1 trillion investment plan for the chip industry, chip startups that were linked to the local government officials were engaged in recommending and verifying candidates for investment subsidies. It was told that 15,700 new Chinese semiconductor companies were registered from January to May 2021. Many of those companies were associated in industries ranging from construction and cement, also from garments to pharmaceuticals, and they switched to chip manufacturing.
It is true that the country has the lack of long-term vision, and if there is no notable achievements with the project’s first two years, they would be cut off from any further funding. China is not nurturing the young scientists and they discourage creativity and independent thinking.
Like many of the grandiose plans, it is also going hand in hand with the propaganda to boost the party’s greatness. It can’t lead on tech race.
China’s Global Mega-Projects Are Falling Apart – WSJ, January 21, 2023
For the past decade, China handed out almost a trillion dollars in international loans as part of Beijing’s Belt & Road Initiative. Its intention is to develop economic trade and expand its influence across Asia, Africa and Latin America. These loans made Beijing the largest government lender to the developing countries and according to the World Bank that the totaling of the loans are as much as other countries combined.
Yet the lending practices have been criticized by foreign leaders, economists and world institutes that they have led countries like Sri Lanka and Zambia to enter into debt crisis. This has exposed its fragile for repayment especially during the global pandemic which has lasted for three years already.
There are projects that are mismatched for a country’s infrastructure needs and created damage to its environment. Now it has also been found that the low-quality construction on some of the projects risks the crippling of key infrastructure and saddling countries with more cost for years to come.
A typical example has taken place in Ecuador where a 1500-megawatt hydroelectric plant, considered as the country’s biggest infrastructure project, built near a spewing volcano which can break down in days or in six months that nobody would know. This $2.7 billion Coca Codo Sinclair hydroelectric plant has already thousands of cracks emerged and has put the government of Ecuador in dire situation.
It is one of the many Chinese-financed projects around the world plagued with construction flaws. The same was found in Pakistan’s 969-megawatt plant after cracks were detected in a tunnel that transports water through a mountain to drive the turbine. The Neelum-Jhelum hydroelectric plant was shut down last year. This shutdown would cost Pakistan $44 million a month in higher power cost.
Uganda’s government has detected more than 500 construction defects in a Chinese-built 183-megawatt hydropower plant on the Nile River that has suffered frequent breakdowns since it went into operation. The Isimba Hydro Power Plant was a faulty design and it costed $567.7 million to build, but Uganda seek $480 million loans from the Export-Import Bank of China.
Further down the Nile, another Chinese-built hydropower plant, the 600-megawatt Karuma Hydro Power Project, is three years behind schedule. Since then repair work and replacement of the faulty cables and switches were called for. The Uganda government has to start repayment of the debt this year for $1.44 billion it borrowed from the Export-Import Bank of China even it was not operable yet.
In many cases like this, China would bring steel and concrete, send the workers to the worksite, provide the blueprint for the infrastructure and bring along Chinese banks to finance the project. Take for instance the Coca Codo Sinclair project, the China Development bank financed 85% of its initial cost and charge a 6.9% interest rate. Sinohydro did the construction and flew in hundreds of Chinese workers to build the power plant between 2010 and 2016. The environmental studies were out of date and the project started with 1000 megawatts ended with 1500 megawatts which caused Coca River’s slope to collapse. The dam also disrupted the river’s natural flow and accumulation of sediments that fast-flowing water began to cut into the river banks as it descended from the Andes on its way to Amazon rainforest.
Normally this kind of erosion process would take thousands and if not even millions of years but the dam can accelerate in in a matter of years. It is like a timebomb now ticking away.
Rare Earths Found in Sweden – New York Times, January 14, 2023
A Swedish mining company announced that it has found Europe’s largest known deposit of rare earth metals which is the critical metals to many green technologies. It is found in the far northern part of the country within the Arctic Circle near the city call Kiruna which is its northernmost city.
The world’s production of rare earths is dominated by China.
LKAB, a state-owned company, created the prospect that over time Europe can develop a domestic source of these minerals. It is estimated at more than one million tons. Meantime it would take the lengthy environmental studies and other preparation work before the mining can start. It requires 10 to 15 years before the metals can be delivered to the market.
Rare earths is consisting a group of 17 elements, are crucial to cutting-edge technologies used for electric vehicles and wind turbine generators.
China has an upper hand on the global rare earth industry not only in mining but also in complex processing of the minerals which produces radioactive contaminants.
But this time with the world going into heavy investment for the electrification of the economy in order to reduce greenhouse gas emissions, both the U.S. and Europe are looking to develop their own sources of rare earths. The concerns over China for its dominant position and the leverage over pricing, as well as the potential to restrict suppliers to rivals. China has tried this tactic over Japan over a fishing dispute.
Russia is also a leader in extracting the metals.
EU’s Answer to the U.S.’s Inflation Reduction Act – WSJ, January 18, 2023
The European Union is planning to push back the clean-tech tax breaks in the U.S. Inflation Reduction Act by easing its subsidy rules and create new funding to help their member states to compete. Their concern is the U.S. subsidies will lure European companies away from the EU which will harm the continent’s clean-tech and manufacturing industries.
European Commission President Ursula von der Leyen mentioned that the bloc intend to develop an industrial plan focused on improving Europe’s regulatory environment and provide more fund for the production of clean technology. The plan would also need to counter subsidies from China who dominates the global market for the solar panels and the rare earth metals need for the manufacture of many clean-energy technologies.
The EU’s subsidy rules are intended to ensure fairness across the bloc so that the wealthier countries are not outspending than their heavily indebted neighbors. Having said that, some European countries have pushed back against the idea of further easing state subsidy rules, and consider for other tools could help promote the EU’s competitive with fewer risks.
The EU leaders are expected to discuss their response to the U.S. subsidies during their meeting in February in Brussels.
Global Debt Crisis – FT, January 18, 2023
The world’s poorest countries which also contain a large proportion of the world’s poorest people are threatened by a lost decade. This means a human catastrophe and a huge moral failing. And because Europe is so close to some of those worst hit countries, it would be affecting its future.
IMF said that about 15% of low-income countries are already in debt distress and another 45% are at high risk of debt distress. And among emerging markets, about 25% are at high risk and facing default-like borrowing spreads. We already noticed that Sri Lanka, Ghana and Zambia are in default, and many more will follow. Something must be done urgently.
For the cause of this is that the low and low-middle income countries have taken on too much of the wrong kind of debt due to the lack of any better alternatives. Borrowers were attracted by debts and were not aware of the risks which led them into easy preys.
With the three years of the Covid pandemic, the soaring energy cost and food prices, higher interest rates, a strong dollar and a global slowdown, these countries found themselves to be buried by debts. They were forced to be restructured.
Exxon Withdrawn from Using Algae for Biofuel – Bloomberg, February 10, 2023
Earlier on Exxon announced its partnership with Viridos Inc., a biotech company based in La Jolla, California, to use algae to produce environmentally friendly fuels and because of Exxon’s withdrawn, the company’s funding dried up and forced to let go 60% of its staff.
Exxon also stopped funding another multi-million-dollar algae project at the Colorado School of Mines end of last year, and another venture with the National Renewable Energy Lab.
Exxon announced that it is pulling out on funding for algae in favor of other technologies. In its Low Carbon Solutions division it is focusing on carbon capture, hydrogen and other biofuels. Even from a record-breaking profit of $59 billion in profits from last year, Exxon is still retreating from algae.
Algae has been playing an intriguing role at Exxon and it has frequently used algae as its significant evidence about the climate change as the solution for cleaner forms of energy. Algae is extremely efficient at turning sunlight and carbon dioxide into lipids which can then be extracted and processed into biofuels. And since it grows in brackish water, it doesn’t need arable land and it doesn’t compete with food crops. But cultivating huge quantities of algae in a way that can compete economically with fossil fuels would not be practical or feasible. Already efforts spent by Chevron and BP failed with any breakthroughs. Other startups, like Algenol and Sapphire Energy, moved away from biofuels to focus on turning algae into specialty products like cosmetics and pet-food additives. Viridos is the only company remaining for developing the biofuels.
Algae performed well in lab but struggled outdoor, where temperature and lighting are less predictable and invasive organisms could devour the algae. It was in 2012, Exxon shut down its project for a 4.5-acre pilot project at its Baytown refinery on the outskirts of Houston where ponds were constructed to grow algae.
It went back to the lab and in 2017 the companies, Viridos and Exxon found out the way to double the Lipid content. They began testing in the outdoor ponds that Viridos built in the California desert near the Salton Sea. In 2018, Exxon announced that it would target commercial production with the production of 10,000 barrels a day of algae biofuels by 2025.
Exxon began in its marketing campaign to promote this green energy for the next three years including spots during the World Series and NBA championships, and advertisements of algae appeared in Facebook and Twitter.
Meanwhile, the production of lipids has been more productive as it jumped from a maximum of 5 grams in 2020 to 6.8 grams in 2021 to 9.1 grams in last year. As the numbers started to improve, Exxon began to pull back, as even if 10,000 barrels would be a success for algae biofuels, it also accounted to less than 0.3% of Exxon’s production of oil and gas. The company has been blamed for disinformation from the company’s algae commercials reflecting its real situation. The effort of Exxon to go for reducing its carbon emissions has been misleading.
Meanwhile Viridos has to shut down its outdoor ponds in the California desert and downscaled its operation to a smaller lab crew. They are still hopeful for hitting the target of 15 grams in a couple of years and they are talking to a wide range of potential funders.
In order to have a commercial-scale algae facility capable of generating 10,000 barrels of biofuel a day would require about 50-square miles of land and cost around $5 billion to build. This will be a challenge.
China’s Demographic’s Ageing Problem – WSJ, January 18, 2023
China is facing its most disappointing growth in decades since 1961. Its rapidly aging population is slowing growth in productivity, high debt levels and rising social inequality. This will weight on the country’s economy for decades to come. It announced that its population shrank by 850,000 to 1.412 billion last year.
The global economy has been relying on China’s vast pool of factory workers for manufactured goods, and also its consumers represent a growing market for Western-made cars and other goods. A shrinking population would affect in both areas.
With the aging of the workers, the productivity is declining, but by introducing automation and related technology such as robotics and using artificial intelligence can increase the workers’ output in China.
And by using some changes and different approaches, China may overcome its challenge in rebuilding its economy again.
Solomon Islands Caught in the Midst of a Strategic Location – New York Times, January 23, 2023
Solomon Islands, a country of about 700,000 people and 1,000 islands sit in the sea lanes between Australia and the United States is the gateway for China to enter into the Pacific Ocean. For some reasons Solomon cut ties with Taiwan in 2019, and China rushed in to open a large embassy, break ground on a stadium complex for this year’s Pacific Games and signed secretive agreements with the government on security, aviation, telecommunication and more.
Here is a little bit more information about the 2023 Pacific Games, officially known as the VXII Pacific Games, a continental multi-sport event for Oceania countries and territories that is scheduled to be held on Honiara, its capital, in Solomon Islands between November 19 to December 2, 2023.
About 24 countries would join and only 6 countries have attended every edition of the Pacific Games: Fiji, French Polynesia (Tahiti), New Caledonia, Papua New Guinea, Tonga and Vanuatu.
Its prime minister, Sogavare, switched the country’s alliance from Taiwan to China in 2019, resulted more Chinese companies moved into Solomon Islands and started to buy mines to grocery stores and gas stations.
The country delayed its 2023 national elections declaring it lacked the capacity to host both an election and the Pacific Games in the same year. The country took on a debt of $50 million to build the stadium for the Pacific Games which the World Bank recently described as unsustainable.
The Chinese presence in the islands are not uneventful as antigovernment riots led to the burning of Chinese businesses in November 2021 took place. The Chinese has operated with a more top-down approach and they behaved very pushy and disrespectful.
It was found that the coziness developed between its prime minister with the Chinese government and a “national development fund” about $25,000 each went to 39 of the 50 members of the parliament.
Lately it prime minister, Sogavare, agreed to a Chinese state-owned to build 161 cellular towers from Huawei with a $70 million loan from the Chinese government.
The opposition leaders are accusing China for expanding a bribery campaign to keep allies in power. The people from the Solomon Islands are aware of this and protests continued.
To the concerns of some American officials that China’s goal in the Solomon Islands is to create a client state, securing deep water ports and satellite communication sites that could surveil or block military operations by Australia and the United States in the event of a war over Taiwan.
Renewable Energy Development Thwarted by Disruptions – WSJ, January 23, 2023
Even as developers plan an unprecedented number of grid-scale wind and solar installations, project construction is plummeting across the U.S. It is due to the supply-chain disruption and the lack of coordination between the regulatory and the political environment are the reasons contributing to the slowdown of the process.
New wind installation plunged 77.5% in the third quarter of 2022 versus the same period the year before. New utility-scale solar installations fell 40% in 2022 compared with 2021.
The Inflation Reduction Act, not only extended the tax credits but also increased for wind and solar projects. It further brought incentives to green hydrogen and battery storage for the electric grid.
Already more than $40 billion in wind, solar and battery projects were announced in the last quarter of 2023. But the supply-chain and the trade issues have complicated the planning for the moving forward. Average lead time for securing high-voltage equipment has risen from 30 weeks to more than 70 now.
Sourcing solar panels have been limited to American-made and the effort to create a domestic solar supply chain to meet the U.S. project demand are expected to take few years to build. Currently, more than 80% of the solar panels are coming from China and other Asian production. The restriction to source from those have already blocked several thousands of shipping containers of solar panels near the ports in Los Angeles.
The wind industry is struggling with both the supply-chain and the logistics challenges in delivering its massive equipment. Uncertainty over the details of the federal tax policy and how the project can quality for tax credits in the Inflation Reduction Act has slowdown the installation.
Even in battery storage, there were more installation in 2022 than 2023.
The big unknown is the time and cost to get new solar or wind or batteries to be connected to the grid who has also to study the power system that may need the network upgrades before signing off on them.
Grid operators are overwhelmed by requests and there were already around 8,100 projects in 2021 in line compared with 5,600 in 2020. Each of them required a technical review. The waiting time for interconnection went up to 3.7 years for projects delivered between 2011 and 2012, from around 2.1 years in the prior decade.
Just 23% of those power generations were completed for grid connection from 2000 and 2016. Completion rate for wind was at 20%, and solar at 16%. Around 19 gigawatts of wind and more than 60 gigawatts of solar were withdrawn from interconnection process in 2020 and 2021. After all, you can draw a conclusion that as of now the renewable energy projects have not been very successful.
China’s Export-Control Plan is Threatening to Disrupt the U.S. Solar Goal – WSJ, February 1, 2023
A plan by China to restrict exports of key solar-manufacturing technology would hamper the U.S. to build up a domestic solar supply chain in the U.S.
China’s Ministry of Commerce and Ministry of Science and Technology are considering a list of technologies that are subject to export controls.
As we know that China accounts for nearly all the solar ingots and wafers, as well as much of the equipment used in the large-scale solar panels in the manufacturing process.
Chinese companies control an estimated 80% of the global supply chain for solar manufacturing and produce nearly half of their components. China is the only country that can produce the larger 182- and 210-millimeters wafers. It is expected to make up 96% of the world’s market share in 2023 because it is cheaper and more efficient.
So far there is no decision that has been made, and if it is the case, the Chinese solar manufacturers would require to obtain a license for export.
South Korean Companies Are Investing in the U.S. for Solar Project – FT, January 12, 2023
South Korean is eyeing on the U.S. Inflation Reduction Act where the $369 billion climate tax law passed last year for significant tax breaks for clean energy like solar for instance. Hanwha Qcells planned to spend $2.5 billion to expand solar power equipment production in the U.S. state of Georgia. This will be the largest foreign investment in the U.S. solar manufacturing to help to rebuild the U.S. industrial base and also to make the supply chain less reliant on Chinese imports.
Last year the total U.S. made solar modules with capacity totaling 8.9 gigawatts was only half of the demand from power companies and dwarfed to China’s capacity of 600 gigawatts.
The U.S. clampdown on solar panel and cell import from China slowed down the installation by 23% year-on-year in 2022. The Hanwha Qcells plan will bring its capacity in the U.S. to 8.4 gigawatts by 2024. It covers wafers, ingots and cells.
Georgia is known for attracting South Korean companies to invest in the U.S. Last year it brought in $11.5 billion in projects including a $5.5 billion electric vehicle plant from Hyundai.
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.
The World of the Semiconductor
Semiconductor industry is no stranger to geopolitical wrestling. In fact, it was in the 1980s when Japan was accounted for more than 50% of the world’s semiconductor production, the U.S. was wary of the Japanese power and rammed through a chip trade deal to the detriment of the Japanese industry. By then the competitors, South Korea and Taiwan rose with the support of their governments and developed their distinctive chipmaking capabilities.
These days the U.S. specialized in design while Taiwan dominates production of the high-end logic chips, South Korea focuses on memory chips and Japan specializes in optical sensors and materials and kits need for making semiconductors.
China is into its own chipmaking industry and make progress in low-end logic chips.
America’s Asian allies are worried about China’s using of the technology in making weapons.
The U.S. is used to give big subsidies to its domestic chip industry, with its CHIPS and Science Act passed last year, it introduced a 25% tax credits for new semiconductor investments as well us a $50 billion in additional public investment.
South Korea passed its “K-Chips Act” which provides an 8% tax credit on large firms’ investments in domestic facilities. But Samsung and SK Hynix, the two biggest chip firms are investing in the U.S. The government is thinking to increase the tax credit to 15% plus another 10% for any extra investments made in 2023.
In Taiwan they have the “Taiwan’s Chips Act” which offers domestic chip companies 25% of their research and development costs in tax credit. Its TSMC is planning to build two factories in America and one in Japan on the island of Kyushu as joint venture. It doesn’t involve its foreign investments in the most advanced technology. It continues to invest in Taiwan.
Japan passed its budget in late December 2023 to invest $10 billion in chips and funding half the cost of TSMC’s plant in Kumamoto. It is known as JASM, the subsidiary of TSMC. On the other hand, Japan government provided ¥70 billion as seed capital to Rapidus, a new venture between leading Japanese electronics companies and will collaborate with America’s IBM and Belgium’s IMEC in developing R&D and production of leading-edge chips in Japan. Japan is thinking to revive Kyushu’s reputation as a “Silicon Island”.
This is in line with Biden’s administration calling for a “Chip 4 Alliance” for the U.S. and this “democratic semiconductor supply chain” is not implausible and unlikely to happen. But fierce competitions between the countries have been obvious, we have seen Taiwan and South Korean chipmakers are in fierce contest to produce the next-generation chips, differences over historical toxic relationship between South Korea and Japan have spilled over the chip trade recently.
The unilateral attacks on China by the American followed by Biden’s administration of control on chip exports to China caught these countries off-guard. Japanese semiconductor companies generate 20-30% of their business there. And on the whole, it would mean a loss of 70%, directly and indirectly. Both Samsung and SK Hynix have significant manufacturing and R&D facilities in China. Between January and September last year, about 40% of Korean chip exports went to China.
What follow will be the lack of engineers and workers if China is out of the equation. The training will take time and will make this “democratic semiconductor supply-chain” infeasible.