By Michael O’Grady
Recently, Gov. Glenn Youngkin blocked a deal with Ford Motor Company and Contemporary Amperex Technology Limited (CATL) to bring car battery research and manufacturing to Southside Virginia, an area desperately needing this type of investment. The move is odd given that Youngkin left the Carlyle Group to champion Virginia workforce development. Furthermore, his excuse in terminating the deal, to limit Chinese Communist Party influence in Virginia, is hypocritical given he oversaw investments of at least $8 billion in Chinese companies while at Carlyle, which is headquartered in nearby Washington, D.C.
But most disturbing is the myopia of this decision by an experienced global investor who should know better. Youngkin didn’t just kill one deal for a factory or even a slice of the car battery industry. He severely imperiled the potential for a new manufacturing sector coming to Virginia. I base this on two factors: First, the dynamics of agglomeration and cluster economies that any Harvard MBA grad should know. The second reason is the current and future market dynamics of both the battery industry and others relying on it for their own products.
The idea of an agglomeration economy is intrinsic: Competing firms will incubate near each other to take advantage of spill-overs. In plain language, they co-develop to poach each other’s ideas and employees. While this sounds unseemly, it has led to wider, faster adoption of new technologies and benefited both workers and consumers. Classic examples include cinema (Hollywood) and automobiles (Detroit). Research has shown most modern manufacturing expansion in the U.S. can be explained by agglomeration.
Business clustering is more complex but also based on geography. In business clusters, interrelated organizations develop in relative close proximity because of shared interests or relationships. Clusters can include private businesses, financiers, government agencies, nonprofits and educational institutions. They include those directly involved in product development and providers of complementary or similar goods and services. For example, many appliance and car manufacturers locate in the Midwest because they need similar types of workers and parts, and thrive in the same infrastructure environments. Regardless of specifics, clusters enhance performance, innovation and resiliency for those in them.
CATL and Ford aren’t just looking to expand production of existing batteries; they are likely developing the next generation of lithium iron phosphate technology (LFP). LFP is critical to the sustainable future of consumer products, transportation and renewable power. Furthermore, the Inflation Reduction Act both mandates and incentivizes a U.S. transition to newer battery technologies. Globally, demand for batteries will increase 20% each year for at least a decade.
While most current production is Asia-centered, this is changing for various reasons. Key to Chinese dominance is its control of cobalt production in Africa, which is concentrated in the Democratic Republic of Congo; there is no way around this in the short term. So the U.S. faces an immediate choice: partner with Chinese firms for domestic manufacturing in the U.S., or completely rely on China for the finished product (i.e., import batteries from China). There are no feasible alternatives for at least a decade. However, cobalt exploration and extraction are accelerating in Canada and the U.S. These deposits are a higher grade than what is currently found in Africa, thus more desirable. Because of transportation costs and the COVID reset, the refinement of cobalt will be close to where it is mined.
Many firms are interested in expanding to the U.S. but no state has emerged as a preferred destination. Virginia has many characteristics that make it ideal for both battery research and manufacturing. These include extensive transportation networks, an experienced manufacturing workforce and multiple research universities with robust engineering programs.
Meanwhile, Southside Virginia is struggling after decades of decline. First, the cotton and tobacco agriculture that historically powered Virginia’s economy collapsed. Textile, paper and furniture manufacturers left because of globalization. Virginia lost 140,000 manufacturing jobs in the last 25 years alone. The construction and operation of one plant would instantly create thousands of jobs for a suffering workforce. This in turn would create jobs in complementary and support services.
Ford and CATL signed a long-term memorandum of understanding last year to cooperate on existing and future product lines for the foreseeable future. LFP technology is still very new, especially compared to the lithium ion technology that has been around since the first Priuses. While Ford and CATL have invested in internal research capacity here, Ford has also indicated it is still interested in partnerships with research universities to guarantee development of these technologies. Perhaps CATL/Ford would be looking to partner with Virginia universities for both workforce and research pipelines, similar to what Amazon did. Other battery manufacturers, including non-Chinese companies, would probably then co-locate to Virginia for agglomeration opportunities. Manufacturers would eventually expand products to include batteries for electronics and renewable energy storage using Virginia-developed LFP technology.
Because of its transportation networks, Virginia could attract upstream manufacturers eager to make products for export to Europe and other parts of North America. I argue this because South Carolina pulled off a similar turn-around when it brought a Boeing plant to Charleston in 2009. Many other investors, including Carlyle, followed Boeing there and Charleston is now an advanced manufacturing export hub. This reversed a decline similar to Virginia’s Southside in South Carolina’s economy after textiles and furniture producers left.
In a macroeconomy where supply chains, networks and even business clusters are globalized, Youngkin’s policy of economic jingoism cannot win.
Ancient Chinese general and military strategist Sun Tzu said, “Every battle is won or lost before it is ever fought.” While the U.S. has been obsessed with fossil fuels for the last 30 years, China patiently assembled a near-vertical monopoly in renewable energy component manufacturing. In a macroeconomy where supply chains, networks and even business clusters are globalized, Youngkin’s policy of economic jingoism cannot win. Decoupling our economy and rebuilding internal capacity will take decades; recklessly canceling Chinese business partnerships will only impede this. With his decision, Youngkin sent a message to manufacturers to choose between participating in the global economy or locating in Virginia. In preparing for his political future, Youngkin is preparing Virginia for defeat.
Michael O’Grady is a PhD candidate in public policy and administration at Virginia Commonwealth University and a research economist for VCU’s Center for Urban and Regional Analysis. His research focus is on community development programs. He previously worked as a research analyst for Arlington Economic Development and as a legislative assistant on Capitol Hill. His views are his own and do not necessarily reflect any of his employers.