Dragoman Digest

5 April 2024

New Delhi enacts significant tariff cut for EV importers with local production plans

Move may come at the expense of dominant local players

India last month announced that it will significantly lower tariffs on EV imports for automakers planning to commence local production in the country, as it seeks to be become a major player in the industry. The current customs duty for vehicles is 70 percent for EVs that cost under US$40,000 and 100 percent for those above. This will be replaced with 15 percent tariff for vehicles over US$35,000 for qualifying automakers. To attain the lower rate, companies must invest a minimum of 41.5 billion rupees (US$500 million), commence production in India within three years, and source a minimum 25 percent of components locally, increasing to 50 percent after five years. The move aligns with the Modi government’s efforts to promote EV manufacturing as part of the ‘Make in India’ initiative - aiming for EVs to account for 70 percent of car and truck sales by 2030.

While the policy change may attract foreign investment, it could also pose a challenge to homegrown manufacturers. Foreign automakers like Tesla, which had been hesitant to commit to Indian manufacturing due to the high tariffs, are now showing interest. Reports this week indicate that Tesla has begun looking for an Indian site to establish a US$3 billion plant. However, this will intensify competition for domestic players like Tata Motors, which currently holds a massive 72 percent share in India’s EV market. Nevertheless, the decision may be necessary to boost local manufacturing, given that EV exports from India are yet to take off and the country’s current EV uptake rate is only around 2 percent – far below the 2030 target.

Australia increases support for rare earths industry

Long-term cost competitiveness of Australian production yet to be proven

Australia is committing significant funds to rare earth projects, aiming to establish itself as a major global supplier. Rare earths include 17 metals used to manufacture magnets in critical technologies like wind turbines and motors in EVs. Last month, Canberra announced an AU$840 million (US$550 million) loan to Australian mining firm Arafura to develop a mine and processing facility for the rare earths neodymium and praseodymium in the Northern Territory. This follows the government’s AU$1.25 billion (US$820 million) commitment for Iluka's rare earth processing facility in Western Australia two years ago. Australia aims to challenge China’s dominance of rare earth supply chains. It currently accounts for 60 percent of mining and 85 percent of processing capacity globally. Australia has the fifth largest reserves and third largest production capacity of rare earths in the world.

However, Australia’s ability to be competitive in the sector is uncertain. It may struggle to compete on cost with China and countries in Africa with rare earth reserves, such as South Africa and Mozambique. In contrast to most rare earth projects, those in Australia are usually located in remote locations and require expensive processes to lower the carbon footprint of production. The recent disruptions to Australia’s nickel industry, in which production became unprofitable after prices plunged, underscore the similar risk that Australia may face in rare earth mining. BHP, Myloo, IGO and First Quantum have suspended nickel investment in Australia. Even the rare earth miners already engaged in Australia such as Lynas Rare Earths have experienced significant financial difficulties. Additionally, there is a notable absence of rare earth processing companies outside China, posing a potential issue for mining companies that aim to avoid Chinese involvement. Ultimately, Australia will be balancing its natural cost disadvantages in the rare earths industry with global demand for non-Chinese supply chains.

Rare earth projects in Australia

Source: Geoscience Australia, Nikkei

Taiwan taps into international student talent pool to fill labour shortages

Taipei racing against the clock amid increased labour demand from AI boom

Taiwan is implementing programs to attract international students into its workforce, as the country tackles severe labour shortages. This year, Taipei rolled out initiatives offering financial support to international students who join the workforce after graduation. Last year, Taiwan earmarked 5.2 billion New Taiwan dollars (US$163 million) to nearly double the intake of foreign students in fields like engineering, science and technology, with a target of reaching 320,000 foreign students by 2030. Additionally, Taiwan aims to raise the rate of international students transitioning to the country’s workforce from between the current 40 to 50 percent to 70 percent. Many of Taiwan’s international students come from Southeast Asian countries such as Vietnam, Indonesia and Malaysia.

The initiatives come in response to fears that current labour shortages in Taiwan may exacerbate. In 2023, the country hit a record low birth rate of 135,000, compared to over 300,000 in the 1990s. 20 percent of Taiwan’s population is expected to be 65 years old by next year. The demographic shift has resulted in an especially large shortage of workers in the country’s technology sector. Demand for talent in the semiconductor industry is expected to widen along with the boom in chips used in new technologies such as generative AI. Filling this labour gap is likely to remain a top priority for Taiwan, given that semiconductors contribute to as much as 15 percent of the country’s GDP.

Number of international students in Taiwan by nationality

Source: Geoscience Australia, Nikkei

Southeast Asian countries forge ahead with nuclear rollout plans

Large costs and unproven technology may present issues

Indonesia, the Philippines, and Thailand are progressing with plans to introduce nuclear power into their energy portfolios, as the region attempts to reduce its reliance on fossil fuels. In September, Thailand is set to unveil a national energy strategy running until 2027 which will assess potential sites capable of supporting a total 70MW of nuclear capacity. The Philippines is targeting the operation of a nuclear plant in the early 2030s, following an agreement with Washington in November 2023 to leverage US technology. President Marcos is particularly interested in reviving the Bataan Nuclear Power Plant which was completed in 1984 under his father’s presidency but never operationalised. Indonesia also aims to establish 1GW to 2GW of nuclear capacity by the early 2030s.

The countries hope that a nuclear rollout will reduce their dependency on fossil fuels. Thailand’s natural gas fields have almost depleted. Around 60 percent of Indonesia’s energy mix is coal. However, the countries are likely to face significant challenges in facilitating their nuclear rollouts. They are aiming to utilise small modular reactors (SMRs) – a new type of reactor that is smaller and safer than conventional plants. However, the technology remains largely unproven, with just a few in the world currently operational. The average cost of producing nuclear power (US$6,695-US$7,547 per kW in the US) is also significantly higher than that of renewables such as solar (US$1,327 per kW) which continues to decrease, even allowing for the variable output of renewables. The available areas for installing reactors in Southeast Asia is also limited by the region’s exposure to the Ring of Fire tectonic belt.

Home insurance rates in the US pushed to new heights by sustained pattern of extreme weather events

Insurance companies struggling to take on increased risk

US home insurance rates are set to reach record levels this year, amid a sizeable uptick in extreme weather events driven by climate change. Insurance comparison company Insurify expects average home insurance premiums across the country to increase 6 percent to US$2,522 from 2023 to 2024. Between 2021 and 2023, premiums increased a staggering 20 percent. The number of weather events that have caused damage of over US$1 billion in the US has increased from around 3 per year in the 1980s, to 13 per year in the 2010s and 28 in 2023.

The sharp increase in the number of severe weather events has destabilised the home insurance market in the most vulnerable states. Seven of the 12 largest home insurance companies in California have severely limited the number of new applications or completely withdrawn from issuing new applications since 2022. Average home insurance rates in Florida, the highest in the country, are projected to increase 7 percent this year to US$11,759. Such high rates significantly increase the risk taken on by insurance companies. With the number of natural disasters expected to continue climbing for the foreseeable future, further weakening of the US’ home insurance market could well be in the pipeline.

China 2060

In this month’s briefing, clients of Dragoman’s China services were updated on a potentially strategic new source of China competitiveness: low cost renewable energy. Some highlights:

Over the past year, China's renewable energy sector has experienced explosive growth, with historic increases in new installations. What has gone unnoticed is the rapid 40-50% decrease in the trading price of green electricity. The primary drivers behind this price drop are falling construction costs and market trading reforms. China finds itself in a unique position to leverage green electricity to transform its raw material industries. China has a focus on high-energy-consuming emerging industries well-aligned with renewable energy, such as green hydrogen, green chemicals, AI data centres, electric vehicles, and green shipping.

Five Key Take-aways:

  • Wind and solar trading rates in China fell below ¥200 yuan/MWh ($US27.7/MWh) in 2023, a 40%-52% reduction from the feed-in tariffs (FITs) of 2020.

  • Large-scale hydrogen electrolysis projects have secured electricity supply at $US21/MWh, well below the commercial viability threshold of $US28/MWh.

  • China's electricity trading design is the key boost in the reduction of renewable energy prices in the past 3 years, coming atop technical oversupply and manufacturing cost cuts.

  • In 2024, time-of-use (TOU) trading reforms are set to further pressure the prices of solar, now facing trading price caps as low as $US21/MWh in the leading solar market.

  • Integration of renewable energy into China's electricity spot market maintain pressure for falling renewable energy prices.

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