Economic security – an idea that encompasses a broad set of interconnected elements including supply chain resilience, research integrity, and industrial competitiveness – has become a defining issue for European policymakers. External threats such as another global pandemic, violence spreading across regions like eastern Europe and the Middle East, an ever more powerful China and the possible return of former US President Donald Trump, are all at the forefront of European policymakers’ minds as they design economic policy. However, the EU is not at the forefront of green manufacturing. China and the US are leading the clean tech race.
In 2022, China overtook Germany to become the world’s second-largest car exporter (after Japan), with one-third of Chinese car exports electric vehicles (EVs). The US, meanwhile, fuelled by the Inflation Reduction Act (IRA), has rapidly become one of the world’s most competitive locations for clean tech investment. The EU27, whose economy has shrunk, in relative terms, from being slightly larger than that of the US in 2008 to one-third of its size in 2022, risks falling behind.
The European Commission has responded with the Net-Zero Industry Act, whose express aim is to “strengthen the European manufacturing capacity of net-zero technologies and overcome barriers to scaling up the manufacturing capacity in Europe”.
The Act is intended to support the EU in meeting a target of manufacturing at least 40% of the strategic net-zero technologies it needs every year by 2030, with measures including the lowering of administrative burdens for net-zero manufacturing projects, skills enhancement programmes, a Net-Zero Europe Platform where countries can discuss and exchange information, and enhanced access to public procurement procedures and auctions.
Europe "cannot compete" with China
Not everyone is convinced that the EU can or should aim to bring green manufacturing home, however. Speaking to Energy Monitor, Javier Cavada, the CEO of Mitsubishi Power for Europe, the Middle East and Africa, said he does not believe the EU can compete with other countries on cost.
“I don’t see Europe being the place that will produce the cheapest version of products like electrolysers and batteries. We cannot compete with the volume and price found in countries like China and South Korea,” he said.
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Mitsubishi Power is a market leader in the manufacture of technologies such as hydrogen-compatible gas turbines (it has led the world’s largest hydrogen-natural gas fuel-blending project), carbon capture and storage (CCS), electrolysers and batteries. It is also a leading software provider to manage grid balancing and power interconnection. The company’s European business is focused on sales and distribution, while manufacturing is focused in the Far East.
“I have been running factories in China for many years, and I have to say, when you have technologies that need high volume and low wages, the idea that Europe can compete is a joke,” Cavada said. “If you look at clothes brands like Zara and H&M, they all manufacture in Thailand and Vietnam – and it is the same here: to be a competitive manufacturer, you want to choose somewhere that is much better value.”
Optimistic: security trumps economics
But even if Europe cannot compete on cost, other factors including technological prowess, education and access to financing mean that we should not write off green manufacturing in the EU. While Europe may have lost much of its solar manufacturing base to China in the 2010s, it remains a strong competitor in the wind sector, continuing to meet a large majority of component demand, shows data compiled in a recent report from the German think tank Agora Energiewende.
For Matthias Buck, Europe Director at Agora Energiewende, there is little chance that wind could go the way of Europe’s solar manufacturing base. For him, the past few years have moved us into a “new political reality”.
“Before Covid, there was very little awareness of the risks associated with supply chains, but now we know that we are highly vulnerable in Europe... The question is: How do we deal with this?" he says
“One thing that we seem to have a broad agreement on is that the cheapest price is no longer the most important criterion”, he adds. “It is not only about economics, but also about security – and there is a new willingness to pay an insurance premium when sourcing products in order to ensure that security”.
A 2022 survey of 368 supply chain professionals from Reuters Events finds that 67% of global retailers and manufacturers were forced to change where they source materials and components due to the supply chain disruptions since the Covid-19 pandemic, with 33% planning to change manufacturing locations.
The same survey shows that European countries are among the top destinations for manufacturers looking to relocate manufacturing and supply chains.
Shifting green manufacturing to the EU
Beyond manufacturers looking for more local suppliers, there is anecdotal evidence that points to growth in Europe’s manufacturing base. Dutch clothes retailer C&A is opening a new textile plant in Germany to produce 400,000 pairs of jeans a year. Swedish carmaker Volvo plans to build a third factory in Europe (Slovakia) in 2025, which will only produce EVs. Leading chipmaker Intel has announced a new major factory in Germany, a design and research facility in France, and an assembly site in Italy.
However, it remains unclear whether a few big announcements translate into the sea change for EU green manufacturing that many are hoping for. One company that claims such a change could indeed take place is Chinese solar manufacturer LONGi, the world’s largest manufacturer of photovoltaic panels.
“Reshoring manufacturing to Europe makes sense from a business perspective, because of risks to supply chains and also because [of] policy incentives [in Europe],” says Benjamin Wong, head of marketing at the company. “The upper reaches of the supply chain – wafers, ingots and polysilicon – remain a very niche product that is likely to remain in China, but the LONGi view is that it would certainly make sense to locate solar modules and cells [production] back in Europe.”
Wong adds that there is a strong logic to manufacturing in Europe, given that raw materials are moving from mining sites in Africa to factories in China, before the finished product is moved back across the globe to Europe. He admits, however, that production costs remain “much higher” in Europe.
In practice, LONGi itself is far from a major shift towards Europe. Technical director Vitor Rodrigues tells Energy Monitor that while 20% of the company’s manufacturing currently lies outside China, the company is only aiming to boost this to 25%. LONGi is building a new factory in the US, but only “looking into” manufacturing in Europe.
An effective policy response
Welcoming global technology and value chain leaders to manufacture in Europe will be a part of the solution. Moreover, Buck also points to several major policy interventions that aim to retain and restore European manufacturing, beyond simple sound bites.
For starters, the German Government has announced a €28bn ($30.7bn) package to shield the country’s manufacturers from high energy costs, as they struggle in an era without cheap Russian gas.
Then there is the European Commission’s Wind Power Package, announced at the end of October, which includes a number of measures to ensure that the EU wind industry is fully supported in the coming years, such as the easing of project permitting constraints; support in holding new wind power auctions; new work with the European Investment Bank to improve access to finance; new trade defence instruments to strengthen the competitiveness of the EU wind industry; as well as work focusing on skills. Industry group WindEurope described the package as a “game changer” for the industry.
Europe continues to fall short in some areas, however. “There continues to be too little cooperation on financial support and state aid among member states which means that some countries can afford to spend a lot, and others cannot. To address this and ensure long-term competitiveness of European clean-tech manufacturing requires dedicated EU-level funding as part of a broader policy package”, says Buck.
Divisions over the question of state intervention emerged when Commission chief Ursula von der Leyen announced a new European Sovereignty Fund in 2022, ostensibly designed so that the EU could compete with subsidies provided by the IRA in the US. However, instead of delivering a figure similar to the $370bn seen in the US, the Commission only proposed €10bn, and that money was mostly rehashed from existing EU funds. That said, analysts say the EU has the same funding available as the IRA – it is just less obvious how to get it.
The EU also retains one major advantage that nobody else can easily compete with: its standards setting, evident in everything from its EU Emissions Trading System (ETS), recently expanded to transport and buildings, as well as the world’s first Carbon Border Adjustment Mechanism and definition of 'green' hydrogen.
“Europe has a real strategic advantage in setting global standards”, says Buck. “Europe’s single market is at the forefront of defining what is or is not green. The world is heading to a place where products will increasingly compete on sustainability, and European companies are very well placed to capitalise on that”.
A complicated path forward for EU green manufacturing
Signs of a more interventionist industrial policy mean there are reasons to be optimistic that the EU can achieve its ambition of both protecting and reshoring manufacturing, but it remains a complicated path to pursue. It arguably makes little sense, for example, to reshore the cheapest inputs in the supply chain – indeed, the very competitiveness of EU industry often depends on the ability to import such products. At the same time, if the aim really is to reshore supply chains for economic security, there is no reason why the cheapest inputs should be discounted.
While both national governments and the Commission have been active in supporting industry, certain sectors continue to demand more support.
“Today, European vehicle manufacturers are facing a very asymmetrical challenge," said Luca de Meo, president of the European Automobile Manufacturers Association, in a statement earlier this year. “We are no longer leading the technological race. At the same time, as purchase incentives for zero-emission vehicles wane in the EU, we note massive support to our competitors in China and the US. All of this is happening in a context where overall European competitiveness is eroding.”
Whatever the correct strategy for supporting EU industry, what almost everybody seems to agree on is that Europe needs a strategy; the era of simply leaving things to market forces is behind us. For Cavada, who believes that the EU will always struggle to compete in green manufacturing given its cost base, this means governments providing more funding to get cleantech projects off the ground, which in turn will lead to economic benefits.
“Clean technologies like hydrogen and CCS are ready: now, we need governments in Europe and elsewhere to really put the money where their mouth is to get projects off the ground, which will lead to economic benefits, regardless of where the technology was manufactured,” Cavada said.