Why are solar panels and batteries from China so cheap?

It's more to do with automation and state-of-the art manufacturing processes than cheap labour.

When it comes to clean energy technologies, China is crushing it.

It dominates the supply chain of the main energy minerals. It’s not only rolling out solar power rapidly at home, it’s also exporting huge amounts of solar panels elsewhere. Take a look at the chart below, which shows solar PV exports from China to the rest of the world.¹ Increasingly, these panels are going to low-to-middle income countries who are hungry for energy, and will go after whatever’s cheap: that’s Chinese solar.

It produces three-quarters of the world’s batteries. Its largest EV carmaker, BYD, is producing high-quality electric cars for as little as $10,000, and is growing rapidly in many markets across the world. BYD is now targetting the domestic battery market. CATL, the world’s largest battery manufacturer, is pushing the limits of battery technologies, with claims that it can add 300 miles of charge in just 5 minutes (I have some doubts about battery degradation, but I’d obviously love this to be true). The list goes on.

European and American manufacturers are being left in the dirt. One response has been protectionist policies: slapping on tariffs and implementing import quotas. A few newsletters ago, I argued that these were not good interventions if the goal was to increase the number of energy jobs in European and American markets. That’s because most clean energy jobs are in deployment and maintenance rather than manufacturing, and since higher costs slow down the rollout of renewables, increasing prices reduces the total number of people working in clean energy (even if the number working in manufacturing increases).

These policies also fail to address the fact that they will not make Western manufacturers competitive in a global market.

This raises the question: Why are solar panels and batteries so much cheaper in China?

The reactionary answer is that they’re only cheap because of unfair subsidies and exploitative working conditions. But that’s an outdated perspective on what’s actually happening.² The idea that China could only compete with Western manufacturers by cutting corners rather than genuine expertise stinks of arrogance. China does provide subsidies to battery manufacturers, and there is convincing evidence that the country has relied on forced labour in some of its supply chains. I’ll address these points later. But, China mainly dominates these markets because it has produced a long-term industrial strategy for these technologies and has honed an optimised, modern supply chain as a result.

The notion that China’s manufacturing output is purely the result of some centralised, governmental program is misguided; it has developed an incredibly competitive market with companies fighting for any edge to cut prices and beat competitors. The solar and battery industries are pretty brutal to be in, with slim margins.

Let’s look at some of the reasons why these technologies cost so much more in Europe and the US, and what could be done to reduce the gap (if that’s actually what we want to do). I’ll focus on batteries, but the main lessons will be similar for solar PV.

The CRU Group has done fantastic work drilling into the global battery markets, where most of this data and insights come from.

---

Leading Chinese battery producers are also far ahead of their domestic competitors

Before comparing costs to those in Europe and the US, it’s worth noting that the best Chinese manufacturers — namely BYD and CATL — also have much lower production costs than others in China.

The chart and table below show the breakdown of where these costs come from. A few things stand out, which also explain the gap to Western manufacturers.

The first is that labour costs from BYD are lower, not because of much poorer salaries, but because of high levels of automation. BYD factories can have as few as 50 workers per gigawatt-hour (GWh) of production, compared to as many as 233 workers elsewhere.

The second is that “yields” tend to be higher, which leads to lower costs for cathode and anode production. "Yields" tell us the percentage of products that are good enough to be used in the next step of the supply chain. BYD has high yields, which means that nearly all of the components it builds meet the quality standards needed to be used in final products. Other manufacturers have medium or low yields, which means that a lot of components are of poor quality and need to be scrapped. That’s throwing money away, and is not good for material use either.

Leading manufacturers have these high yields because they’ve developed extremely state-of-the-art, optimised production processes with minimal mistakes.

---

What makes up the cost of battery production, and how does this compare across regions?

The final cost of batteries consists of three components: the materials, labour to put them together, and the cost of processing materials into the final product (which is mostly energy).

The chart below compares the costs of China, South Korea, the European Union, and the US.

Immediately, we can see where the extra costs are coming from. Material costs are a bit higher in the EU and the US. But, the biggest difference in the US is the high cost of labour. In the EU, it’s processing, because electricity is more expensive than it is in China and the US.

---

It’s not just about low labour costs; Chinese manufacturers have become highly automated

The following waterfall chart shows what the CRU Group thinks the US can do to increase its cost competitiveness. On the left, we have the baseline costs, and each bar to the right shows the potential cost reductions from different factors. In the “optimised case” prices have halved.

The first thing US manufacturers — especially startups without experience — can do is increase yields. The “optimised” case means ramping them up to 94%, which means that manufacturers today are achieving quite a bit less than that today. A significant fraction of battery components go to scrap because they’re of insufficient quality. This once again highlights how much leading manufacturers in China benefit from state-of-the-art, honed production processes with minimal room for error. Over 70% of electric car batteries that have ever been manufactured came from China, so this is not surprising.

Since China also refines a lot of the minerals and smaller components, its supply chains can become incredibly integrated, which also makes them more optimised.

The second big chunk is labour costs. Now, it’s undeniable that wages in the US are higher than they are in China. But this is not necessarily because Chinese salaries are abysmally low. Yes, they are low by American or European standards, but wages for factory roles are often higher than they are in the US’s southern neighbour, Mexico.

The biggest factor in labour costs is automation. The US uses six times as many workers per GWh (I initially found these numbers pretty shocking and hard to believe), so it’s not surprising that labour costs much more. China has invested heavily in automation, meaning many processes run with very little human input.

This is something else to keep in mind when considering the case for “bringing manufacturing jobs home.” There’s certainly scope for this, but it is at odds with the fact that low costs often rely on automation, not human labour. Especially with the growth of artificial intelligence, some manufacturing jobs could be increasingly vulnerable.

---

High energy prices are crushing Europe’s competitiveness

Labour costs and the lack of automation are also relevant for Europe. Another factor that is killing Europe’s competitiveness — not just for batteries but for many industrial products — is the high electricity costs.

If energy accounts for a substantial portion of the cost of manufacturing, then it makes no sense to build stuff in places where electricity costs are high. Unfortunately, that’s the dilemma for many European countries, especially compared to China and the US.

---

What about human rights abuses in Chinese labour?

The above data does not negate or deny the fact that China has very likely engaged in exploitative practices in some of its supply chains. I previously wrote about the issues around cobalt mining in the Democratic Republic of Congo (although this is not only an issue for China; other countries buy this cobalt too).

Here I’m talking about the forced labour of Uyghurs and other minority groups within China itself. This appears to be most prominent in the polysilicon industry for solar panel production, but there are also reports of it happening for lithium production, which is a key component of most batteries.

Xinjiang has become the main hub of clean energy technology production in China, in part because it is rich in resources and has cheap coal. The government’s “Poverty Alleviation Through Labor Transfer” is promoted as a program where millions of people have been transferred across China to regions where they can find work (not just in manufacturing, but industries like agriculture too).³ While this is promoted as a voluntary program, many report that labourers don’t actually have a choice.

Here is the US Department of Energy’s List of Goods Produced by Child Labor or Forced Labor. The US actually has a Uyghur Forced Labor Prevention Act (UFLPA), which aims to ban the import of goods produced with forced labour from Xinjiang. This — rather than thinking you’re boosting domestic energy jobs, while actually hurting them — is actually a good reason to have stricter trade policies.

So it seems very likely that there are — or have been — at least some exploitative practices in China’s supply chains. It should go without saying that I think that’s bad and unacceptable. But my point is that this is still not the reason (or is only a very small reason) why these goods from China are cheaper than elsewhere. The main driver of lower labour costs has been automation; not having a human worker at all.

---

What about all of the subsidies China hands out?

Yes, China has provided a range of financial support mechanisms to promote the development of its clean energy industries. These include potential tax breaks for battery makers that meet certain energy density and safety thresholds. CATL has also received substantial subsidies — in the order of the high hundreds of millions of dollars a year — to support research, innovation, and scale-up.

But China is not alone in doing this. Many countries — including the US — have used similar tools to support strategic industries. In its early years, Tesla received a $465 million loan from the Department of Energy (which it repaid) and has since benefited from billions in regulatory credits and tax incentives. The Inflation Reduction Act was set up to provide financial support for companies like Tesla, with potential subsidies in the tens of billions.

This is not a criticism of Tesla or the US; there are good reasons to do this. It called good industrial strategy. But you cannot support these programs while calling out China for “cheating” for doing the same.

1. Ember Energy tracks solar PV exports from China monthly, including country-by-country data: https://ember-energy.org/data/china-solar-exports-data/

2. Tim Cook, CEO of Apple said something similar about manufacturing in the electronics industry: "There's a confusion about China. The popular conception is that companies come to China because of low labor cost. I'm not sure what part of China they go to, but the truth is China stopped being the low-labor-cost country many years ago. And that is not the reason to come to China from a supply point of view. The reason is because of the skill, and the quantity of skill in one location and the type of skill it is...The products we do require really advanced tooling, and the precision that you have to have, the tooling and working with the materials that we do are state of the art. And the tooling skill is very deep here. In the U.S., you could have a meeting of tooling engineers and I'm not sure we could fill the room. In China, you could fill multiple football fields..."

https://www.inc.com/glenn-leibowitz/apple-ceo-tim-cook-this-is-number-1-reason-we-make-iphones-in-china-its-not-what-you-think.html

3. Murphy, L. and Elimä, N. (2021). “In Broad Daylight: Uyghur Forced Labour and Global Solar SupplyChains.” Sheffield, UK: Sheffield Hallam University Helena Kennedy Centre for International Justice.

https://www.shu.ac.uk/-/media/home/research/helena-kennedy-centre/projects/pdfs/evidence-base/in-broad-daylight.pdf