Inflation Reduction Act and Chips Act projects delayed

Unexpected costs, Chinese overcapacity and ambiguous rules are some of the key roadblocks

A significant number of projects funded from the Biden administration’s Inflation Reduction Act (IRA) and the CHIPS and Science Act have met major delays and cancellations. Deployed in August 2022, the IRA provides US$369 billion of incentives to US green industrial projects. The CHIPS and Science Act was introduced in the same month and allocates US$39 billion in subsidies for semiconductor manufacturing. Around 40 percent of $US100million-plus investments committed in the first 12 months after legislation passed have been delayed or suspended - in total, US$84 billion worth of projects. Suspended projects include Albermarle’s US$1.3 billion lithium processing plant in South Carolina, Enel’s US$1 billion solar PV manufacturing plant in Oklahoma and LG’s US$2.3 billion EV battery plant in Arizona.

Many projects have encountered unforeseen start-up and operating costs which they usually are required to absorb before they are eligible for incentives. Chinese overcapacity has affected a number of sectors covered by the incentives. Notably, cheap Chinese solar panels flooding the global market have challenged the business case of US manufacturing plans.

Slowing growth in domestic demand for some green technologies such as EVs has also made an impact. In the first half of 2023, EV sales in the US increased 51 percent, down from a 71 percent increase in the first half of 2022. A lack of clarity in the IRA and Chips Act has forced some investors into a wait-and-see mode. The US Treasury’s proposed guidance on hydrogen incentives released last December – which many saw as too strict –  caused some producers to stall their plans. The ultimate uncertainty is in the upcoming Presidential election, with Donald Trump having pledged to “terminate” the IRA.

HP signals production shift away from China

This move is emblematic of a growing supply chain diversification

HP, the largest US developer of PCs and associated products, is shifting more than half of its production out of China, favouring countries with lower geopolitical risk. HP has already moved the production of up to five million units to Thailand and Mexico, increasing capacity at two existing factories and contracting five new manufacturing facilities in Thailand. Reportedly, HP aims to produce 70 percent of its annual production of 55 million laptops outside of China. HP has hired 200 new engineers with mechanical and supply chain expertise to build a design centre in Singapore as an alternative to HP’s flagship centre in Taiwan that develops new products and manages supply chains.

HP’s strategy reflects an industry trend. Dell launched a diversification drive in January 2023 and has moved 20 percent of its laptop production to Vietnam. Dell is aiming to phase out ‘made in China’ chips entirely by the end of 2024. Apple began moving production out of China in late 2022 amid production disruptions caused by China’s power supply issues and strict COVID measures. Apple has spent US$16 billion to diversify production of iPhones, iPads, MacBooks and Apple Watches to India, Thailand and Vietnam. HP are increasingly concerned about Washington’s export controls on computer processor chips. Such chips are integral to the next generation of computers. Intel has been banned from shipping its Core Ultra 9 chip to Huawei.

US targets Gulf money as a conduit for critical minerals access

Investments seek to support diversification of Gulf economies and reduce China’s supply chain dominance

Earlier this month, Qatar’s sovereign wealth fund agreed an investment in US-backed Irish mining fund, TechMet. Qatar’s investment is the latest in a series of US-supported efforts to loosen China’s dominance over key energy transition metals and minerals. The US$180 million investment by the Qatar Investment Authority (QIA) will enable the Dublin-based group to deploy funding to support mining operations, particularly in Africa. Cobalt and lithium are key to the production of technologies associated with the energy transition. Chinese companies refine three-quarters of the world’s cobalt supply and 70 percent of lithium-ion batteries. China's dominant position in the EV supply chain was achieved in part by buying up mines in Africa. In the Democratic Republic of Congo (DRC) – which supplies 70 percent of the world’s cobalt – Chinese entities own or have stakes in nearly all of the country's producing mines.

The Biden Administration has leveraged Gulf countries’ ambitions to diversify their economies away from oil to foster actions to reduce Beijing’s dominance over critical minerals. Last year, for example, the US encouraged the UAE’s International Holding Company (IHC) to invest US$1.1 billion in Zambia’s Mopani Copper Mines for a 51 percent stake in the company. Perhaps the US’ biggest initiative in this space involves discussions that began last year with Saudi Arabia’s Public Investment Fund (PIF) – and its plans to invest US$15 billion in mining assets. Among the propositions reportedly on the table was an agreement which would give US companies rights to purchase output from the Saudi-owned mining assets in Congo, Namibia, and Guinea.

Although these developments may boost US access to key minerals, the fact remains that China invested US$19 billion last year in metals and mining projects, a 158 percent increase from 2022. 

Rising German investment in China bucks the trend

Germany’s automotive industry is overwhelmingly driving the influx of German and indeed European investment into China

Data released in August by Germany’s Central Bank revealed that German companies invested US$8.12 billion into China in the first two quarters of 2024. This figure already surpasses the US$7.23 billion invested across 2023. Increased German investment seems to fly in the face of Germany’s 2023 China strategy, which was explicit about the need to pursue de-risking. Elements of the German political class had been increasingly conscious of the risks derived from an overdependence on China, informed in part by the bitter experience of the country’s overreliance on Russian gas. Germany remains overly dependent on China for the supply of certain critical inputs. Germany, for example, relies on China for 94 percent of its Yttrium and 85 percent of its Scandium, minerals which are used in the production of vehicles and consumer electronics.

Germany’s increased investment in China is being spearheaded by its automotive giants. Volkswagen, the bestselling foreign car brand in China, has pushed its “In China, for China” campaign, investing US$2.78 billion to expand its production hub in Anhui. For its part, BMW invested US$2.8 billion to develop a production base in Shenyang. These investments, mostly the reinvestment of profits previously repatriated, are part of an increasingly desperate strategy to recoup lost market share. German companies, like foreign companies in China’s market writ large, have been caught flat footed at the speed of China’s EV roll-out. Volkswagen’s market share dropped from 19 percent in 2019 to 14.5 percent in 2023. The company hopes to maintain at least a 15 percent market share in China. The made in China strategy German automakers are implementing clashes with the German government’s desire to maintain a maximum level of production in Germany.

Protests force Jokowi and Prabowo to abandon controversial legislation

Jokowi and Prabowo’s attempt to overrule a critical court ruling appears to have been defeated – at least for now

President Joko Widodo (Jokowi) and President-elect Prabowo Subianto have sponsored legislation directly counteracting recent rulings of the Indonesian Constitutional Court on electoral law. On Tuesday this week, the Court ruled that candidates for provincial and gubernatorial elections had to be a minimum of 30 years old at the time of nomination. If enforced, this interpretation of electoral law would effectively rule out Jokowi’s youngest son, Kaesang Pangarep, from running in the upcoming Jakarta gubernatorial election. Pangerep will not turn 30 until December this year – after elections scheduled for November.

The court also effectively lowered the threshold for nomination to under 10 percent – potentially allowing Prabowo’s election opponent, former Jakarta Governor Anies Baswedan, to nominate for the Jakarta race. Specifically, the Court stipulated that the requirement for successful candidates to come from a party (or parties) controlling at least 20 percent of legislative seats in the regional council, would be abolished and replaced by less stringent requirements.

Prabowo and Jokowi – who appear to be laying political foundations ahead of the latter’s formal departure in October – responded by introducing legislation nullifying the Court’s decision. Only one party, PDI-P opposed the legislation. Notably, the legislation was endorsed by Law and Human Rights Minister Supratman Andi Agtas, who was appointed by Jokowi on Monday. Supratman is a member of Prabowo’s Gerindra party. The legislation was due to be passed on Thursday. Widespread and unexpectedly vociferous protests against the legislation forced parliament to shelve the proposed legislation. The climbdown by Indonesia’s political class comes as the independence of many institutions associated with Indonesia’s democracy have been eroded.

China targets major reduction in coal plant emissions

Projects to add high operating costs to often unprofitable coal plants

Beijing announced on 15 July a plan to add green ammonia, biomass and carbon capture and storage (CCS) capabilities to some of its coal plants, among efforts to reduce emissions. Details on funding and recipients have not been disclosed. China proposes to increase the share of green ammonia and biomass in the fuel mix in coal-fired plants to 10 percent, as well as explore the possibility of adding on CCS technology. Beijing hopes that this will reduce emissions at coal-fired plants 20 percent by 2025 and 50 percent by 2027 off a 2023 baseline – placing emissions at a similar level to natural gas. The first phase of projects will begin construction next year.

Costs of these technologies may prove prohibitive. Green ammonia production is extremely high cost, partially due to the large amount of energy required. It has much lower energy content than coal, requiring a high volume to attain equivalent output. The high costs of biomass could be pushed up further if Beijing’s new plan makes coal plant operators rush to compete for the fuel. CCS is complex to establish, requiring a unique design for each plant. CCS projects on coal plants require 20 to 25 percent of the energy output of the plant itself to operate.

Increasing the operating costs of coal plants risks unforeseen consequences. Because of China’s price cap system, producers are limited in the costs that they can pass on to consumers. On top, a typical coal plant in China averages only 50 percent of its capacity because of excess investment. In 2021, the inability of plant operators to pass on surging coal costs to consumers led plants to shut down, causing widespread power outages and rationing. More broadly, China’s plan risks diverting capital from large-scale renewables projects and, ironically, slowing down the country’s wider energy transition.