Stay on top of the viability of industrial strategy

 

• Ambrose Evans-Pritchard

Europe’s quest for ‘industrial sovereignty’ has gone horribly wrong

A semiconductor renaissance in the Continent is going nowhere

Ambrose Evans-Pritchard

Related Topics

• UK economy, 
• Industry, 
• Automotive industry

17 September 2024 1:33pm

Europe’s grand plans for battery gigafactories are falling by the wayside Matthias Rietschel/REUTERS

Europe’s grand plan for industrial rearmament and tech sovereignty is at risk of disintegration on multiple fronts. Critical components are proving impossible to deliver.

The semiconductor renaissance is going nowhere. The lynchpin was supposed to be a €30bn (£25bn) project by US chip giant Intel to build two world-class “fabs” near Magdeburg in eastern Germany, a third paid for by German taxpayers in the most expensive undertaking in the history of Deutschland Inc.

These Intel fabs were to make chips down to the technological frontier of 1.8 nanometers (nm), soon to be de rigueur for AI, 5G, autonomous driving, and advanced weapons. They were to be the beating heart of Silicon Saxony, and Europe’s hope of playing itself back into the chip game after two decades of decline.

Intel should have started construction in early 2023 but was held back by wrangling over state aid and by surreal disputes over a neolithic burial site and what to do with the local “black” soil. The company said on Monday that the whole project – and another site in Poland – is on ice for another two years.

Intel is itself in trouble after missing the smartphone boom and the first stage of the AI boom. It is shedding 15,000 workers worldwide and retreating to Fortress America, focusing on four advanced fabs already in Arizona and Ohio under the spur of the $280bn (£212bn) Chips and Science Act – Washington’s national security plan to restore US self-reliance across the semiconductor spectrum.

Europe produced a quarter of the world’s chips in 1990. This has since fallen below 10pc. Almost none of it is at the cutting edge below 10nm.

The EU has passed its own Chips Act, pledging a non-existent €43bn to capture 20pc global share by 2030. World demand is expected to double by then, so the EU must quadruple its output. “It is totally unrealistic,” said Peter Wennink, ex-head of the Dutch lithography group ASML.

True funding at the EU level is just €3.3bn, and some of that comes from cannibalising Horizon Europe (science). It would take at least €500bn to reach scale and the 2nm threshold from a standing start, even if the EU had all the specialist skills, which it does not.

Wage costs are 40pc lower in Taiwan, and the island has a nexus of technical institutes geared to the industry. “The capabilities required to domestically innovate this technology are virtually non-existent in the EU,” said last week’s Draghi report on EU competitiveness.

Europe’s electricity prices are 158pc higher than in the US on average, and large fabs consume 100 megawatt per hour each. It is surprising that Intel was ever tempted.

In my view, Germany should consider itself lucky that Intel has halted this exorbitant prestige project, which was going to cost €3.3m in subsidies for each permanent job, only to replicate chips that can be bought on the open market from allies.

Furthermore, these 1.8nm chips may themselves be heading for obsolescence before long.

There is a limit to how far you can miniaturise silicon circuits. Advanced materials such as graphene and gallium nitride may soon leap-frog ahead. Cambridge start-up Paragraf is developing 2D graphene chips for sensors that are one-atom thick and a thousand times faster.

The UK is concentrating its £1bn semiconductor fund on niche areas where it has an edge. The EU should be doing the same, thinking like a mid-sized power rather than indulging in great power illusions. It should leverage its core strengths in sensors, lithography, optics, or quantum computing.

Europe’s other grand plan for battery gigafactories is scarcely in better shape. BMW has cancelled a €2bn order for lithium battery cells from Sweden’s Northvolt, Europe’s best-funded tech start-up and the great hope of the car industry. It could not deliver the cells in time. The contract will go to Samsung SDI in Korea.

Northvolt is an excellent company, and at least it makes sense to build a green gigafactory in northern Sweden where hydropower delivers Europe’s lowest electricity costs. But the company got ahead of its skis in a brutal world market.

It bet on standard NMC batteries made with nickel and cobalt just as China switches to cheaper and safer lithium iron phosphate (LFP) batteries for the mass market.

Northvolt is having to take drastic measures, halting cathode production at its core plant in Skellefteå. It will have to buy the cathode material from Asia. Other plants in Germany, Sweden, and Canada are under review. The Swedish state has refused a state rescue, leaving the company in talks with creditors. Such are the woes of the meteor once billed as Europe’s new Airbus.

Norway’s Freyr has given up trying to make EV batteries in Europe, switching to America to profit from the Inflation Reduction Act, although that is not plain sailing either.

Only one of Volkswagen’s six gigafactories has progressed beyond the drawing board. The company has axed a proposed plant in Saxony and is building just one of its two planned cell plants in Salzgitter.

“Western carmakers are just passengers travelling at the back of the bus. Others decide where it goes,” said VW board member Thomas Schmall.

“Batteries are a core technology of EVs but today the car industry is totally dependent on Asian battery suppliers. We must change that,” he told the Frankfurter Allgemeine.

Note that he did not join the political backlash against EVs and warned that any delay in the 2035 combustion ban would be fatal. “We all agree that the future belongs to e-mobility. There is no alternative”

Volkswagen is going through its own corporate hell as it pays the price for letting China steal a march on EV technology. But the immediate problem is that China ramped up battery capacity last year to 800 GWh, more than the entire global demand. It will have tripled again by late next year. This galactic excess is landing in Europe.

One European battery-maker said privately that the EU had not offered his company “a single inch of flexibility” on financing, which is extraordinary after all the talk of the European Battery Alliance. But that is the point. The EU’s lofty declarations have no serious funding.

Mario Draghi, economist and former Italian prime minister, is right to call for a double Marshall Plan of €800bn a year in extra investment to make Europe fit for the 21st century. But to do that the EU needs its own Hamiltonian treasury with the full borrowing powers of a unitary state. Such a Europe does not exist.

Either the EU grasps the nettle and goes the whole way with radical treaty change or, more likely, given the political currents in Germany, it devolves economic and legal power back to the nation states. The hybrid status quo is demonstrably failing.

Update on China

 

Ghost cities, fleeing millionaires: China’s rudderless economy

President Xi’s obsession with security and party control is hobbling tech companies and scaring off the foreign investment the country so badly needs

Ian Williams

Sunday July 21 2024, 12.01am, The Sunday Times

Asia

China

Economics

Technology

Xi Jinping

If economic growth was measured by the output of empty slogans, then China would surely be booming again. There will be “high-quality development” and “innovation vitality” to “comprehensibly deepen reform” and achieve “national rejuvenation on all fronts”, the Chinese Communist Party (CCP) declared at the end of a key meeting last week aimed at rebooting the country’s ailing economy.

All this under the leadership of “supreme reformer” Xi Jinping, who was hailed as the heir to a modernising predecessor, Deng Xiaoping — even though his principal achievement since coming to power in 2013, 16 years after Deng’s death, has been to put “reform and opening” sharply into reverse.

That era of change is over and the economy is rudderless and beyond reform — and Xi is the biggest obstacle to change.

President Xi has been in power since 2013

WU HAO/EPA

As the grey men (and they are overwhelmingly men) of the CCP’s central committee gathered, economic sentiment was dismal. The five-yearly meeting — the “third plenum”, in party speak — was delayed from last year, amid rumoured wrangling over how to tackle mounting economic problems. It coincided with figures showing a sharp slowdown in growth and continued falls in property sales and prices. Soaring youth unemployment, plunging levels of inward investment and widespread signs of social stress, including a spike in protests, all added to the gloom.

China’s National Bureau of Statistics cancelled a news conference that usually accompanies new data — perhaps wary of warnings from the Ministry of State Security, the country’s main spy agency, that gloom about the economy is a foreign smear and that “false theories about “China’s deterioration” are being circulated to attack its “unique socialist system”.

It is not as though Chinese officials do not see the problems with the country’s economic model — “unco-ordinated and unsustainable”, in the words of China’s last premier, Li Keqiang. This model, and the heady rates of growth that used to accompany it, was heavily reliant on cheap exports and on massive and wasteful state-led investment in property and infrastructure, which sent debt soaring amid diminishing returns.

A building frenzy has left China littered with ghost cities containing 60 million to 100 million empty or incomplete homes. Property accounts for up to a third of the economy, and CCP efforts to reinflate the bubble have fallen flat. A recently announced $42 billion (£32 billion) fund to buy up empty apartments is a fraction of the $533 billion that developers estimate is needed to finish housing they have sold to buyers and then failed to complete. Companies accounting for 40 per cent of China’s home sales have defaulted — an army of zombified firms that will not be put out of their misery for fear of social unrest.

Local governments, which depended on land sales to developers for a substantial share of their income, have run up debts of more than 66 trillion yuan (£7 trillion), equivalent to half of China’s GDP. They have resorted to desperate measures to boost their coffers: almost all traffic fines issued in Hebei province in northern China in 2023 were exposed as bogus, while a local government in the southwestern province of Guizhou had a local contractor arrested after she demanded the full payment of an invoice for building schools.

It’s widely agreed that Chinese consumers need to spend more, since private consumption accounts for just 39 per cent of the economy — extremely low by world standards (the figure in the US is 68 per cent). But with 80 per cent of family wealth tied up in property and no meaningful social safety net, they are reluctant to splash out.

Officials also talk of creating a self-sustaining innovation economy to turn China into the world leader in cutting-edge technologies. They want to move from an economy based on copying and applying western technology — re-innovation, as it has been dubbed — to one driven by home-grown tech. Ever since Deng launched China’s reforms in the late 1970s, obtaining foreign know-how by all available means has been central to modernising the economy and military, spawning industrial-scale cyber-espionage and the forced transfer of technology as a routine price for doing business in China.

This strategy is no longer so easy, amid growing western restrictions on technology transfers and heightened wariness over Beijing’s espionage and high-tech tie-ups in business and academia.

Yet the most effective way of encouraging domestic innovation — giving more sway to the market and to private companies — has been thwarted by Xi’s obsession with security and party control. He has hobbled China’s most innovative technology companies, which have faced tightening restrictions. Leading entrepreneurs have been forced out of the companies they founded; many, including Bao Fan, one of China’s most famous and respected financiers of tech deals, have simply disappeared amid vague accusations of corruption.

Last year, China led the world in the number of millionaires leaving the country, according to the Henley Private Wealth Migration Report. The party’s tightening grip, increasingly in every boardroom, lab and classroom, hardly seems conducive to innovation or reliable science.

BYD cars are readied for export. China spends billions subsidising its electric vehicle industry

GETTY

In the medium term, Xi hopes that renewable-energy tech can replace property as a new motor of growth, and mouthwatering subsidies have been thrown at industries ranging from solar panels to electric vehicles (EVs) and batteries, leading to massive overcapacity and vicious price wars. Between 2009 and 2023, China spent $230.8 billion supporting its EV industry alone, according to estimates from America’s Center for Strategic and International Studies.

Yet the benign international environment that accompanied China’s earlier export splurges has gone; both the US and EU have imposed hefty tariffs on Chinese EVs that, they allege, are being dumped at below cost.

Meanwhile, China has become a hostile place for overseas businesses. Last year, direct foreign investment into the country fell to a 23-year low. Even China’s most enthusiastic corporate cheerleaders in the West appear to be having doubts; Apple, for instance, is quietly diversifying its supply chains away from China. “Resilience” has become the watchword in western boardrooms, with the Ukraine war exposing the danger of over-dependence on autocrats with hostile ambitions. Foreign companies have never enjoyed a level playing field, and the days when they would put up with almost any indignity for a share of the mythical China market are fast disappearing.

A building frenzy has left China littered with ghost cities stuffed with empty or incomplete homes like these in Huai’an, Jiangsu Province

GETTY

Top western business leaders are due in Beijing this week to meet officials in an effort to understand what the latest pronouncements mean. Good luck with that. The loosening of political control necessary for real economic reform to take root is contrary to everything Xi stands for. Under his leadership, the use of trade, investment and market access as weapons of coercion has become routine, belying the platitudes of reassurance from the third plenum — a meeting that can best be seen as a requiem for the era of reform and opening.

Ian Williams’s new book, Vampire State: The Rise and Fall of the Chinese Economy, is to be published by Birlinn on September 5

Some good arguments about what the UK is good at (for essays)

 

The fashion and textile industry supports 1.3 million jobs

It’s high time to get creative

Any industrial strategy should not overlook one of our top national assets, says David C. Stevenson

Over the next few months there will be an animated discussion about the role of industrial strategy in boosting GDP. But the current obsession with investing in things you can touch and build might cause us to overlook what, in policy terms and growth terms, make Britain great: creative products and services.

Take steel as a contrast, and consider the following statistics. The UK steel industry, championed by MPs and think tanks, exports goods worth between £3.5bn and £4.5bn per annum, while the British music industry – with no political champions – exports between £2.5bn and £3bn annually. 

The steel industry employs between 30,000 and 35,000 people directly. If we include indirect employees, the figure rises to 50,000-60,000. The music industry employs 190,000-200,000 people. And music is just one big part of the wider UK creative industry. The creative economy employs two or three million people, and has been growing at a terrific rate in recent years. It makes up 5%-6% of gross value added, a gauge of output used by productivity-focused economists. 

The creative sector is also key to trade. Creative exports typically account for around 10%-12% of the our total exports of services, with the UK ranking as one of the top exporters of creative goods and services globally, usually in the top five countries. Exports of creative goods and services increased by 150% between 2010 and 2017. One crucial last aggregate measure: 90% of the value of exports from the creative industries is produced domestically. The creative industries are self-sufficient and focused on the domestic economy, yet they have a significant positive impact on trade.

A boost for the local economy

As we dig a bit deeper into the various subsectors, this vital role becomes even more obvious. Take the film and television sector, which employs 180,000-200,000 people. According to the British Film Institute (BFI), an industry body, the combined spend by film and high-end television production (HETV) in 2023 reached £4.23bn, 32% down on 2022 (due to Covid and a writers’ strike), but almost level with pre-Covid output. 

Of that, the lion’s share was “contributed by HETV shows with £2.87bn, or 68%, with feature film production contributing £1.36bn, or 32% of the total spend… Inward investment and co-production of films and HETV shows combined delivered £3.31bn, or 78% of the combined production spend, [demonstrating] the UK’s global reputation as the world-leading centre for international film and TV production”. 

Another recent report from Knight Frank observed that films with a £60m-£100m budget generate more than £750,000 in daily spending, and those with budgets over £100m generate over £1m in daily spending. The slight fly in the ointment is that 70% of film and TV studios are in the southeast and London alone. And those big numbers could grow much bigger. 

An optimistic estimate by Knight Frank sees film production spending reach £8.7bn in 2028, which would require 2.6 million square feet of additional TV and film studio space. The upshot is that we are now mid-way through a boom in new studio construction in London and the home counties. The top ten schemes underway in 2023 and 2024 involve the construction of at least 160 sound stages and a total rollout of a staggering 3.77 million square feet.

Some schemes, though, are facing local opposition. One big project in Marlow has already been halted. Buckinghamshire Council has denied permission for a proposed film studio at Marlow quarry. The BBC says that during a “meeting at the Strategic Sites Committee, concerns were raised that the site was an inappropriate development for greenbelt land and would have a significant impact on the local road network”. 

Councils pursue studios

Still, many other councils are jumping at the chance to host big studios. That’s partly thanks to all that local spending I mentioned earlier, but mostly it’s a matter of simple logic. Film studios are big-box sites that realistically are only likely to be used for one of three purposes: a logistics and distribution warehouse, a data centre, or a film studio close to the M25 and an airport. 

The first involves lots of jobs, many of which are relatively poorly paid. The second is vital for the UK economy to keep up in the world of artificial intelligence (AI), but it doesn’t involve many jobs (just lots of imported Nvidia chip sets). The last involves a lot of highly paid, highly skilled workers, many of whom might want to live locally. 

And of course, film and TV are just part of a broader creative-services economy. Alongside music, there’s also the UK’s other great crown jewel – its gaming sector, which directly employs tens of thousands of very highly paid workers, with estimates often ranging from 20,000-30,000 direct employees, but maybe indirectly reaching as much as 40,000-50,000. 

Exports are also at roughly the same scale as the music industry’s at about £2bn-£3bn per annum, powering a huge export drive into the US. We should also not forget the crucial importance of another part of the creative industry – the fashion industry. According to the UK Fashion and Textile Association, the fashion and textile industry in the UK supports 1.3 million jobs, one in every 25 jobs in the country.

Talk to bosses in all of these subsectors, and they tend to offer the same narrative. UK governments have, to their credit, been innovative in encouraging inward investment. In the film industry, the recent initiative for UK independent films involving a 53% production credit on their expenditure wins many plaudits, yet it only applies to films with budgets up to £15m. 

Likewise, the gaming sector has benefited from generous tax credits, but the Treasury keeps huffing and puffing about the credits and threatening to rip up the rule book. TV, which helps power much of the creative sector, largely misses out on these generous schemes. 

Two key difficulties

Two topics keep popping up in industry forums. The first is business rates. Film studios pay huge amounts in rates, with some facing 600% increases in recent years. Rumours abound that at least one major studio development is being canned because of those costs. One insider says the problem isn’t with the government as such, but with a quango called the Valuation Office Agency, which many accuse of hampering development. 

But skills also matter. The broadcasting trade unions, for instance, complain that huge numbers of freelance workers are underemployed. The issue is the quality of training. There are too many low-quality, media-based courses, and not enough on-the-job skills training. There is too little funding for further education, yet sustained demand for skilled vocational training. It’s wonderful that universities are churning out experts in media studies, rather less encouraging that we don’t have enough highly skilled game developers.

What makes that problem much worse is that, bar a few exceptions – the e-games segment in Dundee – too much of this highly skilled work takes place in the southeast, east and, to a lesser degree (in TV) the north west. If ever there was an argument for levelling up, it would be in the creative sector. Studies have shown that there are creative clusters in Oxford, Bristol, Edinburgh and Sheffield, along with as many as 709 micro clusters around the UK, in places as diverse as Carmarthen in Wales and Louth in Lincolnshire. 

Maybe the sensible thing to do for a new government focused on speeding up growth is not to spend hundreds of millions of pounds on single-place, mega-scale manufacturing facilities that sound “important”, but employ a relatively small number of people. Focus instead on creative clusters and sectors using lots of skilled, well-paid people whose offerings sell well worldwide. It’s time to create creative enterprise zones.

MoneyWeek