China’s top priority: energy structure adjustment and carbon emission reduction

In August , at least 10 provinces in China cut power and temporarily shut down factories, especially energy-intensive ones, to mitigate the impact of soaring coal prices and achieve the government's carbon emission targets for 2021. These examples show the Chinese government's determination to achieve its carbon emission peak target.

On October 24, 2021 , China's State Council announced China's new climate plan to peak carbon dioxide (CO2) emissions before 2030. According to the plan, the proportion of non-fossil energy consumption will reach about 25% before 2030 , and carbon dioxide emissions per unit of GDP will drop by more than 65% compared with 2005 levels . The plan proposes major goals and key guidelines for achieving carbon peak before 2030 , including promoting green and low-carbon transportation, advancing the circular economy, and supporting technological innovation.

In this article, Omdia analyses the long-term impact of this new climate plan on China’s manufacturing sector.

Figure 1 : China’s five strategies to achieve its climate plan by 2023

Source: State Council of the People's Republic of China, Omdia

Energy structure: the key to China’s decarbonization

China's new climate plan sets the goal of green and low-carbon energy transformation. These measures will be a double-edged sword for China's machinery and automation market as it will affect demand for both renewable and non-renewable power generation industries.

• In the non-renewable energy power generation industry, especially traditional coal-fired power generation, the Climate Plan requires strict control of new coal-fired power projects, closure of existing projects that do not meet energy efficiency standards, and the use of high-efficiency systems to accelerate the transformation and upgrading of existing facilities. These restrictions on investment in new coal projects will directly affect the industry's demand for new machinery and equipment.  On the other hand, driven by the demand for energy-saving transformation and upgrading of existing units, the industry's demand for high-efficiency automation products will continue to grow.

• The renewable energy power generation industry is expected to get a boost under China's new climate plan as the Chinese government will focus on investing in new energy power plants such as wind, solar, hydropower and other renewable energy sources to accelerate the transition to clean energy. The document published on the website of the United Nations Framework Convention on Climate Change ( UNCCC ) shows that the installed capacity of wind and solar power will more than double from 535 gigawatts in 2020 to 1,200 gigawatts in 2030 .

These plans and measures will directly drive the growth of machinery and automation products in related industries. For example, low-voltage motors and drives have always been one of the key automation equipment for driving and improving energy efficiency. Omdia expects that the growth of low-voltage motors and drives in China's renewable energy power generation industry will exceed that of non-renewable energy industries throughout the forecast period.

Figure 2 : Unit shipment growth of low voltage motors and drives in China’s power generation industry

Source: Low Voltage Drives Report – 2021 ; Low Voltage Motors Report – 2021, Omdia

Carbon reduction in energy-intensive industries

Metal processing industries such as steel and non-ferrous metals, building materials industries such as cement, glass and ceramics, and industries such as petrochemicals have been listed as key industrial sectors in the climate plan action guide. Similar to the coal industry, the steel industry is one of China's largest polluters, generating about 15% of China's carbon emissions. China has implemented a series of production restrictions and banned unplanned new projects to reduce carbon emissions. Policy changes have also forced steelmakers to consider reducing emissions from existing steel mills, such as replacing existing blast furnaces with electric furnaces with relatively low carbon footprints. Omdia believes that these shifts will promote the adoption of more energy-efficient machinery and automation equipment in these industries.

On the other hand, actively guiding these industries to use renewable energy, natural gas and other energy sources instead of coal will also accelerate the growth of equipment transformation needs in these industries to adapt to energy transformation. In addition, digital transformation will become one of the key factors in optimizing the efficiency of these industry systems. These growing digital needs will provide opportunities for related automation products, such as industrial network infrastructure equipment, machine vision, sensors, etc.

Figure 3 : Forecast of sales growth of automation equipment in the following industries ─ China

Source: Omdia

Focus shift: from cost-oriented to energy-efficiency-oriented automation products

As mentioned earlier, China’s new climate plan is expected to lead to a shift in end-user demand for industrial automation products. In the past, a cost-sensitive market where price was the primary factor influencing purchasing decisions, Chinese end-users are shifting their focus to products with higher efficiency standards. Electric motor-driven equipment such as fans, pumps, compressors, transformers, heat exchangers, and industrial boilers account for the majority of energy consumption in the industrial sector. According to the International Energy Agency ( IEA ), China’s electricity consumption from electric motors has grown from 1,400 TWh in 2006 to approximately 3,000 TWh in 2020 , accounting for 60% of the country’s total electricity consumption . More than 70% of the total electricity consumption from electric motors is attributed to inefficient large and medium-sized induction motor systems.

The aggressive targets outlined in the policy are expected to accelerate the phase-out of obsolete, high-energy-consuming products, thereby creating market opportunities for products with higher energy efficiency standards.

Omdia believes that China may pass legislation in the future to promote and guide the performance improvement of products in the above fields. For example, the low-voltage motor legislation in the legislation of mainland China will take effect in June 2021 , requiring motor manufacturers to meet the IE3 minimum energy efficiency standards for single-phase and three-phase asynchronous motors. From July 2023 , the new regulations will require motors between 75kW and 200kW to meet China's IE4 minimum efficiency level. Such legislation will create market opportunities for other equipment markets, especially when all IE4 synchronous motors sold are eventually connected to drives, which will benefit drive suppliers. During this period, suppliers who are at the forefront of technology, continue to innovate, and provide higher efficiency products will gain an advantage in the Chinese industrial automation equipment and mechanical equipment market.

Figure 4 : China's machinery production and automation equipment market growth forecast

Source: Omdia

In summary, China's new climate plan reflects the Chinese government's determination and action to put the medium- and long-term goal of carbon peak first. In the short term, in order to achieve the carbon peak target, the production and investment of high-energy-consuming industries will be negatively affected to a certain extent due to restrictions on new projects and short-term production restrictions.

However, in the long term, Omdia expects strong market penetration of more energy-efficient machinery and automation products, particularly driven by demand from renewable energy generation and energy-intensive process industries.

Omdia believes that sustainable development remains the focus of China's industrial market and product prices will no longer be an obstacle to end-user market decisions.