April `24 Issue of The Bigger Picture

“All roads lead to Rome” captures the Roman empire’s dominance of world affairs that lasted for about a millennium. During the empire’s existence from 510 BC to 476 AD, Rome served as the empire’s political, cultural and commercial capital. Key to the extremely long survival of the Roman empire were roads. Roads made the Roman empire’s invasions efficient and their administration effective. And all those roads originated from Rome and radiated in various directions in a wheel and spoke fashion - literally all roads led to Rome.

Fast forward more than 1500 years later and the phrase has come alive again, just not with Rome at the center this time. The ‘All Roads Lead to China (ARLC)’ phenomenon has significant political and cultural relevance but a lot more commercial relevance. China dominates global manufacturing and even more significantly, sits at the center of the supply chains of energy transition metals (raw materials for solar panels, wind turbines and batteries). As such, the supply chains of energy transition metals are increasingly at risk of overconcentration or excessive centralization.

Why does this even matter? In this reign of free trade, should we not be happy when globalization and specialization yields benefits such as ‘cheaper’ labor and low-cost goods? This might have been the case in the 1990s when the US and other Western countries embraced offshoring of manufacturing. However, in this atypical scenario of a climate-change driven energy transition, this model is threatening to undermine our chances of achieving the 1.5ºC climate threshold.

Now, China’s success in creating energy transition metals supply chains must be lauded and appreciated. China’s move to subsidize lower margin sections of these supply chains has made all the difference and created the industry we know today. However, continued reliance on the wheel and spoke model based out of China bears the following costs:

1. Environmental cost: as China’s manufacturing fleet for renewable energy technologies grows, so does her consumption of fossil fuels and greenhouse gas (GHG) emissions. I must point out that this practice is not particular to China. Faced with growing energy demand, many countries fall back to proven (and polluting) generation assets such as coal and gas plants.

2. Social cost: mines and factories ran by some Chinese companies both at home and abroad have been linked with child labor, forced labor and forced displacement. The dream of an equitable energy transition will remain just that if whole supply chains remain in the grip of companies with questionable human rights track records.

3. Governance cost: some Chinese companies operating in the DRC have been accused of overt bribery and tax evasion. Practices that prevent local populations from partaking in their country’s mineral wealth.

If implemented correctly, the benefits of decentralized supply chains will be:

1. 1.5ºC climate threshold: setting up manufacturing in jurisdictions with more stringent renewable energy requirements should reduce consumption of fossil fuels and abate CO₂ emissions in the long run.

2. Redundancy: establishing alternative supply chains will enable the global economy to withstand any local shocks that might affect China. So fragile is the global battery industry currently that local shocks in China rock through the entire industry.

3. Improved practices: competitor supply chains outside of China will leverage standards reflective of their national guidelines. Such standards might then become industry norms thereby availing an avenue for an equitable energy transition.

Despite its impressive longevity, even the Roman empire could not outlast her fundamental weakness: excessive centralization.