The Chinese "Electrostate" Behind EVs, Batteries, and Solar

This week’s episode of The Big 3 features special guest Rogan Quinn of Rhodium Group, author of Minerals, Metals and Megawatts: How China’s Power Generation Drives Its Industrial Metals Ecosystem. Quinn joins CPA economists Mihir Torsekar and Andrew Rechenberg to explain how China became what he calls an “electrostate” — an industrial power whose dominance in electricity generation, metals processing, and manufacturing mutually reinforce one another.  

The conversation breaks down how China’s cheap thermal power, hydroelectric capacity, state-backed credit, and local-government growth incentives helped build the world’s most powerful metals and electrification supply chain. Rather than simply controlling minerals in the ground, China dominates what happens after extraction: refining, smelting, separation, processing, and downstream manufacturing for batteries, EVs, solar panels, electronics, and other electric-current-driven industries.

Quinn also highlights the demand side of China’s system, especially batteries, where falling costs have opened new use cases across vehicles, storage, and heavy-duty trucking. But the system contains major vulnerabilities, including weak cash flows, overcapacity, global demand dependence, and exposure to recession.

The episode closes with lessons from Japan and South Korea, and Quinn’s central takeaway: any country hoping to compete with China’s industrial ecosystem must solve the problem of abundant, cheap power.

Read Rhodium Group's report here: https://rhg.com/research/minerals-metals-and-megawatts-how-chinas-power-generation-drives-its-industrial-metals-ecosystem/


CHAPTERS:

00:00 - Introduction
03:15 - China's Electrostate, Cheap Power, & the Metals Machine Behind EV Dominance
10:16 - Battery Demand, Industrial Scale, & the Engine Driving China's Supply Chains
19:06 - Rare Earth Leverage, Global Risks, & the Fight to Compete with China

Transcript

SPEAKER_00 0:04

This is the victory from the Coalition for a Prosperous America with senior economist Makier Toyscar and Andrew Rashidko.

SPEAKER_01 0:16

China's dominance of EVs, batteries, and solar panels is one of the most surprising economic stories of the 2020s. But the bigger story is what underpins it. China has built an industrial system where cheap thermal power, dominant metals processing, and the world's largest manufacturing base reinforced each other. But that system didn't emerge from a master plan. Local government incentives and cheap credit to state-owned enterprises drove a build-out that often outran domestic demand. The excess flows out as exports, and China now produces almost anything that runs on electric current. And the advantage is harder to replicate than analysts expected. The result is what Rhodium Group analyst Rogan Coyne calls an electrostate, and he's here today to walk us through the mechanics of that system. You won't want to miss it. So welcome to the big three from the Coalition for a Prosperous America, where each week we break down the three biggest stories shaping U.S. trade, industrial policy, and the American economy. I'm here toursicar, and I'm joined by my fellow senior economist Andrew Reschenberg. So let's get to it. So uh Rogan, before we get started with the show, first I want to welcome you to the program and give you a chance to really talk a little bit about your work at Rhodium Group. What brought you to writing this latest report called Minerals, Metals, and Megawatts, how China's Power Generation Drives Its Industrial Metals Ecosystem.

SPEAKER_03 1:35

Hi, Great, and thank you both for having me. So my my position at Rhodium Group uh focuses on macroeconomics and subcategory. I look at the industrial ecosystem, particularly metals demand, major metals on behalf of financial institutions, uh corporations. Um I came to Rhodium Group uh after completing my MBA in in Shanghai. Uh it was the European Commission and the Chinese government created a joint venture called TEEBS. Um before that, I had worked in institutional investment consulting um as well as global economic development. Um the joke I like to say is I left Haiti and cholera broke out. I left Ebola, or excuse me, I left Sierra Leone and Ebola broke out, and then shortly after I left uh China, COVID broke out. So I've had some some trouble um with travel. But um broadly I've been passionate about uh economic development um and and how uh countries get on uh the the the motive to to grow and and better mental people's lives. And in China always stood out to me. Um I did my undergraduate exchange at Fudan University and then um decided to pursue my MBA in the same city of Shanghai um because I had such a wonderful time.

SPEAKER_01 3:05

Amazing. That's great.

SPEAKER_02 3:08

Yeah, and I think that gets us exactly where we're looking for for the first segment of this on the electro state in China. One of the main concepts in your report is that China has become an electric state. I think this is really one of the main chokeholds that we're seeing in the system at this point. And when so, for example, when people hear critical minerals, they usually think of it like oil, where the resource is, where it's coming from out of the ground. But your report suggests that it's actually what happens after it comes out of the ground that's actually most important in the system. So I was wondering if you could walk us through what do you mean by an electrostate and what does China's version of this electrostate look like in comparison to some of the older models of resource power?

SPEAKER_03 3:48

Sure. Um, so I think that this this phrase electrostate can can take on a tremendous number of meanings. Um and what I think the report does well is first it it points out that China's industrial system has been driven by access to power. That power has primarily come from thermal coal, um, often supplemented by hydroelectric. Um on an annual basis, it's often growing at a size of Germany. Um and all of these energy-intensive industries put China in a tremendously advantageous position for the new growth sectors associated with renewables because uh material synthesis, separation, refining are all energy-intensive. Um metals is the most energy-intensive industry, and it often is high volume, low margin, um, and difficult to compete. Um, so China's position here, uh producing large volumes of metals, but also consuming them has created an environment uh that's very conducive for incremental innovation uh in regards to electric vehicles or robotics, um, many of the industries that we're looking to for the future.

SPEAKER_01 5:06

So, question I had so the the electrostates processing dominance you talk about like extends upstream into mining. This is one thing you mentioned. So, you know, you mentioned in the report China is the largest producer of 19 of the 20 most critical minerals or metals for uh electrification. Uh, and even like the one exception is nickel in Indonesia, but that's built by Chinese engineers and owned by Chinese firms. So you could maybe walk us through how that mining position actually developed. And you know, because there was this other thing you talked about, it it seemed like there was there was parts of the policy that was and the plan out that was intentional and part that almost seemed like an a happy accident of and and maybe you could talk a little bit about that.

SPEAKER_03 5:43

Sure. I I think that one thing that's challenging in the mining space um in the global environment has always been um you cannot control your natural endowments. Um so you know, concentration of mineral resources in specific jurisdictions uh creates tremendous risks for certain players. Um and in many of those jurisdictions, China has passed those uh political risks and created investments, um, built infrastructure necessary for extraction purposes, um, built relationships with governments that uh often are changing. Uh, none stands out more than the bauxite in Guinea and the build-out of the railway there in terms of gathering uh greater amounts of iron ore. Um there's been political changes in Guinea over the last five years that would uh push away many potential investors. Um and so the willingness to engage, I think is this step one. Um the risk taking uh China's policy banks would be step two. Um the capacities domestically and expertise in processing of complicated concentrates, uh the ability to um extract uh greater amounts of minor metals, um, the know-how to do so in a cost-effective way, and then downstream having the uh demand uh either in synthesis or fabrication manufacturing enables the system to continuously expand and incorporate greater amounts of the global industrial base uh as it relates to metals and materials.

SPEAKER_01 7:25

Yeah, the on the mining story just seems so interesting. You know, the the fact that they might have set out to to process some of the the principal or primary metals and and then as a result and the maybe through the byproduct of that refining process, you create maybe is it non-primary metals that are basically then you you have you know in place, but now they also address the demand side of it because their downstream sectors, the TVs, the smartphones, that industry now needs those, you know, those uh things that might have otherwise be discarded and left on the cutting room floor because they're just not profitable to mine, but now you have a ready demand signal for it. Um, you know, it strikes me that was that part of like an kind of an accidental benefit of then, or is that you know, because that just doesn't seem like it was intentional or planned.

SPEAKER_03 8:10

I think that um, you know, there are a few few um important caveats here. Is one is most of China is new um in relative terms. And so many of the technologies developed over the last 40 years to improve things like uh the amount of sulfur gas coming from a copper refinery that goes into, you know, what what makes everybody upset about the stinky egg smell? Um, you know, these things can be captured and and that capture can be turned into uh a revenue stream. So right now in the global environment, sulfuric acid shortages are are critically important uh for for uh refining uh metals like copper and nickel, silver, gold, um, but also for things like fertilizer supply chains. Uh China is the largest processor of phosphate rock. And so um without phosphate, you know, KP and N, uh potash, nitrogen, and phosphate, um we we can't sustain, you know, nine billion people on the planet. And so the intensity of sulfuric acid in the fertilizer space uh can drive uh incentives for copper refiners to capture more of that uh sulfur gas and then transfer that into sulfuric acid. Um the other part of this, too, that China has had long-term experience in would be things like processing earths, which for a very long time you know went into things like our Tyco RC motors uh rather than our our drones um or you know electric vehicles or wind turbines. And so China had an expertise in separation, uh capturing some of the revenue streams from these uh complex uh concentrates, and so adding that type of capacity onto uh smelters was something that um China would was well positioned for um based off of the rest of the industrial system.

SPEAKER_02 10:10

And I think this gets us exactly where we want to be for segment two of this for the off-take demand engine. And I think this from your report is really what's keeping the machine running in China for a lot of these supplies. And a lot of times we think of the Chinese system as more of a supply system, that they're supp they have all the refineries, the smelters, they have all this cheap power. But in your report, you really highlighted also how the demand side within China also plays such a huge role in this, that it's the demand for these critical minerals or other things that go into things like electronics. And can you explain a bit more of why this is so important for the Chinese system as well and how this demand and supply side are so linked?

SPEAKER_03 10:49

I think one of the best examples um in this uh supply versus demand side uh economics is batteries because they've become such a critical component of all uh technologies, whether you're talking about data centers or renewable energy uh intermittency issues or transport. Um but in that space, uh you know, 30 years ago we had um you know our first cell phones um coming out, and those required uh batteries that could last a longer period of time and be recharged uh you know hundreds of times before failing. Um and so what we're dealing with now is just a massive scaling up of those capacities um and then some substitution of certain components. Uh one in particular is nickel, manganese cobalt, high energy density uh batteries for less energy dense but far cheaper LFP. So by removing the nickel and cobalt from the cathode material and substituting that for the abundant lithium iron and phosphate, China was able to drive down battery costs, which expands the number of use cases. Um you can think of it now as a way of preheating your oven much faster because um you can increase the voltage being going into the oven relative to what's coming out of the wall. Um and so the use cases of of batteries expand with the reduction in cost. Um but what China's uh uh in in industry is built for is substituting certain materials for others uh in an incremental innovation way, which enables faster iteration um in terms of production. And so over the last three to five years, China's battery production has grown exponentially and largely due to the number of use cases and the reduction in costs, um, or the reduction in costs resulting in the in expansion of use cases. Um now we're talking about heavy-duty trucks in China being close to 20-25% of total sales. I could I could see that number jumping to the mid-30s this year because you know, in 12 to 14 months you can uh replace your chassis in that industry um and all of the costs associated with it uh by switching from diesel to um batteries and and in the current environment it's very attractive uh for players to think about that. Um all that being said, I I think that there are going to be limitations on the capacity of China to reduce costs across the board and that electrification as an idea is amazing, but uh uh one of the consequences is you will create material constraints because of the demands associated with those um technologies.

SPEAKER_01 13:43

Well, even within the discussion of demand, you know, it occurs to me that even as you know the report talks about the how prolific China is in obviously in their industrial build-out and their you know electrification process, um, it just occurs to me that there's a vulnerability that lurks in the system here, and that is the fact that they are so dependent on external markets overseas to sustain this engine because so little of what they're producing is consumed. Or at least maybe I'll push back on that actually, because on the renewable side, they are doing a lot of solar installations and wind installations, but it's just never going to keep up with as much production as they're putting online. It just seems like there's this engine that's just like that just can't turn off. And and you know, are you able to maybe talk a little bit about that vulnerability that kind of exists in the system? Uh, because for example, you're we're seeing this big supply shock in um in energy markets and and how it's roiling, you know. We we still haven't seen what the play out of the Middle Eastern conflict might be on demand and things like that. But any kind of external shock to global demand seems like could undermine this entire system. Is that maybe it's something that you feel like you can maybe speak about or you know, just uh on the margins, however you feel comfortable talking about that a little bit?

SPEAKER_03 14:49

Uh 100%. So I think that uh when we think about the current oil shock, there's there's competing forces. The first is um for those that can afford to swap, uh they they may have encouraging signs of greater usage of solar panels, solar plus storage, um, you know, moving to an EV in terms of new sales. Um, but ultimately when you think about uh a change in um patterns of consumption, uh the first order of effect right now is that we've gone from, let's say, $60 a barrel to $90 a barrel, um, $30 a day, um, that would be, you know, or excuse me, $30 a barrel, um, $100 million barrels per day. You're talking about a trillion dollars in lost sales in a year. And if that is substituted for other types of consumption, that's a negative headwind to uh to many of Chinese exports. Um if you were planning, if you're in the growing global middle class and you were planning on buying uh more clothes this year, but your energy bills have gone up, um, you know, Chinese textile exports would go down. So there are ways in which um this type of oil shock is a headwind to um Chinese demand as much as it is a tailwind. I think when we talk about um something that could disrupt China's entire industrial ecosystem and the marginal dependence on the rest of the world, um, there's certainly a case to be made that China's industrial ecosystem is more vulnerable to a global recession than it is to U.S. tariffs. Um because many of the nodes in which China dominates are far upstream. And so uh what you have is Chinese industrial players moving certain nodes of assembly to third markets, which enable access to end markets like the United States or Europe. Um they also uh engage, and this is in two-way trade, engage in transshipments, whether that's you know sending copper concentrates through Thailand and then Thailand to China to avoid Chinese tariffs, or um sending complete products to Vietnam and restamping them, relabeling them and moving them to the United States. There's a large amount of that type of activity going on in both directions of trade to avoid the cost of tariffs. Um, and so some of that, what I would label as logistical costs associated with tariffs, uh cannot uh you know change the dynamics entirely. But uh certainly I believe that a global slowdown in consumption um would be detrimental to uh the Chinese system. And one of the ways to think about that is China's credit system um has grown tremendous rates over the last 15 years and it's now starting to slow down. There's tremendously weak cash flows associated with a lot of these businesses, and you're building uh minor metals uh refining businesses that are supposed to be financed over a 30 to 50 year period because that's how long these facilities go. But if the cash flows associated with them get cut in half, um, whether it's because um, you know, the end demand uh offtake isn't there, or um you know there's a decline in prices because we have a global supply glut in in certain metals like uh gallium, for example, um you would see parts of the Chinese industrial ecosystem start to suffer because of it. Um and and so in essence, I would I would say that China's uh you know export reliance is significant. It's not you know um world-ending in many ways for them, but uh it certainly would be one of the biggest headwinds to the to the economy when you have you know weak retail sales in China growing at 2% and then a slowdown in major uh industrialized economies demand for Chinese products because of the economic slowdown within that country. Um, certainly I think is a huge case.

SPEAKER_01 19:00

Yeah, I think we might have all we might already be then well positioned to kind of pivot to the third uh topic of discussion for today, which is like the the the risks inside the system itself. And we might have already touched on it a little bit, but the yeah, the structural risks and the cost dynamics. But you know what, one thing and and one thing that occurs to me is like, and I just wonder how much of this is also intentional, like China's dominance of so many, you know, so much mining and refining of critical minerals and rare earths and elements like that, you know, it gives them it gives that such um tremendous power over like market, like over pricing power and just you know, just being able to flood the market with supply to discourage any kind of mining from Western comper uh countries or anything like that. They've just become the the only game in town here. Um I'm wondering if if you can talk about was that you you feel like that was you know intentional, it intended to try to uh um achieve some sort of geopolitical leverage, because it's it occurs to me that so much of their posture has been about trying to achieve self-sufficiency, but it seems at the same time they've been able to develop these geopolitical tools by developing these choke points. And maybe if you if you can talk about that a little bit. Sure.

SPEAKER_03 20:07

I I'm I mean um in a more natural level, I think you know, one of the things that I found very interesting about business school in China was how relevant KPIs were. You had key performance indicators, so it's like everything had a KPI. Um and one of the KPIs I think that um local government officials um were dealt was um GDP growth. This is our number one KPI for a long, long time. And one of the ways in which you can create GDP growth most effectively is by increasing the power generation and then increasing the use of that power. Um so it's like a double whammy uh in terms of GDP statistics. Uh you have this tremendous amount of output in terms of energy generation, and then you have this tremendous amount of consumption in terms of uh energy consumption for these industries. Um and then downstream you'll have another layer of manufacturers. Um the easiest one to talk about uh is uh you know Nexends and in Glencore in Montreal and the challenges that these types of uh trade relationships create is that Nexends put their manufacturing of copper rod about a hundred meters away from the Glencore uh copper uh refinery. And the reasoning to do that is because by co-locating these two industries, I can reduce the cost of logistics between the two of them. If I'm transferring this cathode into rod and I let's say have a 3% scrap rate, um I can send that right across the street uh back to the previous step of the manufacturing process. And so in the Chinese economy, you have not only the uh the refinery dismelter, but then you have the rod manufacturer. And then the guy downstream from that is in insulating wire and cable. And that insulated wire and cable then creates demand for plastic coating. Um and then that goes into your grids, your your electric vehicles, the walls of buildings, et cetera, et cetera, et cetera. Um and so I think that the KPI of economic growth, the energy intensity of a lot of this processing was the primary factor of major metals development in China. I think that uh infrastructure and use of those things was another, you know, how this snowball or this ball, you know, snowballs and grows into something much larger, just like you you see with the rod manufacturing or fabrication. Um the challenges in the global environment, in my opinion, aren't in the major metals areas. They're in the minor metals areas. Um so when we talk about gallium, germanium, indium, tellurium, um, interestingly, none of these are um coming from your uh rare earth uh set, right? So there's like 90 metals. Um the major metals that are traded on exchange are much smaller in terms of the number relative to the total amount of these random things that no one ever talks about, but if you broke down your cell phone would have to find them. Um the build on to these major facilities to process these metals, uh like gallium, uh, come after you've built or when you build uh the aluminum plant, the zinc plant. Um some of this results also from natural endowments of things like zinc in China. But ultimately, uh the production of those minor metals can be incentivized by price or demand. Um so if I'm going to build a major consumer uh set for these metals, um you know, semiconductors in some cases, then I'm gonna wanna ensure that the materials going into those don't end up in tailings. Uh, because then I can maximize my GDP as a local government official. I can maximize the output. Um, and it's not necessarily built on whether or not uh the capital returns look that attractive. And so the KPIs, I think, in China aren't necessarily aligned with global dominance, they're aligned with uh local government officials hitting a number and getting a promotion. Um what that means now is something completely different. Uh as the world uh gets into this area of uh resource and dominant technology nationalism, I I think that you have a breakdown of some of the things we took advantage of for the last 40 years. Um and so China's position and uh is strong. It it doesn't seem intended to me. Um, and and now it is a point of leverage. Absolutely.

SPEAKER_02 25:01

And then I also wanted to ask, uh so the report also talks about some other countries and what they're doing in the supply chain outside of China. For example, Japan and South Korea, you describe them as fixer countries where they don't necessarily have or they're not sitting on the material, the minerals themselves, but their strengths lie further down the supply chain. So I was curious what are these countries doing that's different from what China's doing? And how have they been able to be successful in some of these supply chains when countries like the US or or Europe have been a little bit further behind?

SPEAKER_03 25:32

I think um these two fictions approach things uh very differently. Um what we saw with the IRA was a massive response from China or from Korean battery manufacturers. Uh LGES and LG Energy Solutions was probably the largest. Um then Samsung SK On um planned on building large battery manufacturing plants that relied on primarily on NMC uh caffeine materials in the United States for the potential build-out of um you know the EV sector. Um and so some of the challenges they face now is that NMC isn't as good of a fit with battery storage, uh stationary storage as something like LFP would be. Um but their response was you you provided me an incentive and a downstream demand source, and I provided uh a technology and a know-how into your market to meet your your requests. Um they even went as far as to reduce the Chinese owner ownership of certain partners in order to qualify for IRA-related subsidies. Um the Japanese case is a little bit different because it's independent. Um it is long-term and it's structured in a way that is challenging to replicate. Um so the Sogo Shosha, I'm I'm I'm butchering that phrase, is is for Japanese trading houses. Um and one of the most well-known um contracts that they have is an off-take agreement with Linus. Um so Jogmac is a Japanese government entity, Japanese organization for metals and energy security. Um, and then you have Sojits, which is one of these uh training houses. And so what's different about uh Japanese training houses is they go raw materials to finish product and they can sell you anything in between. Um so it's like uh being a wholesaler of an entire industrial supply chains. Um if you want to buy uh copper rod and and insulate it in Vietnam, I'm more than happy to sell it to you. If you want to buy copper cathode and and you know turn it into tubes yourself, I can sell it to you. You have an you have a demand, I have a price. And so the trading houses operate in this world where they primarily need meet the needs of the other downstream manufacturing and industrial enterprises in Japan, think uh uh Toyuna, for example. But they also uh de-risk projects in conjunction with JogMec. And so the Linus story is of interest because um following China's um restrictions on magnets to Japan about 15 years ago, um they decided to create this off-take agreement with Linus, who is operating in a uh uh Malaysia, but it's an Australian mining company. And so, you know, I like to say that uh with rare earths, um, you know, uh what do you say? U uranium is uh in deposits and thorium comes with your loose change. Um the loose change is all of these random small volume, uh very critical uh metals that go into all of our high-tech products. Um, but what the particular ones were these magnets. Um and so the separation of that thorium is a major challenge uh for dealing with uh you know, what what do I produce that I don't want to deal with? Um and the second part is the chemicals. Uh so these are toxic chemicals that you don't know how to dispose of. And so de-risking projects can involve not only government intervention, but also finding jurisdictions and environmental, um, for a lack of a better term, you know, uh avoiding the developed country environmental rules. Um and so some of these issues uh in which the trading houses have developed capacities to create solutions to uh complex problems is in partnership with the Japanese government. And so because these um trading houses have been a part of Japanese development strategy since World War II, um they've also had a strong relationship with the government in an ability to build these capacities uh in a way that's difficult to replicate, uh, solely on the basis that they work from the mine to the finished product.

SPEAKER_01 30:15

Yeah, the Japan story is kind of interesting because they really were in the front lines of the the early stages of this sort of maybe weaponization strategy of you know uh of of China when China they had like a geopolitical dispute back in 2010, uh, and China really previewed this playbook on weaponizing their rare earth dominance. And Japan at the time, as I as I recall, I think it was like 90% reliant on Chinese supply. And then through the course of some of the uh investments that they've made and the and the prioritization of the industry, it seems like they've been able to wean themselves slightly away. I think last I saw something about 60% reliant on on China's. So there's still there's still a substantial reliance, but you know, interesting thought for Andrew and me to maybe think about when we talk to our members is just maybe there there's hope perhaps for the US in looking at that. Maybe that provides a playbook on what could potentially happen if if we want to try to you know replicate what Japan's doing. I don't know if that's even possible, but that just occurred to me that that's uh you know that that would be nice. There's some optim reason for optimism, perhaps. Um so listen, this is this has been really uh great, uh Rogan. Thank you so much for your time. Before we let you go, um, I guess I wanted to ask you maybe if there's one maybe analytical point or takeaway from the report that you'd want to leave our listeners to walk away with.

SPEAKER_03 31:36

I think that um the the the challenge that goes unspoken is producing large abundant amounts of cheap energy for uh developing industrial ecosystems outside of China. Because you have to find where on this supply chain you want to compete, and if the objective is to leverage the US consumer's pocketbook in order to create a demand side uh for this potential supply chain, the challenge is um the consumer in the United States is eventually constrained and the amount of sales you can make of more expensive goods is lower. And so these trade-offs are real, but fundamentally what it will always come back to, especially in the developed world, is how cheap I can produce power in order to make the raw materials into something valuable. Um and I think that fundamentally, if we can address that, um we'll be able to compete on on almost any vertical.

SPEAKER_01 32:49

Great. Well, Brogan, thank you so much for joining us. Uh so to our listeners at home, the report Minerals, metals, and megawatts, how China's power generation drives its industrial metals ecosystem is up at rhodiumgroup.com and we'll link it in the show notes. Um so you can learn more about our work at the prosperous at prosperous america.org, and be sure to find us on YouTube, and you can check us out. You can check out the big three on Apple, Spotify, Google, or wherever you get your podcast. For now, we're signing up. Take care.