Thinking about the work we did on innovation...

 

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MAY 23RD 2024

Essential India Your guide to an emerging great power

Arjun Ramani Global business and economics correspondent

Global business has long viewed India as the world’s “back office”. Movies such as “Outsourced” (2006) and “Slumdog Millionaire” (2008) popularised the trope that you went to India to economise on simple business services like call centres. By the 2010s the rise of Indian IT giants—from Tata Consultancy Services (TCS) to Infosys—became too hard to ignore. Today, TCS’s market capitalisation of $167bn is  larger even than IBM’s. But even so, Indian IT giants typically do not do the research and development or design work that fuels innovation in global firms. But quietly, India is levelling up. As my colleague Tom Easton explains in this week’s issue, India now boasts nearly 1,600 “global capability centres” of multinational firms, up from 700 in 2010. Collectively they employ some 2m-3m of India’s best and brightest and often do mission-critical work from research to core-software development. Tom’s reporting shows how data scientists in Lululemon’s Indian office direct operations from the Middle East to New York. Mercedes-Benz’s R&D centre, which has nearly 6,000 employees, received 32 patents last year. Pretty impressive stuff for a supposed back-office. The total value of all this is hard to measure, but a recent estimate from Wizmatic, a consultancy, suggests it could be $120bn, a third of India’s overall services exports. Two big questions, however, loom over the future of Indian services. First is the impact of AI. Recently I wrote about how some AI experts think that chatbots could eat the tech-services industry. The concern makes sense. Computer programming is the forte of large-language models and they are improving fast. Second is the risk that India’s services heft one day proves as disruptive to the world as Chinese manufacturing has been. Massive inflows of manufacturing foreign direct investment (FDI) into China in the 2000s laid the groundwork for the rise of firms like BYD and Shein that are now dominating global markets. China received technology and its workers were trained up. As we observe in our leader, the rise of global capability centres in India today appears oddly similar. Western firms are investing heavily in Indian people. You could imagine the best designers from the 85 semiconductor firms with offices in India one day starting their own shop. That would pit Western white-collar workers against Indian ones, adding tension to global trade.  Yet there are also reasons to be cheerful. After spending some time talking to global businesses and the Indian IT firms they work with, I became a bit more sanguine about the threat from AI. Yes, it will disrupt Indian techies, but it could also be a big demand shock. Businesses are often turning to their Indian arms to incorporate AI into their operations, a process which has no end in sight. As for the possibility of an “India shock” to the West, the growth of Indian services has been consistent rather than sudden. With luck that could mean the rise of the Indian services does not arouse as much hostility as Chinese manufacturing. Thanks for reading. Today I will join my colleagues for a webinar to discuss India’s election, economy and future. If you subscribe to The Economist you can join me here from 8.30pm IST.

This newsletter is free. You can forward it on to your friends and family, who can then sign up here. If you want to send us comments on this newsletter, or ideas for future editions, write to us here: essentialindia@economist.com.

Get on top of China, trade and tariffs:

 

Europe must defend itself or be crushed by China’s export tsunami

Other world powers are protecting their industrial cores – the Continent is a sitting duck

AMBROSE EVANS-PRITCHARD22 May 2024 • 8:00am

Related Topics

• Europe, 
• China, 
• Manufacturing industry, 
• Trade Deals

19

The EU will be forced to follow Joe Biden’s tariffs against China whether it likes it or not, otherwise Europe will alone face the concentrated trade shock from Xi Jinping’s predatory mercantilism.

It will become the primary dumping ground for China’s exorbitant overproduction of industrial goods, with a flood cars, batteries, and cleantech components together posing an existential threat to the European social market model.

Britain, too, will have to follow suit or become the market of last resort for over-indebted Chinese companies desperately seeking a foreign outlet for excess goods that they cannot sell into their own depressed economy, a fate that would annihilate the UK’s manufacturing base within a decade. We are beyond the point of theoretical discussions about the merits of free trade.

An open world economy cannot coexist under normal trade patterns with a deformed Chinese economy that accounts for 13pc of global consumption but produces 31pc of global manufactured goods. This imbalance is not the result of natural trade flows. Nor is it simply “a reflection of the vitality and creativity of China’s economy” as the People’s Daily told us last week.

It is the mechanical consequence of a hyper-investment strategy directed by the Communist Party. China’s trade surplus has ballooned to 5pc of GDP. Capital Economics estimates that it is twice as large a share of world output as it was before the Lehman crisis in 2008, when it was already causing trouble.

This excess capacity can be absorbed only by hollowing out the industrial cores of America, India, and Europe. The first two are defending themselves. India has just imposed a de facto ban on the use of Chinese-made solar panels in projects that receive public subsidies. Europe is the last big sitting duck.

The original “China Shock” hit the developed world in the 1990s and the early 2000s after China opened the door to offshore plants by Western multinationals. American and European companies could tap China’s vast reserve army of labour and play off Chinese wages against wages at home via “labour arbitrage”. The profit share of GDP in the US rose to extremes not seen since 1929. It was an era of collusion between Western capital and Chinese Communism. It was also an abject failure in the political management of globalisation.

China’s export tsunami was tolerated by Western governments but we now know the damage it did to the cohesion of the western democracies. The China Shock, published by the US National Bureau of Economic Research in 2016, concluded that the overall effect cost 2.4 million American jobs directly, lowered real wages, and devastated local communities in rust-bowl regions. The survivors were Donald Trump’s “deplorables”, to use the ill-judged term of Hillary Clinton.

Most economists assumed that this shock was a one-off episode: the world would rebalance as China progressed from export-led growth to a consumption economy in time-honoured fashion. It has not happened.

Professor Michael Pettis of Beijing University says investment has spiked back up to 42-44pc of GDP, far surpassing any level ever seen in any major country since the industrial revolution. Other Asian tigers peaked in the low-30s before dropping back as they became richer.

Xi Jinping has reverted to the worst pathologies of the old model, partly as a quick-fix to counter the property crash and secular debt-deflation, and partly because the Communist Party needs its instruments of political control.

What makes it intolerable this time is Xi’s bare-knuckled push for cleantech hegemony and his open attempt to overthrow the universalist liberal order – a broader grouping than the West since it includes Japan, Korea, and Taiwan.

Washington is not going to tolerate this second and even larger China Shock. “They’re driving manufacturing companies out of business in Europe. We won’t let that happen here in America,” said Joe Biden.

“We’re not going to let China flood our market. The future of EVs will be made in America by union workers. Period,” he said.

The tariffs announced last week are breathtaking: 100pc on EVs; 50pc on solar panels, semiconductors, and syringes; 25pc on steel, aluminium, lithium batteries, magnets, and so forth. There is much election theatre in this blitz, but it is not protectionist as such.

Adam Smith recognised the limits of free trade. He supported the Navigation Acts in order to sustain a dual purpose shipping fleet, deeming “absolute prohibitions” to be necessary when national security was at stake. Clearly you cannot conduct trade on normal terms with a hostile power infused with Leninist zero sum ideology and in league with Putin.

The Biden tariffs cover 4pc of America’s total imports from China. They are nothing like Trump’s plan for tariffs on everything and against everybody. Nor are they a Smoot-Hawley free-for-all. They are surgical.

Xi says “there is no such thing as ‘China’s overcapacity problem’”. Really? 

China’s output of solar cells was 310 gigawatts (GW) in 2022, 567 GW in 2023, and heading for 1,000 GW next year – five times the total installed capacity in the US to date.

Battery output capacity was 550 gigawatt hours (GWh) in 2022; 800 GWh in 2023, and will be 3,000 GWh in 2025, four times the current world market. China already has enough EV plants to meet global demand three times over. This surplus capacity has been promoted by state planners and it is coming Europe’s way.

The EV wave has barely begun. Capital Economics says three quarters of the 4.8 million cars exported by China last year – up from one million in 2021 – were petrol and diesel models. Old internal combustion engine (ICE) cars are becoming unsellable in China where the car market is shrinking and where over half of all car purchases in early April were EVs and hybrids. They are being diverted into the global market instead.

China has already wiped out the EU’s solar industry, first by copying the technology and then flooding the market. It is following the same script with wind turbines. Electrolysers are next. It will happen with EVs soon because Chinese carmakers can make a much fatter profit per car overseas.

Europe’s political economy is in no fit condition to weather this shock. Economic growth has been negligible for 15 years in the big mature economies. The post-Covid recovery is anaemic. Public debt ratios are badly stretched, and fiscal austerity is back. The political centre is crumbling almost everywhere.

Xi slapped Europe in the face earlier this month, visiting his groupies in Hungary and Serbia, with a brief stop in Paris. He needs to move with care. The further he goes in helping Putin to crush Ukraine, the harder it will be for Europe’s globalist camp to hold the line on free trade.

The Commission’s probe of Chinese EVs will conclude in early July. It does not take a crystal ball to see that a giant tariff wall is coming, and that it will spread to every area targeted in Xi’s bid for cleantech hegemony. 

The Europeans may wish to carve out a third way between the US in China. Reality will not let them.

Protection - no detailed analysis but some numbers to show the scale:

 

BIDEN HAS EMBRACED TRUMP’S AGENDA

Trade wars heat up

Biden announces 100% tariffs on Chinese EVs. Matthew Partridge reports

In a move that is “likely to inflame trade tensions between the world’s two biggest economies”, the US has imposed “more stringent curbs on Chinese goods worth $18bn”, says Larry Elliott in The Guardian. The centrepiece is a 100% tariff on Chinese-made electric cars (EVs), but the US will also hike tariffs on lithium batteries to 25% (from 7.5%), on critical minerals to 25% (from 0%), and on both solar cells and semiconductors to 50% (from 25%). Tariffs on steel, aluminium and personal protective equipment – which range from zero to 7.5% – will also rise to 25%. President Joe Biden’s administration says the measures are intended to “stop cheap subsidised Chinese goods flooding the US market and stifling the growth of the US green technology sector”.

A SHOT IN THE GREEN FOOT 

Both the US and the EU have expressed “alarm” at the rapid growth of China’s electric-vehicle manufacturing, says Richard Spencer in The Times. At the end of last year, China’s BYD overtook Tesla as the world’s leading seller of EVs. Its basic model sells in China for just £8,000. Critics argue that the low prices are the result of hidden subsidies from Beijing in the form of “cheap land from local government, cheap loans from state-run banks and cheaper energy”, and “unfair” Chinese trade practices with regard to technology transfer, intellectual property and innovation.

China may well have achieved much of its advantage through its own unfair mix of protectionism and subsidies, but it is now “well ahead” of US firms in the EV sector and is “capable of producing a vast number of cars at a much lower cost”, says The Economist. The immediate impact will be limited because much trade in the tariff-hit categories has already shifted away from China, but US consumers will be the ones to pay the price for Biden’s tariffs, both in the short term, as they will spend more on EVs, but also in the long term, as domestic producers will be under less pressure to develop cheap goods. It may also represent a “lost opportunity” for the environment – lower prices for EVs, solar panels and batteries from China “would have boosted their appeal to consumers”.

EXPECT MORE WALLS 

Indeed, trying to divorce the industry from China’s supply chain will make EVs a harder sell, says Jonathan Guilford on Breakingviews. Without access to “cheap, advanced Chinese tech”, US EVs might remain “expensive, niche products”, especially given that US domestic efforts are “faltering”. Ford and GM have cut their manufacturing targets, leaving Tesla, where growth is already starting to slow, as the remaining “creaking pillar” of America’s EV efforts.

US protectionism is here to stay, says James Politi in the Financial Times. Trade policy is set to be the “heart” of this year’s presidential contest as Biden and Donald Trump compete to appear the “most aggressive protector of working-class American jobs in the face of rising Chinese manufacturing prowess”. Biden has “embraced” Trump’s protectionism and gone further; Trump and the Republicans, for their part, want to go further still.

Now we've done supply side here is something on UK & infrastructure

 

Net zero U-turns will hit UK infrastructure, say government advisers

Written by

The Guardian

Published

May 16, 2024

Rishi Sunak’s U-turns over net zero have delayed progress on vital infrastructure that is needed for economic growth, the government’s advisers have said.

Sir John Armitt, the chair of the National Infrastructure Commission (NIC), said good progress had been made on renewable energy in the past five years, but changes to key policies, including postponing a scheme to boost heat pump take-up, had created uncertainty and delay.

He said the government could no longer “duck key decisions”, as Britain was falling behind on vital infrastructure, from rail transport and energy to water, flood defences and waste.

Failure to catch up would stymie economic growth, and imperil climate targets, the NIC found in its latest annual review.

Since last September, when he watered down key net zero policies, Sunak has repeatedly referred to the need to be “pragmatic” on net zero.

Armitt said: “I can understand the need to seek to be pragmatic, but every time you seek to be pragmatic you take your foot off the gas and you provide an encouragement to people to say: ‘Well, do I really need to do this?’

“The message clearly has to be that this is something we’ve got to do if we believe in our carbon targets.”

He said heat pumps in particular, which the NIC found to be the only viable alternative to gas boilers for home heating, must be a top priority.

The NIC found:

• The government will fail to meet its targets on heat pump rollout.

• The promised lifting of a ban on new onshore windfarms has not gone far enough.

• Massive investment is needed in the electricity grid.

• There is no proper plan for rail in the north and Midlands now that the northern leg of HS2 has been cancelled, severely inhibiting economic growth in those regions.

• Water bills will need to go up to fix the sewage crisis, and more reservoirs are needed to avoid drought, while water companies have done too little to staunch leaks.

• The UK lacks a coherent strategy on flooding, with more than 900,000 properties at risk of river or sea flooding and 910,000 at risk of surface water flooding.

• Good progress has been made on the rollout of gigabit broadband around the country.

Armitt called for this government, and the next, to act swiftly. “It’s not too late to catch up in many of the areas we’ve highlighted, if the goals are matched with policies of sufficient scale. But the window is closing,” he said.

“Ducking big decisions over the next 12 months will put the major goals of net zero, regional economic growth, and environmental protection in jeopardy,” he warned.

Greater investment was needed in public transport, the NIC found. Uniquely in Europe, the UK’s second and third cities showed lower economic productivity than the national average, largely because of poor transport links, the review found.

The axing of the next phases of the HS2 high-speed rail project left a “critical gap” in rail connectivity between the Midlands and the north, with northern cities likely to “remain poorly served” without further investment.

Given long-term growth in demand “a do-nothing scenario north of the proposed connection of HS2 and the west coast mainline at Handsacre is not sustainable”, the report found.

The target of rolling out 600,000 heat pumps a year by 2028 to reach 7m homes by 2035 was way off track, the report found, while putting off a decision on hydrogen for home heating until 2026 had created uncertainty.

The next government should end new connections to Britain’s gas network from 2025, and ban the sale of new gas boilers for homes and fossil fuel heating in large commercial buildings by 2035, according to the report. It also called on the government to rule out subsidies for hydrogen heating.

These commitments should be underpinned by steps designed to make heat pumps more affordable for households, including sufficient funding, and a plan to shift the burden of policy costs from electricity bills to either gas bills or into general taxation.

Armitt stopped short of calling for force-fitting heat pumps and smart meters in a street-by-street programme – put forward earlier this month by Chris O’Shea, the chief executive of British Gas parent company Centrica – saying it was difficult to do “from top down” while maintaining public trust. He added that other low-carbon home heating options – such as heat networks – should also be considered in areas where they made sense.

The greatest challenge to the UK’s green electricity goals, according to the review, is the need to upgrade the country’s transmission infrastructure. The bottleneck of renewable projects waiting to connect to the grid has already increased costs for households. By 2030, network constraint costs are estimated to rise to between £1.4bn and £3bn a year, unless grid capacity is expanded.

A government spokesperson said: “We’re making sure we have the infrastructure we need to grow the economy, improve people’s lives, and tackle climate change – having already increased electricity generated from renewable sources to nearly half in 2023, giving more powers to cities to build the transport they need, and providing billions to tackle potholes up and down the country.”