Last November I went back home to China, where I met more than 30 companies across 15 cities. My visit was timely, as Chinese equities had de-rated sharply throughout 2023 after COVID-reopening excitement quickly faded. Leading companies in the decarbonisation space were not spared the downdraft. My main objective was to try to separate market sentiment from company fundamentals, and test our conviction in the Chinese businesses we hold in our portfolios in this challenging macro environment.
Priority sectors
My biggest takeaway from a macro perspective is that the clean energy sectors remain central to China’s ambitions to achieve an economic transition. Policymakers are set on switching its growth momentum from ‘old to new’. ‘Old’ means real estate, debt-led infrastructure investments and low-quality exports. The ‘new’ growth drivers are renewable energy, EVs and other high-tech sectors such as semiconductors.
The new sectors are still not big enough, in terms of contribution to GDP, to replace real estate. But people believe the switchover must be achieved for China to get past its current economic difficulties. So with the new industries seen as pillars of the economic transition that China is determined to accomplish, my conclusion is that we can expect China to continue to support its clean-tech sectors.
The effects of state support to date are clear to see. China has dominated global EV sales, battery production and solar-module production for years. In 2023, the country recorded 216GW of solar installation, more than double the volume of the next three biggest markets combined. It sold >8 million EVs, 60% of the global total; and produced >580GWh of EV and energy-storage batteries out of c.700GWh of global demand1.
Watt the …?A country’s solar capacity is usually counted in gigawatts, a measure of how much power its solar modules can produce at any one time. The new solar panels China installed last year (i.e., not counting the ones already in place) can produce about 1.6 times the capacity of the entire UK electricity grid. Battery capacity is usually counted in gigawatt hours, a measure of how much energy they can store, which is a function of both their potential power output and the time they can sustain it. With 580GWh of battery power, you could drive a modern EV to Jupiter about five times (c.2.3bn miles). |
Price competition
While I was able to confirm that demand for clean-tech is continuing to grow, one challenging issue cropped up repeatedly throughout my meetings and conversations: price competition. The Chinese have a term for it: neijuan, which means something like ‘the rat-race of relentless competition’.
Most companies I met used this word to describe the hypercompetitive dynamics in their industries, which often result in significant price decreases. To illustrate the point, in the first 10 months of 2023, the Chinese solar industry achieved export-volume growth vs. 2022 of 90%, 72% and 34%, respectively, for solar wafers (thin slices of silicon used to make solar cells), cells (devices that convert light into electricity) and modules (multiple cells integrated into a panel). Yet the total value of these exports declined by 2.4% year on year2. Similar phenomena can be observed in EVs and batteries, where many companies are struggling to grow earnings despite significant volume growth. The reasons for this include slowing domestic demand growth (from a high base), worsening trade tensions between China and many developed markets, and excessive nameplate capacity (i.e., the amount factories could theoretically produce at full capacity) due to the ease of accessing public equity financing prior to 2022.
Investors are understandably worried that the earnings growth of many Chinese clean-tech businesses may not be sustainable. However, I came back with stronger conviction in companies such as CATL and Sungrow Power Supply3. Clear leaders in their fields (batteries and solar inverters, respectively), I think they are well positioned to emerge stronger from the downturn. Their differentiated products and solutions should help them defend their profitability and returns, while their peers with more commoditised products can compete only on price.
Take CATL, which continues to release new battery products for different end‑markets. I got to see some of these, such as its Shenxing 4C LFP battery (a fast‑charging lithium-iron-phosphate battery, which is the more affordable type of battery chemistry); and the Qilin battery (a 140kWh mega battery pack with an innovative heat-dissipation design). Importantly, these products are sold at different price points to the more commoditised products on the market. I also visited CATL’s zero-carbon factory, built to prepare the company for the European Union’s upcoming Carbon Border Adjustment Mechanism, which will impose tariffs on imported goods based on the carbon emissions required to produce them.
Qilin batteries
Shenxing (4C LFP) batteries
Source: Ninety One.
Another reason for my trip to China had nothing to do with our Chinese holdings per se. Rather, it provided a useful opportunity to get another perspective on some of our European holdings that compete with Chinese and other businesses. In particular, I visited customers and competitors of Infineon (semiconductors) and Industrie De Nora (electrodes, which are used for alkaline electrolysis, an essential process for green-hydrogen production)4. The ‘bear thesis’ for these companies is that they are vulnerable to Chinese competition. However, I learned that leading manufacturers that use Infineon’s products still see significant technological and capability gaps between the German company and its Chinese rivals. Similarly, customers of Industrie de Nora regard its electrodes as having an edge in terms of performance and durability – even though more than 80% of global alkaline hydrogen electrolysers were produced in China in 2022. That should help them retain their competitive advantages.
Long-term view
I always enjoy my trips to China, not least for the chance to catch up with friends and family. But I came away this time with other reasons to feel positive despite the macro concerns. Business conditions are certainly tough. And from talking to many companies across China, it looks likely that the ‘neijuan’ period of hyper-competition has further to run. Those with weaker businesses and commoditised products will struggle, and we can expect a shake-out in some industries. But with demand for cleantech continuing to grow and Chinese policymakers showing every sign of remaining fully committed to using these sectors to transition the economy to a new model, I think the longer-term prospects for leading businesses in the ‘decarbonisation’ space remain attractive.
About the companies
- CATL (China) is a global leader in electric vehicle and energy-storage battery manufacturing.
- Sungrow Power Supply (China) is one of the world’s largest manufacturers of solar inverters, which are key enablers of solar-power systems.
- Infineon Technologies (Germany) is a power semiconductor company whose products are widely used in clean-tech applications across renewable energy, electrified transport and energy efficiency.
- Industrie de Nora manufactures electrodes used for alkaline electrolysis, an essential process for green-hydrogen production.
Outside CATL’s net zero factory
Source: Ninety One.
General risks. The value of investments, and any income generated from them, can fall as well as rise. Costs and charges will reduce the current and future value of investments. Past performance does not predict future returns. Investment objectives may not necessarily be achieved; losses may be made. Target returns are hypothetical returns and do not represent actual performance. Actual returns may differ significantly. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Emerging markets: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
1 Source: CPIA, CPCA, RealLi.
2 Source: CPIA.
3 This is not a buy, sell or hold recommendation for any particular security. Individual security performance does not represent the performance
of any Sustainable Equity strategy. There is no guarantee that any Sustainable Equity strategy is currently investing and/or will invest in the
securities in the future. Sustainable Equity portfolios may change significantly over a short period of time. CATL and Sungrow Power Supply
were held in Sustainable Equity portfolios as at 31 January 2024.
