The supply chain challenges of the sustainability transition

For many key energy transition technologies, supply chain resilience is a critical issue in the Asia-Pacific (APAC) region.

Last year, the United States and the International Energy Agency (IEA) encouraged Asian countries and others to diversify their energy and critical mineral supply chains in order to reduce their dependency on China and Russia¹. However, this is easier said than done.

When it comes to the energy transition, for example, China dominates the solar photovoltaic (PV), battery and electric vehicle (EV) supply chains, having gained scale, cost advantage and technological competitiveness over the past decade with its policies and protectionist measures. Other countries in the region have, however, struggled to set up or maintain their own supply chains.

During the last decade, global solar PV manufacturing migrated from Europe, Japan, and the US to China. According to the IEA, China has invested over USD 50 billion in new PV supply capacity² – that is ten times more than Europe's investment allocations. The country has also seen its share in all manufacturing stages of solar panels, such as polysilicon, ingots, wafers, cells and models, rise to more than 80% of world production, with the potential to go up to 95% by 2025 in some cases³. It is also home to the world's ten top suppliers of solar PV.

In batteries, China also dominates. A combination of subsidies on both the supply and demand sides during the early 2010s, alongside protectionist measures, have created domestic battery giants with substantial cost advantages and an entire supply chain built around them. Estimates suggest that China will have produced 76% of global lithium-ion battery cells in 2022, essential for battery manufacturing for EVs, compared to Europe's 7%⁴.

Meanwhile, key minerals required for batteries are heavily sourced from South America⁵, Australia⁶, Russia and the Democratic Republic of the Congo⁷. The Democratic Republic of the Congo is by far the largest producer of cobalt, followed by Russia in second place⁸. Russia is also home to one of the world's largest nickel producers. As such, Russia's invasion of Ukraine has intensified concerns around the vulnerability of supply chains.

Finally, China also dominates the rare earth supply chains used in wind turbines and EV motors, among many other critical components in missiles, firearms, radars and stealth aircraft. China accounts for 63% of the world's rare earth mining, 85% of rare earth processing, and 92% of rare earth magnet production⁹.

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Transforming supply chain risks

According to the IEA, the risk to supply chains is not only geopolitical, but also physical, with supply chains at risk in the event of floods, fire, or other damage. Talking about solar panel supply chain concentration in China, for example¹⁰, Fatih Birol, head of the IEA, told the Financial Times that the concern is “not only a geopolitical issue. It can be a fire in major facilities. It can be floods. Disruption of the solar PV supply chain has huge implications for our clean energy transition and energy security."

Europe and the US are ahead of other regions in undertaking a series of measures to achieve sustainable energy independence. In 2021, The European Commission proposed legislation to further the development of the battery market in the region, as part of its 'Fit for 55' package. The US is similarly looking at encouraging domestic manufacturing of EVs and EV batteries. The Inflation Reduction Act (IRA) expands not only EV tax credits, but also adds new credits to support US manufacturing¹¹.

For the APAC region, there are hopes of establishing new clean technology supply chains domestically, albeit challenges remain to achieve capacity of global relevance. Asian corporates are increasingly pivoting their supply chains closer to home, according to one study¹², which estimates that, between 2022-2023, 24% of supply locations for the region will sit in Asia (excluding mainland China), and 30% will be located in mainland China. The rest will be spread between Europe, North America, Africa, the Middle East and others.¹³ However, while 33% of respondents have environmental policies in place across their supply chains, 41% of these have no metrics to measure the progress or success of their sustainability transition projects.¹⁴

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Another survey, conducted in 2020 by EY, found that 67% of APAC respondents were taking steps to change supply chains, compared to 52% of global respondents.¹⁵ A Harvard Business School whitepaper highlights the innovative approaches some APAC companies are taking to strengthen their supply chains.¹⁶ Businesses are moving beyond thinking about efficiencies and cost controls in order to focus on building more resilient firms.

Looking ahead

The IEA points out that achieving its pathway to reaching net zero emissions by 2050 requires significant expansions in manufacturing capacity. For example, annual additions of solar PV capacity to electricity systems around the world need to quadruple by 2030 to stay on track.¹⁷ This means that as corporates and governments aim to meet international energy and climate goals, supply chain management is becoming more strategic.

Countries are trying to address their manufacturing gaps. Last year, for example, the Thai government agreed to fund the development and production of zinc-ion batteries to power EVs¹⁸, while in Singapore, JIOS Aerogel commissioned a new EV battery component factory.¹⁹ In 2021, the Philippine Department of Energy signed a memorandum of understanding with Australia's Star Scientific to explore the potential of hydrogen as an energy source for the country.²⁰ Elsewhere, Malaysia's PV industry is growing in strength, thanks to government support, reducing costs, and growing investor confidence.²¹ Last year also saw the Japanese government designate 11 items, including semiconductors, batteries, and rare earth materials, as 'critical materials', in an attempt to shore up supply chain resiliency, particularly amid China's growing influence and the Russian invasion of Ukraine, it said.²²

Indonesia is perhaps the most ambitious example of growing clean technology supply chains in the APAC region. The country is home to the world's largest nickel reserves, a key raw material in battery manufacturing. However, despite the export potential, to promote more value-added activities domestically, Indonesia banned nickel ore exports in January 2020. Instead, the national government is creating legislation to build an entire EV value chain while setting ambitious targets for EV production and usage. The country aims to produce 600,000 EVs by 2030 and one million in 2035.²³

With Western and Asian companies seeking supply chain diversification, there are significant new opportunities to be gained in the APAC region by building domestic capabilities in clean technology manufacturing. Although the scope of the challenge is substantial, the speed of change, bolstered by upcoming regulations and foreign commercial partnerships, cannot be underestimated.

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¹https://fulcrum.sg/southeast-asia-a-key-link-in-renewable-energy-supply-chain-resilience/
²https://www.iea.org/reports/solar-pv-global-supply-chains/executive-summary
³https://www.ft.com/content/6b17331c-8ea1-49ab-a95a-9d72e84493cf
⁴https://www.ft.com/content/a79e1277-6e34-4ece-b624-bc7fb5c93875
⁵https://www.undp.org/latin-america/blog/graph-for-thought/lithium-latin-america-new-quest-el-dorado
⁶https://www.minerals.org.au/news/australia%E2%80%99s-critical-minerals-drive-usas-ev-battery-program#:~:text=Driving%20investment%20in%20local%20processing,%2C%20cobalt%2C%20nickel%20and%20copper.
⁷https://www.reuters.com/business/energy/us-iea-urge-asian-countries-diversify-energy-supply-chains-2022-07-12/
⁸https://www.piie.com/sites/default/files/documents/wp22-12.pdf
⁹https://www.politico.com/news/magazine/2022/12/14/rare-earth-mines-00071102#:~:text=As%20of%20today%2C%20China%20accounts,firearms%2C%20radars%20and%20stealth%20aircraft.
¹⁰https://www.ft.com/content/6b17331c-8ea1-49ab-a95a-9d72e84493cf
¹¹https://www.engage.hoganlovells.com/knowledgeservices/news/the-iras-electric-vehicle-and-battery-credits-more-complexity-and-more-benefit-for-us-manufacturing
¹²https://www.gbm.hsbc.com/en-gb/feed/sustainability/creating-sustainable-supply-chains?cid=?cid=HBEU:KB:TB2022:P0:GBM:L14:GO:CAM:9:XX:14:1122:190:TB2022_Google_PPC_Phrase_sustainabilityandsupplychainmanagement&gclid=CjwKCAiAv9ucBhBXEiwA6N8nYH0nDcU7Yw1ySlMhChWDdvR5HWiWuDmU33ET0XXCjNYnyQW-weVEIBoCq4UQAvD_BwE&gclsrc=aw.ds
¹³https://www.gbm.hsbc.com/en-gb/feed/sustainability/creating-sustainable-supply-chains?cid=?cid=HBEU:KB:TB2022:P0:GBM:L14:GO:CAM:9:XX:14:1122:190:TB2022_Google_PPC_Phrase_sustainabilityandsupplychainmanagement&gclid=CjwKCAiAv9ucBhBXEiwA6N8nYH0nDcU7Yw1ySlMhChWDdvR5HWiWuDmU33ET0XXCjNYnyQW-weVEIBoCq4UQAvD_BwE&gclsrc=aw.ds
¹⁴https://www.gbm.hsbc.com/en-gb/feed/sustainability/creating-sustainable-supply-chains?cid=?cid=HBEU:KB:TB2022:P0:GBM:L14:GO:CAM:9:XX:14:1122:190:TB2022_Google_PPC_Phrase_sustainabilityandsupplychainmanagement&gclid=CjwKCAiAv9ucBhBXEiwA6N8nYH0nDcU7Yw1ySlMhChWDdvR5HWiWuDmU33ET0XXCjNYnyQW-weVEIBoCq4UQAvD_BwE&gclsrc=aw.ds
¹⁵https://hbr.tradepub.com/?p=w_defa2461&w=d&email=98f5a3051f760bc2f73b576c5f2b582b&key=WQQGIGnZzOMjhZEZJegq&ts=62768&u=0920270780931670862676&e=bWFoYUBtYWhha2hhbnBoaWxsaXBzLmNvbQ==&secure=1&_afn=0
¹⁶https://hbr.tradepub.com/?p=w_defa2461&w=d&email=98f5a3051f760bc2f73b576c5f2b582b&key=WQQGIGnZzOMjhZEZJegq&ts=62768&u=0920270780931670862676&e=bWFoYUBtYWhha2hhbnBoaWxsaXBzLmNvbQ==&secure=1&_afn=0
¹⁷https://www.iea.org/news/the-world-needs-more-diverse-solar-panel-supply-chains-to-ensure-a-secure-transition-to-net-zero-emissions
¹⁸https://www.just-auto.com/news/thailand-to-fund-zinc-ion-battery-development/
¹⁹https://batteriesnews.com/jios-aerogel-commissions-new-factory-singapore-electric-vehicle-battery-components/
²⁰https://www.reuters.com/article/philippines-energy-hydrogen-idUSL4N2K40T8
²¹https://www.pv-magazine.com/2021/07/02/malaysias-commercial-and-industrial-pv-segment-is-thriving/
²²https://www.aa.com.tr/en/asia-pacific/japan-designates-semiconductors-as-critical-materials-among-11-items/2767939
²³https://think.ing.com/articles/indonesia-bets-big-on-electric-vehicles-cars-but-has-a-long-way-to-go/