Day: September 16, 2023
By Abdul Rahman Yaacob
The AUKUS agreement between the United States, the United Kingdom and Australia significantly shifts Australia’s defence strategy and future capabilities by providing the opportunity for Australia to acquire nuclear-powered submarines. But Australia will also receive advanced technologies under Pillar Two of the deal. This is one area in which Australia can leverage AUKUS to cement its defence relations with Southeast Asia.
Pillar Two focusses on developing advanced technologies in several areas, including artificial intelligence (AI), hypersonic missiles, undersea capabilities, cyberspace and electronic warfare.
Many of these technologies are just as crucial to Australia as the nuclear submarines, but it’s the acquisition of nuclear-powered submarines has received most of the public’s attention. The AUKUS leaders’ joint statement in March 2023 was issued at Naval Base Point Loma in San Diego, California with warships in the background. Even the joint statement by the three leaders focussed mainly on submarine-related issues.
Perhaps the focus on nuclear submarines is unavoidable. But the Albanese government and a number of security specialists have recognised the broader importance of Pillar Two. The Australian government’s 2023 Defence Strategic Review demonstrates this by calling for a senior official or officer to be appointed to focus on the implementation of this part of AUKUS.
The emphasis given to acquiring nuclear-powered submarines under AUKUS has caused friction between Australia and several Southeast Asian states, drawing concerns that AUKUS could trigger an arms race and ratchet up military tensions in Asia.
Underlining these concerns is the uncertainty expressed privately by several Southeast Asian defence officials as to whether nuclear-powered submarines will be a net contributor to Southeast Asian security or a source of instability that threatens their sovereignty. One key concern is that Australian nuclear-powered submarines may end up operating covertly within Southeast Asian states’ territorial waters.
Despite the initial scepticism, Southeast Asian officials have quietly accepted that AUKUS is here to stay, and some are looking at drawing benefits from its existence. This creates a convergence point between Australian and regional strategic interests.
This is where Pillar Two could play a part. Unlike the first pillar, which will take decades to come to fruition, the second is comparatively low-hanging fruit that can be developed rapidly. This was shown in the deployment of AI-enabled assets to detect and track military targets during a demonstration in the United Kingdom in April 2023.
Based on interviews and conversations with Southeast Asian defence officials, some regional states are interested in receiving assistance in undersea capabilities, cyberspace and electronic warfare — areas well within the scope of AUKUS’ Pillar Two.
These defence officials privately expressed their understanding that Australia will not be open to sharing the most advanced military technologies acquired. But they hope for assistance in developing minimum defensive capabilities, especially in the cyber and maritime domains.
The cyber domain represents one of the most promising for Pillar Two in Southeast Asia. Based on a Recorded Future report, Chinese state-sponsored entities are known to conduct espionage activities targeting critical institutions in Southeast Asia, including defence-related organisations in Malaysia, the Philippines and Thailand, and political offices in Vietnam and Indonesia.
Another area in which Australia could collaborate with Southeast Asian states, especially Indonesia, is in undersea capabilities. Indonesia is an archipelago connecting Australia with Asia through critical undersea cables traversing its waters. This includes the Australia–Singapore Cable (ASC), Australia’s most advanced, high-capacity and low-latency submarine fibre optic cable system stretching some 4600 kilometres from Singapore to Perth.
Indonesia does not have the capabilities to monitor and secure undersea infrastructure, such as the ASC, even though several officials privately expressed their suspicions that submarines from a certain foreign power have been secretly operating within the Indonesian archipelago. This situation indirectly threatens Australia, as hostile powers could target the ASC and other undersea cables and critical infrastructure. Thankfully, Pillar Two provides a mechanism through which Australia could assist Indonesia in developing its undersea monitoring capabilities.
But one key feature of the AUKUS agreement may limit Australia’s sharing of Pillar Two technologies with Southeast Asian states. Advanced technologies under AUKUS are developed trilaterally with the United Kingdom and the United States. They may not want to transfer or share advanced technologies with parties outside the AUKUS framework. Australia must convince its AUKUS partners that certain Pillar Two technologies can be shared safely with selected Southeast Asian states to improve their defence capabilities and indirectly contribute to Australia’s security.
Given its geographical proximity, Southeast Asia is crucial to Australia’s security and prosperity. Skilfully leveraging Pillar Two will enable Australia to attain strategic objectives in both defence and foreign affairs. Southeast Asian states would likely perceive Australia’s efforts to improve their defence capabilities as improving rather than destabilising their security environment, making Pillar One all the easier to accept.
About the author: Abdul Rahman Yaacob is a Research Fellow at the Southeast Asia Program, Lowy Institute.
Source: This article was published by the East Asia Forum
By He Jun
Electric passenger cars, solar cells, and lithium batteries constitute China’s three new important products in foreign trade. Against the backdrop of an overall decline in the country’s exports this year, these three products have maintained rare export growth. That being said, China’s photovoltaic industry development is facing potential risks of industry-wide overcapacity, and even self-destructive competition.
According to reports from the Chinese business news site Caixin, JionkoSolar, the world’s largest photovoltaic component shipper, has declared its focus on investments in its Shanxi mega-base. The company plans to invest in a 56GW strategic capacity project in four phases over two years. This mega-integrated solar super factory, the world’s largest, covers the entire chain of production, including silicon wafers, cells, and modules. It is also the industry’s largest production base for next-generation N-type batteries, with a total investment of approximately RMB 56 billion.
JinkoSolar’s massive investment plan symbolizes the current state of development in China’s photovoltaic industry. While the industry appears to be experiencing a booming phase of investment and massive capacity expansion, it has, in reality, started to witness looming dark clouds over it. Since 2023, the combined forces of capital, enterprises, and the government, hot money has poured in. Then, there is the announced capacity for various segments of the photovoltaic industry chain that by the end of 2023, it would rapidly progress toward the terawatt level, reaching 1000GW. This is double China’s total global demand, signifying an oversupply of investments across the entire photovoltaic industry chain in the country.
Caixin’s statistics show that in the photovoltaic component segment aimed at the end market, the production capacity plans of just the top five photovoltaic component companies, including JinkoSolar, LONGi Green Energy, JA Solar, Trina Solar, Canadian Solar, by the end of this year have reached 465GW, a 54% increase compared to the end of 2022. Their combined shipment targets are in the range of 310-325GW. In reality, this level of shipment can already meet the demand of most of the world. It’s worth noting that beyond these top five, silicon material leader Tongwei Corporation and GCL Technology, as well as silicon wafer leader TCL Zhinghuan, are all substantially expanding their production capacities as they move toward integration.
The term integration here refers to achieving self-sufficiency in at least three key segments of silicon wafers, cells, and modules, with a minor portion sourced externally. It may even extend to the upstream silicon material segment. For example, in 2023, Tongwei Corporation plans to increase its module production capacity by 4.7 times to 80GW, and its integration rate with cells will increase from 20% to 80%. Meanwhile, LONGi Green Energy aims to increase its cell capacity by 1.2 times to 110GW, with its integration rate with silicon wafers rising from 37.6% to 58%. If companies across different segments of the industry chain pursue such a path, it implies that previously distinct companies operating in different parts of the industry chain with clear-cut roles are now becoming more homogeneous.
The large-scale expansion of Chinese companies has led to a peak photovoltaic supply capacity in China of nearly 1000GW within this year, while the combined global demand is less than half of this figure. According to estimates by various organizations and experts, the global new installed capacity in 2023 is expected to be between 350 and 400 GW. Considering the capacity in the distribution segment, the most optimistic estimate for the maximum terminal component consumption is also around 400-500 GW. This means that China’s photovoltaic production capacity is absolutely excessive on a global scale.
Even if the Chinese photovoltaic industry is aware of the risks associated with rapid expansion, in this abnormally competitive environment, no one dares to withdraw from the expansion competition.
The survey by Caixin revealed that the Chinese photovoltaic industry is full of conflicting attitudes – should production capacity be expanded further? Should integration be pursued? Not expanding may result in losing industry status, while not integrating may make it difficult to withstand the impending price war across the entire industry chain
Why does the industry, despite recognizing the risks, continue to invest? Local governments play a pivotal role in driving this surge in production expansion. An insider close to JinkoSolar revealed that the Shanxi mega-base, being a major project, received robust backing from the local government. Beyond the RMB 9.7 billion raised through additional shares, the remaining RMB 20-30 billion required for the project primarily originates from local urban investment funds or urban investment platforms, which provide bond financing guarantees for companies. Essentially, it involves funding from financial institutions operating behind the scenes. Industry experts note that this has become the prevailing model nationwide, with photovoltaic projects enjoying unwavering support from authorities, and government investment returns consistently exceeding 30%. When a company invests one hundred million yuan, the government utilizes mechanisms such as land allocation, tax incentives, interest subsidies, and financial aid to ensure a minimum return of RMB 30 million.
China’s surplus production in the photovoltaic industry has now permeated the global market. Currently, 8 out of every 10 solar panels worldwide are produced in China. Data reveals that the country’s capacity and output in each segment of the photovoltaic supply chain, including silicon materials, silicon wafers, cells, and modules, hover around 80%, with silicon wafers astonishingly reaching 97%. More than half of China’s photovoltaic modules are exported. Apart from the European and American markets, Chinese photovoltaic exports are rapidly increasing in the Middle East, including Saudi Arabia, the UAE, and Oman, South America, including Brazil, Chile, and Peru, as well as Africa, including South Africa. However, regardless of the market, numerous Chinese companies are swiftly saturating it.
In the face of intensifying competition, companies in the industry are well aware of the situation but are reluctant to withdraw. Within the same technological category, these companies essentially have no viable exit strategy. In its financial report released on August 30, LONGi Green Energy stated that it is inevitable that the industry will face temporary and structural surpluses as industrial end-demand struggles to absorb rapidly increased new capacity, and the entire industry is about to enter a survival of the fittest.
From the above situation, one of China’s prized new exports, the photovoltaic battery sector, is actually facing significant risks due to industry-wide oversupply. For both the industry and Chinese government departments, it would be crucial to recognize the severity of the oversupply risk across the entire industry chain. Due to multiple investments leading to chain expansion, some segments in the upstream photovoltaic industry still seem to have market and profit potential. However, once downstream oversupply is transmitted to the upstream along the industry chain, it is only a matter of time before there is absolute oversupply across the entire chain. When that happens, it is possible that the Chinese photovoltaic industry will undergo another major reshuffle, and even face the risk of a large number of major enterprises going bankrupt, similar to the risk currently faced by the real estate industry.
This risk situation has developed partly due to businesses not adjusting their operating strategies rationally based on risk assessment. Instead, they collectively decided to gamble over it. Additionally, local governments have overlooked easily identifiable industry and market risks and still invested their limited resources in this increasingly fierce market. Researchers at ANBOUND believe that these issues merit profound consideration and analysis.
Amid global geopolitical games putting added pressure on China’s industrial development, it is crucial for China to wisely choose its areas of focus and allocate resources strategically to achieve breakthroughs or enhance business profitability. However, in the absence of systemic and coordinated efforts, both businesses and local governments often prioritize their individual interests, resulting in low-level competition within mature industries. This approach can lead to a scenario where everyone loses. Even though Chinese companies dominate global photovoltaic capacity, factors such as market space on the consumption side, environmental standards, and legal changes continue to significantly impact the low-profitability supply side.
Final analysis conclusion:
The seemingly flourishing Chinese photovoltaic industry is facing systemic risks that both the industry, as well as the country’s central and local governments need to take seriously. If the industry continues to fall into self-destructive competition, it could deal a significant blow to the country’s already leading photovoltaic sector.
He Jun is a researcher at ANBOUND
By Daniel Lacalle
The eurozone economic figures show the risk of stagflation, and the short-term impact is clear in Germany and France, but it extends to the rest of the countries.
Why has the eurozone lagged the United States and other developed economies in recent years? The enormous stimulus packages, including the 2009 Growth and Job Plan, the Juncker Plan, the New Green Deal, and the Europe Next Generation, are proving that central planning only delivers poor growth, elevated debt, and now high inflation.
The ECB’s latest figures show that monetary aggregates are starting to moderate, but inflation remains high and, in the latest print, is rising.
Consensus estimates of GDP growth in 2023 stand at 0.6% with inflation above 5%, according to Bloomberg, and it is important to remember that core inflation continues to be three times higher than the target of price stability.
Lagarde’s inflation messages seem clear, but the ECB’s target must be met. and interest rate increases are here to stay, although the market estimates that the ECB will start lowering interest rates by 2024. The problem is that the eurozone is only betting on rate hikes to moderate inflation, while governments continue to spend billions of euros on so-called Next Generation Funds and deficits that mean more inflation or taxes in the future.
We should not be surprised that credit in the eurozone is falling along with monetary aggregates. The entire burden of monetary normalization is falling on the productive sector, families, and businesses, while many governments continue to increase deficit spending.
The figures for growth in the eurozone are very poor, but they are even worse when we take into account that Ireland’s progress, as shown by Eurostat, almost entirely explains the most recent upward revision. What does the eurozone do? Instead of incentivizing the economic freedom model, it subsidizes the intervened ones.
The economy is expected to grow slightly in 2023, plagued by high inflation, rising interest rates, and lower exports. The Next Generation funds have no discernible marginal or multiplier effect.
The weak state of manufacturing and service indices confirms this fear. PMIs show a widespread negative trend in new orders and investment.
Hiking rates is not enough when the ECB’s balance sheet is 52% of GDP. Harmonized inflation fell to 5.3% in July from 5.5% in June, due to the base effect and the decline in commodities. However, commodities have been bouncing since May, when the market started discounting the end of rate hikes.
We cannot ignore the fact that the data on eurozone inflation expectations is rising.
The ECB raised its benchmark interest rate to 4.25% from 4.00%, a cumulative increase since July 2022 of 425 basis points. I believe it will end in 2023 at 4.43% and in 2024 at 3.68%, but without finishing the inflation battle.
Despite trillions in deficit and growth central plans, the eurozone faces an environment of poor growth and high inflation with strong headwinds, led by an increase in energy costs and the lagging effect that rising rates can generate, as interest rate increases do not show their full effect on the economy until 12–18 months after they are completed, according to the ECB’s estimates.
We would also remember the EU’s technological problems. While the US and China are leading global technological advances, it seems that the European Union has lagged in growth and investment, but above all in patents and technology companies. The EU does not have technology giants that can challenge the global leaders, and one of the factors that worries us most is the very high level of taxation. It works against the opportunities for creating world-class tech giants.
According to the European Commission itself, taxation in Europe remains at a very high level for capital (27.8%) and labor (21%), two key factors for the development of technology companies. Such high taxation jeopardizes innovation, the attraction of investment, and the improvement of human capital.
If there is a lesson for the United States and the rest of the world, it is that massive central planning does not deliver growth and that governments do not lead economic development and innovation. The eurozone would benefit from a supply-side, bottom-up approach to the economy. Unfortunately, it is doubling down on central planning.
About the author: Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014). He is a professor of global economy at IE Business School in Madrid.
Source: This article was published by the Mises Institute