Breaking free: Can the West build independent cleantech supply chains?

Whether viewed with admiration or as a threat, China’s achievements in clean technology are undeniable. The numbers speak for themselves. But this dominance did not happen overnight; it took over 10 years to build the manufacturing scale, supply chains and technological expertise that brought China-made renewables and batteries to the forefront of the energy transition.

Under China's leadership, solar photovoltaic components, batteries and, increasingly, onshore wind components have become highly commoditized. In contrast, Western countries have historically held supply chain and technology advantages in other clean technologies such as hydrogen, geothermal and carbon sequestration. However, these technologies, which are challenging to commoditize, are not advancing at the expected pace due to higher-than-anticipated costs, unclear business cases and lengthy permitting processes. These increased costs and delays in project pipelines may create additional opportunities for China to enhance its role in the energy transition through its control of renewable and battery supply chains. Low-cost, easily installable and transportable technologies dominated by China, such as solar and batteries, will play a significant role as decarbonization progresses rapidly.

China’s cleantech manufacturing ambitions are not only significant in the context of the renewables industry — they have become a growth driver for its economy. The International Energy Agency reported in April 2024 that cleantech manufacturing accounted for 5% of China’s GDP growth in 2023, with the clean energy sector in general responsible for 20% of GDP growth that year.

China’s dominance of the sector was a strategic move to control critical industries to lead and capitalize on the energy transition. Western countries dominated solar and wind components manufacturing until the early 2000s, when Chinese companies emerged as big contenders, achieving technological advancement, increasing efficiencies and scale, and slashing production costs. Foreseeing the electrification of transport, China also made early moves to acquire access to critical materials for cleantech and battery manufacturing and to build up its battery manufacturing capabilities.

China already had something of a pedigree in lithium-ion supply chains, given its dominance of lower-end consumer electronics manufacturing. The importance of these early industrial clusters and the flow of technological expertise between them cannot be overstated. However, with the massive scale-up in requirements for critical minerals from electric vehicles and stationary storage, China leveraged this foundation and actively built global supply chains to cater to its future needs. Benefiting from a low cost of capital and a willingness to invest in jurisdictions that many Western miners would not, Chinese companies made huge investments in copper-cobalt operations in the Democratic Republic of Congo, nickel mines and smelters in Indonesia, and lithium mines across Australia, South America and Africa. These investments enabled many Chinese refiners and original equipment manufacturers to become vertically integrated and maintain an enviable cost position versus the rest of the world.

China also consumes a huge volume of cleantech equipment. Accounting for 42% of global power generation-related greenhouse gas emissions in 2024, China has an oversized role in tackling emissions. As a result, 39% of global solar and 49% of global wind installations over the next five years are forecast to be built in the country. Even so, local supply far exceeds local demand, and China will inevitably remain a powerhouse in equipment exports.

Its vast battery manufacturing capabilities and supply chain access could make China a key player in the global automotive industry — historically, a difficult sector for new entrants — as EVs become increasingly important. Chinese manufacturers, offering EVs at competitive prices in global markets, are gaining attention and threatening the position of long-established incumbents.

Economies of scale play a huge role in reducing manufacturing costs, particularly for PV cells and lithium-ion (Li-ion) battery cells, where annual global production reaches tens of billions of units. When manufacturing in such high volumes, even relatively minor incremental improvements to processes, technology and efficiency can have a significant effect on lowering costs, allowing the largest manufacturers to enjoy the most optimized cost structures.

When it comes to low-cost mass production, everything points in China’s favor. Inexpensive labor, land and energy keep overheads down, while minimal regulatory hurdles and streamlined permitting processes allow factories to be built quickly, and in optimal locations with access to some of the world’s largest shipping hubs and an established upstream supply chain. The technological innovation and scale-up of China’s cleantech giants have driven dramatic cost declines across the sector in recent years. For PV cells, a fiftyfold increase in manufacturing capacity in China between 2010 and 2024 was accompanied by a 95% decrease in the average global price.

What perhaps made China’s rise to a renewables manufacturing superpower difficult for the West to accept was the latter’s failure to foresee that many Chinese manufacturers would transition from being low-cost alternatives to technology leaders as they scaled up.

When the large-scale adoption of solar PV began in the early 2010s, primarily in Europe, local solar panel manufacturers could command a premium over their Chinese competitors. However, a decade and billions of dollars in research and development later, the majority of Chinese solar manufacturers have long since dismissed the notion that their products are anything but best in class.  

For mass-produced Li-ion batteries, the West cannot claim to have ever held a leading technological position; Chinese companies, along with their Japanese and South Korean counterparts, have led from the start. Battery manufacturing has proven complex to master, with many ambitious and well-funded startups struggling to maintain quality and reliability or to achieve high utilization rates in their early days. Ultimately, this was a major contributor to the downfall of Northvolt, the poster child of Europe’s battery manufacturing ambitions. Despite attracting a vast amount of capital, the Swedish company failed to produce even close to its promised volumes at an acceptable quality. This led to some of its major customers canceling long-term supply agreements, triggering its demise.

The desire to decouple supply chains from China and nearshore production as much as possible gained momentum during the COVID-19 pandemic, which exposed the risks of single-country reliance in supply chains. However, efforts thus far have met with limited success. Early attempts by the US to protect its solar sector from Chinese supply chain dominance by establishing a more restrictive trade environment failed dramatically as manufacturing moved to different export bases across Southeast Asia to circumvent the restrictions. Even with alarm bells ringing as early as 15 years ago over China’s monopoly on rare earths processing, the country still accounts for more than 90% of global refined supply.

Despite this lack of progress, support from Western policymakers to reshore manufacturing has increased in recent years, particularly as the complexities and importance of Li-ion supply chains have come into focus. The two largest players — the US and EU — have implemented policies to challenge China’s dominance using different approaches.  

Although its future is uncertain following the reelection of President Donald Trump, the US Inflation Reduction Act uses a carrot-and-stick approach, incentivizing OEMs and mining companies via generous tax credits and loan guarantees and penalizing the sourcing of minerals and components from certain countries through reduced subsidies and increased trade barriers. The US has a stronger mining sector than the EU, and developing localized production is a core component of the Inflation Reduction Act.

The EU’s comparable policy, the Critical Raw Materials Act (CRMA), acknowledges the challenges of developing localized mining and processing and focuses instead on securing supplies and building relationships with reliable countries outside the EU and European Economic Area. The EU is in a somewhat weaker position than the US since it is a bloc of 27 countries, each with competing interests. As such, a country such as Hungary, unconcerned with the conflicting interests of Western European automakers, may welcome Chinese investment in EV supply chains — something the US’ holistic policy forbids. The positive for the EU is its openness to investment from market leader China, which may prove advantageous in the long term. 

Both the Inflation Reduction Act and the CRMA have made progress to date. However, with spot prices for most critical minerals at multiyear lows and demand from the EV sector uncertain, the incentives to advance mining, refining and manufacturing projects in the US and EU remain weak. Additionally, higher labor and energy costs, smaller scale and, for now, less technological expertise mean that most Western projects in the cleantech sector cannot compete on price with Chinese incumbents.

Government intervention, coordinated multisector planning and significant long-term investment are essential for Western countries to supply the energy transition, especially since a domestic supply chain cannot develop overnight. The lengthy time frame presents a challenge, as achieving a midterm strategic consensus among political stakeholders often clashes with the short-term electoral cycles that characterize Western democracies.

It remains uncertain whether supply chains can successfully be localized, but several actions are essential to increase the chances of success:

• Simplifying or streamlining the permitting and legal challenges associated with mining, refining and new manufacturing plants would be highly beneficial, as mentioned by the Trump administration in the US. Longer lead times for these projects in Western countries pose substantial hurdles for developing domestic supply chains and can deter investment decisions.
• Establishing incentives for local manufacturing and stimulating demand. Manufacturing subsidies in the Inflation Reduction Act serve as an example, proving effective in increasing cleantech manufacturing capacity since their enactment. Continued support for projects through initiatives such as the US Energy Department's loan program and the European Investment Bank will also be key, especially given low commodity prices. Mandates to incentivize local content procurement are equally important; manufacturers need confidence in demand for locally manufactured products before making investment decisions, particularly as higher manufacturing costs in the US and Europe hinder their ability to compete in international markets.
• Barriers to lower-cost imports level the playing field. Over the last decade, the US market has progressively restricted material and component imports through policy mechanisms such as Section 301 or Section 201 tariffs. In the case of the ongoing antidumping and countervailing duties investigation of PV manufacturing in four Southeast Asian countries, the higher-than-anticipated preliminary determinations — with the final ones expected in the second quarter of 2025 — indicate a likely halt to production.
• Private investors must engage to secure the billions of dollars needed. Private capital must surpass public spending for local supply chains to succeed, but current uncertainty is not favorable for high-capital, long-term investments. The wave of manufacturing announcements triggered by the Inflation Reduction Act's enactment has only partially progressed. While it created strong incentives for domestic manufacturing, policy risk and demand uncertainty persist.

The risk remains that, even if these steps are taken, domestic manufacturers may fail to sufficiently ramp up manufacturing capacity, creating material bottlenecks and delays in cleantech deployment, or that customers will continue using the imported products with which they have grown comfortable.

Western buyers or consumers of cleantech materials and components must acknowledge that a more expensive energy transition — characterized by increased overall capital expenditure and lower capital efficiency — is the price to pay for localized supply chains. This inflationary effect could be particularly impactful in the US, where the total cost of deploying cleantech, on a per-watt basis, is already double that in China.