Playing catchup with China: The West faces uphill battle in growing cleantech supply chains

After decades of strategic investments, China has become the undisputed leader in clean technology manufacturing and dominates the associated supply chains.

On the other hand, Western economies are engaged in an uphill battle to develop domestic manufacturing to boost their economies and create more resilient supply chains. While the benefits are clear, a more expensive transition is inevitable.

China's dominance in cleantech manufacturing

Whether viewed with admiration or as a threat, China's achievements in cleantech are undeniable. 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. Since 2015, China has invested over $300 billion to build 1,000 GW of photovoltaic cell manufacturing capacity, 600 GW of wind turbine factories and 2,500 GWh of battery cell production capacity.

Under China's leadership, solar PV 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 rapidly progresses.

China's strategic move to control critical industries

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 responsible for 20% of GDP growth that year.

China's sector dominance 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.

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 electric vehicles become increasingly important. Chinese manufacturers, offering EVs at competitive prices in global markets, are gaining attention and threatening the position of long-established incumbents.

China also consumes a considerable 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 solar and 49% of wind installations worldwide are forecast to be built in China over the next five years. Even so, local supply far exceeds local demand, and China will inevitably remain a powerhouse in equipment exports.

Catching up a key priority of the West

The desire to decouple supply chains from China and nearshore production as much as possible gained momentum during the coronavirus pandemic, which exposed the risks of single-country reliance in supply chains. In the past few years, favorable policies have aimed to fuel cleantech manufacturing growth in new regions despite global oversupply

Government programs, such as the US Inflation Reduction Act and India's production-linked incentive, have promoted domestic cleantech production to create local jobs and enhance supply chain resilience.

The IRA 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. However, the IRA's future is uncertain following the reelection of US President Donald Trump.

By contrast, in Europe, policy initiatives aiming to support cleantech manufacturing have been largely ineffective.

The current trade tensions have also spurred a wave of cleantech capacity announcements across the Middle East and North Africa region, particularly in Saudi Arabia, positioning the region as a new hub for solar and battery manufacturing.

When it comes to low-cost mass production, however, everything points in China's favor. Lower labor, land and energy costs keep overheads down, while fewer 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.

Uphill battle

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. 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. 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.
• Building barriers to lower-cost imports to level the playing field. Over the last decade, the US market has progressively restricted material and component imports through diverse policy mechanisms (e.g. Section 301, Section 201) or high antidumping and countervailing tariffs that will raise the barriers to export low-priced components to the US.
• Engaging private investors 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.

Further reading: Breaking free: Can the West build independent cleantech supply chains?(opens in a new tab)