How the green transformation is reshuffling the cards
· 6 min read
The international race for the future technologies of a sustainable economy seems to be in full swing, fueled by significant policy measures in the world’s largest economies.
In my newsletter this week I look at:
◾ How the U.S., Europe and China are trying to channel capital flows
◾ What we can learn from the German auto industry and EVs
◾ Why we need to recognize, accept and learn to deal with industrial change
I travelled this week to Hamburg, in the northern part of Germany, to talk with clients about markets and sustainability. This year is on track to be the warmest on record after the previous high set in 2023 and as I don't have an air-con at home – living in a late 19th century building –, I was relieved to be in the cool train and to spend a night in a cooled hotel room. At the same time I was thinking about how air-con is a deceptively comforting blanket of climate tech and my break from the heat also had me thinking about the major investments being made around the world to bring our carbon output down.
The international race for the future technologies of a sustainable economy seems to be in full swing. Fueled by significant fiscal policy measures in the world’s largest economies. Consider this:
In the U.S., the Inflation Reduction Act (IRA) aims to disburse around USD 370 billion for measures dedicated to improving energy security and accelerating clean energy transitions.[1] While at least USD 206 billion of investments have been announced as of April this year (according to Bloomberg)[2], another analysis shows that in the past four quarters, there was USD 284 billion in new investments in the manufacture and deployment of clean energy, clean vehicles, building electrification and carbon management technology.
Meanwhile, China invested roughly USD 890 billion in clean-energy sectors in 2023, a 40% increase year-over-year (yoy). In detail, from the so-called “new three” industries receiving the most investments (solar, storage and EVs), investment in clean power generation and energy storage capacity increased 48% yoy, and investment in manufacturing capacity for solar, EVs and batteries increased by 60% yoy.[3]
In the EU, the EU Green Deal pledged to mobilise at least EUR 1 trillion in sustainable investments over the next decade.[4] In 2022, clean energy investments reached almost EUR 360 billion – twice as much as in 2015 and 20% more than in 2021. Investments into energy saving measures such as heat pumps, electric vehicles and other efficient equipment stand out with a 24% increase yoy.[5]
In view of this targeted (re-)channeling of capital flows towards sustainability, it seems reasonable to expect a significant shift in the industrial structures of the respective economies, as the chart below demonstrates.
Annual investment in clean energy by selected country and region, 2019 and 2024 (USD billion; Source: IEA, Deutsche Bank AG. Data as of August 2024)
Understanding this shift in industry structure is crucial for policy makers and business leaders, as it reshuffles the cards for technology and market leadership in the future world of the sustainable economy. A good – but also cautionary – example of how the sustainable transition is altering existing industry structures and disrupting long-established positions of technology and market leadership is the German automotive industry in comparison to the Chinese one.
German excellence in the field of car production made the local automotive industry an export hit –even today, around 76% of cars manufactured in Germany are exported.[6] In China, one of the main sales markets for German car manufacturers, where some even sell up to a third of all their cars, the dynamic seems to be reversing. According to the VDA, around one in five new cars in China in 2021 was a German car. In 2023, this figure fell to around 17%, according to the ICCT. In the market of battery electric cars, the share of German cars in China is even lower at 7%.[7, 8] At the same time, China's share in pure electric car imports into Germany more than doubled to 29% in 2023 compared with the previous year. From January to April 2024, China's share of total imports of pure electric cars to Germany rose again to 40.9%, although the number of electric cars imported from China fell by 15.7% compared to the first four months of 2023 due to weak German domestic demand.
This example illustrates why policy makers and business leaders need to recognize, accept and learn to deal with the shift in industry structures we are currently seeing. After all, major German car manufacturers are abandoning their former ambitious electric car targets and political measures to protect the industry may prove ineffective (as the recent example of EU’s import tariffs on Chinese EVs shows).[9,10] Meanwhile competitors are pushing ahead.
Reacting to this shift requires understanding and leveraging your own competitive advantages: The market and technological leadership of German automobile manufacturers is not only the result of the fact that it was created in Germany, but also due to the outstandingly efficient engine and production technology compared to the competition in addition to access to cheap input factors such as energy.[11] Now, however, the dynamic seems to have reversed: In addition to government subsidies, China's leading electric vehicle manufacturers benefit from massive cost advantages in virtually every phase of production - from raw materials to batteries to land and labor.[12] In addition, as industry experts emphasise, selling points for cars nowadays are much more focused on software than hardware, which is no particular strength of German car manufacturers.[13]
Finally, zooming out from EVs to the sustainable transition as a whole, the point to be made here is twofold. First, political and business decision-makers must admit that the global competition for future technologies is already reshuffling the cards, as recently emphasised by the German Institute for Economic Research.[14] Second, they need to articulate a carefully-chosen response – focusing on one’s own strengths (such as highly qualified labor market or a stringent policy framework), and weighing up the opportunities and risks of the strategy to be pursued. This is by no means a simple task and requires a holistic approach, ranging from the creation of an appropriate policy framework that has been shown to increase the number of patent applications and thus prosperity[15], to the utilization of existing human capital, as some research indicates that environmental policy can increase demand for green skills by incentivizing investments in green technologies.[16]
This article is also published on the author's blog. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.