SAUDI ARABIASBUDGET REPORT2025DECEMBER 2024CONTENTSThe Key Takeaways IntroductionSummary Review of 2024Fiscal PerformanceEconomic Performance2025 Budget at a Glance2025 Macro Assumptions&Outlook2025 Fiscal OutlookLooking aheadBudget dashboardReferences0304050507101214192122STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|02STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|03The rising public spending and widening fiscal deficit over the medium term,estimated at 2%of GDP for 2025,is manageable and reflects Saudi Arabias tolerance for a moderate debt burden to deliver on Vision 2030 targetsTotal expenditure is projected at SAR 1,285 billion,with over half allocated to military,health,and education sectors.The mission to diversify the states income streams away from oil remains,with non-fossil income having contributed 38%of total revenues in 2024 and VAT and income taxes forecast to grow by a rate 2-to-3%in 2025.Among the budgets high priorities is tourism,with the introduction of VAT deductions for tourists seeking to reinforce the National Tourism Strategy and increase domestic and international tourist influx to 127 million and tourism spending to around SAR 347 billion.The budget allocation for wages is still growing at a faster pace than for capital expenditure and currently represents over 50%of the total 2025 budget.Despite the rise in public spending and private sector consumption,inflation is forecast to remain at a stable 1.9%in 2025,among the lowest globally.Saudis strong fiscal position is echoed by a buffer of reserves,a sustainable public debt level,and a reassuring credit profile,which should provide affirmations for investor confidence.THE KEY TAKEAWAYSNational budgets are fundamental governance tools that determine how economies will collect and spend money.Their successful design and execution hinges on balancing healthy public financial management practices and ambitious national goals for markets and people.In Saudi Arabia,the government passed the 2025 national budget on November 26,2024,making it the ninth budget plan that upholds Vision 2030 principles.This report reviews Saudis economic and fiscal performance for 2024 and presents a breakdown of the 2025 national budget.Below are the key takeaways.STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|04For economies around the world,a national budget is the most fundamental governance tool that determines how governments will spend and collect money.Complying with healthy public financial management practices and allocating resources according to national goals are thus paramount for producing a well-designed,purposeful budget.In this vein,and as part of Strategic Gears research on public finance and GCC economies,this report reviews Saudi Arabias economic and fiscal performance in 2024 and presents a breakdown of the 2025 national budget.In short,the 2025 budget for Saudi Arabia maintains the focus on Vision 2030 targets while balancing fiscal sustainability and discipline,investment atraction,and stimulating economic activity.This report is structured into three themes.First,the report synthesizes the budgeted and actualized numbers from the 2024 fiscal year.Second,it provides a reading of the expenditure and revenue structures of the 2025 budget,its macroeconomic assumptions,and economic forecasts.And third,the report concludes with an assessment of the strengths,weak points,and opportunities of Saudis 2025 public finances.On November 26,2024,Saudi Arabia passed the national budget for the incoming 2025 fiscal year.This marks the ninth budget statement to be issued afer the launch of Vision 2030 and sets the tone for the next half of this transformative decade.In line with previous formats,the 2025 budget estimates the closing of accounts for 2024 and outlines fiscal projections and macroeconomic objectives for 2025.INTRODUCTIONSTRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|05SUMMARY REVIEW OF 2024FISCAL PERFORMANCE Saudi Arabias fiscal balance shifed to a surplus in 2022 afer eight consecutive years of deficits.However,the budget returned to a back-to-back deficit trend in 2023 and 2024.The increase in Saudi Arabias expenditures in 2024 was driven by a 6.5%rise in capital expenditures,reaching SAR 198 billion,and a 3.7%increase in operational expenditures,which amounted to SAR 1,148 billion.Within operational expenses,subsidies experienced the most significant growth,surging by 62%from SAR 21 billion in 2023 to SAR 34 billion in 2024.Total estimated expenditure for 2024 represents one of the highest levels in recent years,exceeding the 20172023 average of SAR 1,091 billion.Moreover,public spending has grown by 45tween 2019 and 2024,rising from SAR 930 billion to SAR 1,345 billion,reflecting the Kingdoms growing financing of large-scale national projects as part of its broader economic vision.Although revenues increased in 2024,it was modest compared to the rise in spending.Tax revenues rose by 3%year-on-year and reached SAR 366 billion in 2024.Within tax revenues,taxes on goods and services exhibited the highest growth,increasing by 7%or SAR 280 billion.STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|06Fiscal Year 2024:Benchmarking the actualized figuresExpenditureSAR Billion7.5%higherthan budgeted4%increasecompared to2023 fiscal year4.9%higherthan budgeted1.4%increasecompared to2023 fiscal year1,345RevenueSAR Billion1,230DeficitSAR Billion115STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|07Growth estimates for 2024 now currently stand at at 0.8%,well below the Ministry of Finances projection of 4.4%ahead of the 2024 fiscal year and the 8.7%growth achieved in 2022,but an improvement from the-0.8%contraction in 2023.And while the economy remains under pressure,due to a 6.8%contraction in oil activities through Q3 of this year,non-oil activities are providing some buffers,following a 4.2%growth during the same period.2024 Real GDP growthis estimated at 0.8%compared to:4.4%in the 2024 budget-0.8%in 2023ECONOMIC PERFORMANCEGrowthSources Saudi Ministry of Finance and GASTATFigure 1:Saudi 2024 growth is rebounding from the decline experienced in 2023.Real GDP Growth in Saudi Arabia(%)2018201920202021201720162012201320142015201120102023202420222.8%0.8%-4.3%3.9%-0.1%2.4%5.4%2.9%4.0%4.7%4.8%-0.8%0.8%8.7.0%2.0%-8.0.0%STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|08 The Kingdoms 2024 growth rate also represented one of the slowest among G-20 members and slowest among BRICS countries.Sources:Saudi Ministry of Finance and IMF.Figure 2:Saudi 2024 growth was among the lowest in G20.%0.3%2.5%1.5%3.6%0.8%0.7%7.0%5.0%0.0%1.1%1.1%1.1%4.8%1.3%3.0%1.2%3.5-%2.8%1.1%3.0JapanRep KoreaMexicoRussiaSaudi ArabiaItalyIndiaIndonesiaGermanyEUFranceUKChinaCanadaBrazilAustraliaArgentinaUSASouth AfricaTurkeySources:Saudi Ministry of Finance and IMF.Figure 3:Saudi 2024 growth is among the lowest in BRICS.%4.8China%1.1South Africa%0.8Saudi Arabia%3.7Iran%6.1Ethiopia%7.0India%3.6Russia%3.0Brazil%2.7Egypt%3.5-Argentina%4.0United Arab EmiratesReal GDP Growth in BRICS Countries(%)Real GDP Growth in G20 Countries(%)STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|09InflationSaudi Arabias inflation is projected to reach 1.7%by the end of 2024,even slightly below what the budget had forecast,reflecting the Kingdoms strong efforts to stabilize prices.Despite an 8.9%rise in housing,utilities,and fuel prices as of August 2024,transportation costs fell by 3.4%during the same period and overall inflation remained stable at 1.7%year-on-year in September 20241Saudi Arabias inflation rate remains among the lowest globally,driven by the Kingdoms economic activity and growth in key sectors such as tourism and hospitality.2 This has contributed to an increase in private consumption,helping to maintain relatively moderate inflation rates compared to both advanced economies and other regional groups2024 Inflation is expectedto have averaged 1.7%compared to:2.2%in the 2024 budget2.3%in 2023 Emerging and Developing EuropeLatin America and the CaribbeanMiddle East and Central AsiaSub-Saharan Africa United StatesUKChinaIndiaSaudi ArabiaREGIONAL GROUPCOUNTRIES%4.1%7.3%0.2%5.4%2.32023%3%2.6%0.4%4.4%1.72024*%1.9%2.1%1.7%4.1%1.92025*.1.8.6.62023.9.8.6.12024*.1%8.5.7.32025*Sources:Saudi Ministry of Finance and IMF.Figure 4:Inflation rate by country and region.STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|10Public spending in 2025 is projected at SAR 1,285 billion,slightly higher than budget estimates for 2024.Capital expenditure will see a year-on-year decrease of 2.6%,while operational expenditure will witness an increase of 3.6%.A sectoral breakdown of the budget shows a patern in expenditure that is consistent with the previous year of 2024:Three sectors,namely Military,Health and social development,and Education were allocated over 50%of total budget expenditures.In 2025,government revenues are forecast at SAR 1,184 billion,1%higher than budget estimates in 2024.The deficit is forecast in 2025 at SAR 101 billion(-2.30%of GDP),lower than the SAR 115 billion deficit estimated for 2024(-2.80%of GDP),and higher than the SAR 81 billion deficit in 2023(-2%of GDP).The government intends to proactively purchase a portion of its outstanding debt maturing in FY 2024,FY 2025,and FY 2026.By diversifying its debt instrumentssuch as bonds,sukuk,and loansit aims to mitigate refinancing risks and manage future debt maturities.2025 BUDGET AT A GLANCEExpenditureSAR Billion1,285RevenueSAR Billion1,184DeficitSAR Billion101STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|11Source:Saudi Ministry of Finance.Figure 5:2025 fiscal balance forecasts a deficit.201820192020202120172016201420152023202420222026f2027f2025f2000150010005000-500Budget Balance,Revenues&Expenditures(SAR B)RevenueDeficit/SurplusExpenditureSTRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|12GDP GrowthThe 2025 budget projects a growth rate of 4.6%,driven primarily by non-oil activities.This growth will be supported by expanding private sector contributions,developing the labor market,and improving the business environment to atract investment,in alignment with economic diversification goals of Vision 2030.Saudi Arabias 2025 budgetassumes growth of 4.6%compared to:IMF4.6%World Bank34.9025 MACROASSUMPTIONS&OUTLOOKInflationSaudis budget forecasts inflation level in 2025 to be in line with 2024s and the lowest among G20 economies,reflecting the kingdoms efforts to contain inflation and maintain social protection programs.The 2025 budgetforecasts inflation at 1.9%compared to:IMF 20251.9%World Bank 20252.2%Ministry of Finances 20241.7%STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|13Based on figures retrieved from Statista,the oil price is at$72.6 per barrel,which is below the IMFs breakeven oil price estimate for Saudi Arabia for both 2024 and 2025.3 The IMF estimates an average oil price of$73.68 per barrel in 2025.Geopolitical tensions in the Middle East and the Ukraine-Russia conflict have influenced forecasts,with Goldman Sachs predicting Brent crude to decline from an average of$80 per barrel in 2024 to$76 in 2025,despite previous peaks of$104 in 2024.Fitch expects prices to drop to$80 or lower,while the EIA projects an average of$77.59 per barrel in 2025.4 5 Oil Price&Production According to October 2024 IMFs October Regional Economic Outlook,Saudi Arabias breakeven oil price is estimated at:90.9 USDper barrel in 202598.4 USDper barrel in 2024The IMF also estimates Saudi Arabias oil production to average:9.6 million barrels per day in 20259 million barrelsper day in 2024STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|14RevenuesThe Saudi budget does not typically specify the exact breakdown of oil and non-oil revenue forecasts for the year;however,it outlines certain non-oil revenue sources that will contribute to total revenues,with VAT income still contributing the most among other non-oil sources.These include:The annual contribution of non-oil income to total government revenues has grown significantly over the years.Starting at just 7%in 2011,non-oil income accounted for 38%of total revenues in 2024,maintaining the same share as in 2023.Total revenue is forecast at SAR 1,184 billion in 2025,3.7%lower than the actual revenue yield in 2024 but 1%higher than its projections.Taxes on Goods and Services projected at 24%of total revenue and 3.5%higher than in 2024.Taxes on Income,Profits,and Capital Gains projected at 3%of total revenue and 3.3%higher than in 2024.Taxes on International Trade and Transactions projected at 2%of total revenue and 4.5%higher than in 2024.2025 FISCAL OUTLOOK Source:Saudi Ministry of Finance.Figure 6:Non-oil share of revenues is stabilized in 2024.2018201920202021201720162012201320142015201120232024*202226GB76%8%7882hdSXcdsbbhOilNon-OilSTRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|15ExpendituresA sectoral breakdown of the 2025 budget shows a consistent expenditure patern with previous years,with over 50%allocated to three sectors,namely Military,Healthcare,and Education.The military sector accounts for the largest share,representing 21%of the total budget and approximately 6%of the projected GDP for 2025.Source:Saudi Ministry of Finance.Figure 7:Wage bill share is growing at a faster pace than the CAPEX share.20184071884842019CAPEX&OPEX Share of Actual Fiscal Balance(in billions of SAR)3851695052020Non-Financial Assets(CAPEX)Wage Bill OPEXOther OPEX4261554952021426117496201730220842020235701865372024*5901985582022508143513In 2025,expenditures are forecast to be 4.4%lower than actualized spending in 2024 but 2.7%higher than the 2024 budgeted amounts.The annual share of capital expenditure in the total budget has declined over the last five years,from 22.4%in 2017 to less than 15%in 2024 and is estimated at 14%in 2025(Figure 7).Some of the capital expenditure in the country is also financed outside the budget by the Public Investment Fund,who is a principal private sector investor,thus evading estimations at this stage.In 2023,capital spending by the Fund hovered around SAR 150 billion.7Meanwhile,the wage bill,which constantly grows year-on-year,currently accounts for over 50%of the total budget.STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|16Budget Allocation by Sector(in billions of SAR)Public Administration Military Security and Regional AdministrationMunicipal ServicesEducationHealth and Social DevelopmentEconomic ResourcesInfrastructure and TransportationGeneral Items442721216520126087421922025 BUDGET432691128119521484382162024 BUDGET2.3%1.1%8%-19.7%3!.5%3.5.5%-11.1%ANNUAL CHANGESource:Saudi Ministry of Finance.Figure 8:Largest share of budget still goes to Military.STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|17Deficit and Public DebtThe SAR 101 billion deficit forecast by the government for 2025 is their baseline estimate as part of the budget statement.In the best-case scenario for the government,the fiscal balance could turn into a deficit of only SAR 50 billion,while the worst-case scenario could result in a SAR 160 billion deficit.To finance the deficit,the government is expected to continue issuing different types of debt.The public debt is projected at SAR 1,300 billion in 2025(around 30%of GDP),compared to SAR 1,199 billion in 2024(29%of GDP),still less than the governments debt ceiling of 50%.According to the governments medium-term projections,the public debt will increase to 32.3%of GDP in 2026 and to 33.3%of GDP in 2027.Given Saudi Arabias lower debt-to-GDP ratio,compared to other G20 nations(Figure 9)and its sizable foreign reserves,borrowing rates are anticipated to remain low.The fiscal deficit is forecast at SAR 101 billion(-2.3%of GDP)in 2025,slightly lower than the actual deficit of SAR 115 billion(-2.8%)in 2024.Source:Saudi Ministry of Finance and IMF.Figure 9:Saudi debt-to-GDP is one of the lowest among G20 countries.X w0&T$995bA3Py44MexicoRussian FederationSouth AfricaSaudi ArabiaRepublic of TurkeyRepublic of KoreaJapanItalyFranceGermanyIndiaIndonesiaPeoples Republic of ChinaCanadaBrazilAustraliaArgentinaUnited StatesEuropean UnionUnited KingdomDebt-to-GDP Ratio in G20 Countries(%)STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|18The outlook is also supported by the Kingdoms structural measures and reforms toward long-term fiscal sustainability,its strong government balance sheet and high credit rating profile(Table 1).MoodysS&PFitchAa3(Stable)8 A/A-19A 10RATING&OUTLOOKRATING AGENCYRatings Change ConsiderationsLAST ACTIONPOSITIVETable 1:Saudi boasts a strong credit rating profile.Moodys upgraded Saudi Arabias credit rating to Aa3 from A1”Date:22 November 2024Global Ratings revised its outlook on Saudi Arabia to positive from stable and affirmed its A/A-1 Date:13 September 2024Fitch Affirmed Saudi Arabias credit rating at A ;with Stable OutlookDate:5 February 2024Progress in Vision 2030 reforms and non-oil sector growth reduces reliance on oil revenues.Strong fiscal metrics,including low debt and diversified revenue streams,support stability.NEGATIVEProlonged low oil prices could weaken fiscal balance and economic performance.Regional geopolitical tensions may undermine investor confidence and growth.Saudi Credit RatingsSTRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|19Saudi Arabias 2025 budget reflects its commitment to delivering on its Vision 2030 promises while balancing fiscal sustainability and discipline.The budget prioritizes expanding non-oil activities,enhancing the private sectors role,and fostering a favorable business environment.Despite a challenging fiscal landscape in 2024,characterized by rising deficits and low growth,the Kingdom continues to demonstrate resilience through moderate inflation and a sustainable debt-to-GDP ratio.Looking ahead,growth is projected to rebound to 4.6%in 2025,driven by non-oil sector expansion and increased private sector engagement.Inflation is expected to remain among the lowest globally,supporting economic stability.However,the fiscal outlook is tempered by potential risks,including prolonged oil price volatility and geopolitical uncertainties.To face these challenges,the government is well equipped with policy buffers,a strong fiscal position,and investment-friendly reforms that promote economic activity.LOOKINGAHEADSTRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|20StrengthSome of the Kingdoms structural,fiscal and economic strengths,weaknesses,opportunities and threats are highlighted below:Saudi Arabia maintains one of the lowest debt-to-GDP ratios globally,at 29.9%in 2025,well below the 50bt ceiling,providing fiscal flexibility.High ratings from agencies like Moodys(Aa3),S&P(A/A-1),and Fitch(A )highlight confidence in the Kingdoms fiscal policies and economic outlook.Continued focus on non-oil sector growth,economic diversification,and structural reforms reduces reliance on oil revenues.WeaknessesRising fiscal deficits,projected at SAR 101 billion(-2.3%of GDP)in 2025,reflect higher spending on large-scale projects without corresponding revenue generation.Despite diversification efforts,oil revenues remain a significant contributor to the budget,making fiscal health vulnerable to price volatility.The Kingdoms GDP growth remains slower than G20 and BRICS averages,with economic performance impacted by a contraction in oil activities.OpportunitiesInitiatives like the National Investment Strategy and special economic zones aim to increase FDI contributions to GDP and strengthen economic transformation.Expansions in transport,tourism,and industrial sectors provide avenues for sustainable job creation and long-term growth.Hosting major global events and enhancing sectors like sports and entertainment elevate Saudi Arabias international standing.Reforms in the business environment and legal frameworks,along with Vision 2030 projects,position Saudi Arabia as a hub for foreign direct investment.Strategic investments in tourism,healthcare,education,and infrastructure create avenues for sustainable job creation and economic transformation.ThreatsProlonged low oil prices,projected by the IMF and other organizations,may undermine fiscal balance and revenue forecasts.Regional tensions and global conflicts(e.g.,Middle East instability,Ukraine-Russia war)pose risks to investor confidence and economic stability.Potential global economic slowdowns or inflationary pressures could impact the Kingdoms trade,investment flows,and fiscal plans.STRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|21Total Revenue(SAR Billion)Oil RevenueNon-Oil RevenueTotal Expenditure Fiscal Balance(SAR Billion)(%of GDP)Debt(SAR Billion)(%of GDP)1,2127554581,293-81%2.0-1,050&.2ACTUAL 20231,172-1,251-79%1.9-1,103%.9BUDGET 20241,184-1,285-101%2.3-1,300).9BUDGET 20251,2307584721,345-115%2.8-1,199).3ESTIMATES 2024BUDGETDASHBOARDSTRATEGIC GEARS|SAUDI ARABIAS 2025 BUDGET REPORT|22General Authority for Statistics(GASTAT),Consumer Price Index(CPI)August 2024,htps:/www.stats.gov.sa/en/news/552,accessed November 2024.Strategic Gears.November 2024.“The Hospitality Industry in Saudi Arabia:Status and Outlook.”World Bank,Middle East and North Africa Economic Update,htps:/www.worldbank.org/en/region/mena/publication/middle-east-and-north-africa-economic-update,accessed November 2024.Statista,Weekly Crude Oil Prices,htps:/ prices/#:text=On November 25, 2024, the,exception of the OPEC basket,accessed November 2024.International Monetary Fund(IMF),World Economic Outlook:Statistics Appendix,April 2024,htps:/www.imf.org/-/media/Files/Publications/WEO/2024/April/English/statsappendix.ashx,accessed November 2024.Paraskova,Tsvetana,Goldman Sachs Expects Brent Oil to Average$76 Per Barrel in 2025,OilP,htps:/ November 2024.Fitch Ratings,Fitch Ratings Keeps Oil&Gas Price Assumptions Mostly Unchanged,Fitch Ratings,htps:/ November 2024.S&P Global,US EIA Lowers Oil Price Forecast by$2/b Despite Middle East Uncertainty,S&P Global Commodity Insights,htps:/ November 2024.Almozaini,M.October 2023.“The Economic and Energy Transformation in Saudi Arabia Exploring the Role of Strategic Investments.”King Abdullah Petroleum Studies and Research Center.Ministry of Finance,Saudi Arabia,Moodys Upgrades Saudi Arabias Credit Rating to Aa3 with Stable Outlook,htps:/www.mof.gov.sa/en/MediaCenter/news/Pages/23112024.aspx#:text=“Moodys Ratings” upgrades its credit,Aa3” with “stable” Outlook,accessed November 2024.S&P Global Ratings,S&P Global Ratings Affirms Saudi Arabias A/A-1 Sovereign Credit Ratings with Stable Outlook,htps:/ November 2024.Ministry of Finance,Saudi Arabia,Fitch Affirms Saudi Arabias Credit Rating at A with Stable Outlook,htps:/www.mof.gov.sa/en/MediaCenter/news/Pages/News_522024.aspx#:text=Fitch Affirmed Saudi Arabias credit,A+; with Stable Outlook,accessed November 2024.123456789101112REFERENCESWWW.STRATEGICGEARS.COM
2024-12-31
23页
5星级
AUCKLAND ECONOMIC MONITORJULY 2024Contents1.2.3.Tmaki Makaurau Auckland Auckland at a glance Key met.
2024-12-30
34页
5星级
Urenco Capenhursts socioeconomic impact on the UK URENCO CAPENHURSTS SOCIOECONOMIC IMPACT ON THE UK .
2024-12-30
30页
5星级
UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT2024Economic development in Africa reportUnlocking.
2024-12-29
180页
5星级
Budget travelers report 2024:Revealing the travel habits and preferences of KSAs budget S AOn a budg.
2024-12-29
16页
5星级
12DOCUMENT DISCLAIMERThe following legal disclaimer(“Disclaimer”)applies to this report(“Report”)and.
2024-12-29
58页
5星级
Research Report on Promoting Green Jobs for a Resilient Economic Recovery from COVID-19 APEC Human .
2024-12-29
161页
5星级
CENTER FOR AUTOMOTIVE RESEARCH i Affordability:The Twenty-Five Thousand Dollar Electric Vehicle Authors:Snehasis Ganguly Tyler Harp Yen Chen K.Venkatesh Prasad www.cargroup.org 880 Technology Dr Suite C Ann Arbor,Michigan,48108 August 2024 White Paper CENTER FOR AUTOMOTIVE RESEARCH ii Table of Contents Table of Figures.ii Acknowledgments.iii Abstract.4 Introduction.4 Affordability:A working definition.6 Supply factors.8 Demand factors.13 Policy factors.20 Conclusion.27 Citations.30 Table of Figures Figure 1.Engineering decisions to reduce cost,provided by U.S.Steel.9 Figure 2.A possible scenario of Tesla Model 3 path to$25,000.10 Figure 3.Household income distribution:all households vs.households owning an EV.13 Figure 4.Available new vehicles in the US market under$25,000 MSRP .14 Figure 5.US light vehicle sales and vehicle producer price index(1982=100),2015 2024.15 Figure 6.NADA/JD Power new vehicle average transaction price by year.15 Figure 7.2023 US light vehicle market share breakdown by segment.16 Figure 8.After-tax household income expenditure on transportation,2008 2022(left)and by major expense category,2022(right).17 Figure 9.Percent of households that may afford an auto loan based on 10%of pre-tax income and an 8%interest rate.18 Figure 10.Percent of households that may afford a$25,000 auto loan based on 10%of pre-tax income and an 8%interest rate.18 Figure 11.JD Power EV Affordability Index:The tipping point of affordability.19 Figure 12.Challenge of policy support affordable EV adoption AND protect US automotive manufacturing.21 Figure 13.IRA section 30D new clean vehicle credit increasing sourcing requirements by year.23 Figure 14.US EV sales in the first half of 2024,potential 30D eligibility by model.24 CENTER FOR AUTOMOTIVE RESEARCH iii Acknowledgments CAR would like to acknowledge the input from the participants of the roundtables that included automakers,suppliers,market experts,industry economists,and local,state,and federal representatives.880 Technology Drive,Suite C Ann Arbor,MI 48108 www.cargroup.org CARs mission is to inform and advise,through independent research,education,and dialogue,enabling a more viable and sustainable automotive ecosystem For citations and reference to this publication,please use the following:Ganguly S.,Harp T.,Y.Chen&Prasad,K,(2024).Affordability:The Twenty-Five Thousand Dollar Electric Vehicle.Center for Automotive Research.For more information,contact infocargroup.org CENTER FOR AUTOMOTIVE RESEARCH 4 Abstract Mass adoption of electric vehicles(EVs)hinges on affordability.Using a“twenty-five thousand dollar”EV as a symbolic reference to affordability,this report presents a scenario where affordable EVs help accelerate the clean energy transition for transportation.To understand the drivers and implications of EV affordability,Center for Automotive Research(CAR)organized three roundtables on related topics.Each roundtable engaged subject matter experts and key industry stakeholders in discussions on three aspects of affordability:Supply,Demand,and Policy.Through these discussions and supplemental research,CAR explored what would have to be true for manufacturers and their supply chains to produce affordable EVs at scale for the US market,the necessities and the underlying challenges to adoption by consumers,and role for policy makers to both enable EV affordability and adoption,while continuing to help strengthen domestic manufacturing.Introduction The automotive industry is facing an affordability challenge.This challenge is multifaceted.Industry factors have played a role,trending towards larger and higher-margin vehicles accompanied by record profits despite historically low production1.Unprecedented investments in automotive electrification have further pushed automakers to rely on profitable internal combustion engine(ICE)vehicles to support electrification investments.The CAR Book of Deals has captured over$160 billion of automaker-announced investment tied to electrification since 20202.Advanced vehicle technologies,such as autonomous driving and advanced driver-assistance systems(ADAS)require more technology in the vehicle increasing not only the initial cost of production but also the cost of repair3.In addition to a rapidly evolving vehicle technology landscape,the industry also faces disruptive externalities like the semiconductor chip shortage,the long-lasting effects of the COVID-19 pandemic,and federal regulations that translate to increasing costs for the consumer.1(Phillips,2022)2(Center for Automotive Research,2024)3(Aeppel,2024)CENTER FOR AUTOMOTIVE RESEARCH 5 In April of 2024,the average transaction price of a new vehicle was$48,510,up from a pre-pandemic April 2019 average of$36,843.This translates to an increase of over$11,000,or nearly 32%,in the transaction price of a new vehicle.To put this in perspective,the Consumer Price Index(CPI)4 increased by 21%over this same period.This affordability challenge impacts the entire automotive industry,regardless of propulsion technology.However,the issue of affordability is particularly acute in the electric vehicle(EV)segment.In April of 2024,the average transaction price for a new EV was$55,252 nearly$7,000 more than the industry average.5 The electrification of the automotive industry is arguably the most transformative and disruptive transition to face the industry in recent times.As with the advent of internal combustion engines and moving assembly lines,electrification affects both human(and societal)behavior and reshapes the boundaries of the transportation industry.Such a transition requires researching and applying new technologies,establishing new supply chains,sourcing critical minerals and materials,reskilling and upskilling the workforce,and the added challenge of building the necessary infrastructure to support such vehicles on the road.All this costs time and money,and automakers are committed but are faced with all the uncertainties that come with transition on a global scale.Their commitments are evidenced not by their capital commitment-a record amount of dollars,noted in the Book of Deals that the Center for Automotive Research(CAR)updates each month.The challenges,among others,are topped off by perhaps the most important hurdle consumer adoption.This transition is not just spearheaded by industry;regulators are using both the incentives and demands to electrify the automotive industry in efforts to address both climate and national security concerns.As Western automakers work to surmount these obstacles,there looms the growing competitive threat of low-cost Chinese EVs dominating the global market and finding pathways into the U.S.market.Affordability is a problem agnostic to propulsion technology and is not confined only to the United States.Average transaction prices have surged for the industry,not just for EVs.Europe faces its own vehicle affordability 4(Bureau of Labor Statistics,2024);CPI All items less food and energy in U.S.city average,all urban consumers,not seasonally adjusted 5(Cox Automotive,2024);(Kelley Blue Book,2019)CENTER FOR AUTOMOTIVE RESEARCH 6 challenges as it electrifies its automotive industry6,7.However,the affordability and EV transition challenges faced in the United States are ubiquitous and,at the same time,unique.CAR is exploring the topic of automotive affordability in the United States with particular attention to the EV market.In pursuit of this,CAR has engaged in independent research as well as convened industry experts in round table discussions.In this regard,there is a clear choice for customers to choose between used ICE vehicles,new ICE vehicles,used EV vehicles,and new EV vehicles.However,the new EV vehicles are the preferred direction from a national security,industry,and EPA standpoint.CAR explored three aspects of affordability:Supply,Demand,and Policy.Economics 101 suggests that an increase in supply will lead to a decrease in price,all else being equal.Therefore,understanding the supply-side challenges facing the industry is critical to understanding vehicle affordability.However,a primary challenge of increasing supply is reaching economies of scale which necessitates consumer demand.Understanding what is necessary for mass consumer acceptance of EVs is integral to developing a market that supports the business case of EVs.Finally,there is room for policy and regulation to impact both the EV transition and affordability concerns,an impact that can be either positive,negative or,as seen increasingly,both.CAR researched the challenges and opportunities of supply,demand,and policy regarding EV affordability,engaging a round table of automakers,suppliers,legislators,and industry experts on each of these aspects of affordability.Affordability:A working definition In discussing affordability,a clear“benchmark”on which to judge is essential.The industry appears to be coalescing around such a benchmark:the$25,000 EV.Tesla hinted at a future$25,000 car,named the“Model 2”by fans,back in 2020.This next-generation vehicle may come as soon as the end of 20248.Ford is working on an affordable EV,forming a“skunkworks”project to design a low-cost EV platform with its first model planned to launch in late 2026 with a price tag of around$25,0009.Stellantis is following suit,planning 6(ACEA,2023)7(Gerner et al.,2023)8(Levin,2024)9(Foote,2024)CENTER FOR AUTOMOTIVE RESEARCH 7 to launch a$25,000 Jeep EV in the United States“very soon”10.Other automakers are similarly working to introduce affordable EVs to the market:General Motors is reintroducing the Chevy Bolt EV to its lineup in 2026 after discontinuing the model in 202311;Volkswagen has announced the ID.2all to be priced around 25,000(about$27,000)with production scheduled to begin in 202512;and Kia is expected to launch the EV3 later this year or by early 2025,with prices starting at around$30,00013.This industry sees affordability as a major issue facing the automotive market,especially in the EV space.Automakers are racing to bring affordable EVs to market as federal and global efforts to address climate change push the industry to electrify.The lack of affordable EVs poses a threat to environmental goals the vehicles on the road are getting older.According to a report by S&P Global Mobility,there were 286 million vehicles in operation(VIO)across the US in January of this year.The average age rose to 12.6 years,up two months over 2023.The average age of the US fleet is up three years since 2022 when the average vehicle on the road was 9.6 years.A combination of“prohibitively high”prices,persistent inflation,and uncertainty surrounding the EV transition has led to consumers holding onto their vehicles longer14,15.This means keeping older,less fuel-efficient vehicles on the road a threat to climate goals.However,environmental concerns are not the only driver in the race to an affordable EV.The US automotive industry itself may be at stake.There is growing concern,among regulators and automakers alike,of a potential threat from low-cost Chinese EVs.These fears are best embodied by the BYD Seagull a sub$10,000 EV sold in the Chinese market.While BYD stated that they have no plans to enter the US market anytime soon,the threat of a low-cost mass-market EV entering the market looms in the minds of automakers and regulators in the US16.This led to an increase of tariffs imposed on Chinese EVs,with the Biden administration raising tariffs to 100%in May 10(Johnson,2024a)11(Deslauriers,2024)12(Strong,2023)13(Johnson,2024b)14(Hodder,2024)15(Parekh&Campau)16(Visconti,2024)CENTER FOR AUTOMOTIVE RESEARCH 8 2024,quadrupling the previous 25%tariff in place a move supported by automakers like General Motors,emphasizing the need for fair competition17.Given the urgency of accelerating EV adoption in the US to address both climate goals and national security considerations,CAR explored three aspects of affordability.Through roundtable discussion and supplemental research,CAR examined the underlying supply,demand,and policy factors.Supply factors The fundamental economic theory of supply and demand stipulates that an increase in supply,all else equal,will lead to decreased prices.An increasing shift in supply can lead to decreasing price and increasing quantity a potential solution,or part of the potential solution,to affordability.Common factors that can lead to such an outward shift in supply include decreasing input/material costs,technological advances,expectations,and the entry of new suppliers into the market.As such,each of these is considered an avenue to reach affordability.Decreasing material costs can have a large impact on vehicle affordability.This is particularly true for EVs,where the battery can account for a substantial share of the total vehicle cost.For example,the 229kWh nickel cobalt manganese(NCM)battery in the 2025 RAM 1500 REV Limited is estimated to cost$25,853 or nearly 32%of the total cost of the vehicle18.GlobalData reports EV batteries can account for up to 40%of the cost of a battery electric vehicle(BEV)19.However,progress is being made on this front.The International Energy Agency(IEA)reports that the average lithium-ion battery costs have fallen by 90%since 2010,falling from$1,400 per kWh in 2010 to less than$140 per kWh in 2023.Furthermore,the IEA projects the average lithium-ion battery cost to drop by another 40%globally from 2023 to 2030 due to innovation,with further progress made as sodium-ion grow in use and solid-state batteries become commercially available20.Furthermore,material cost reductions outside of the battery can also play a part in vehicle affordability.For example,generation-three steels high 17(Lopez,2024)18(Venditti,2023)19(GlobalData,2024)20(Petropoulos,2024)CENTER FOR AUTOMOTIVE RESEARCH 9 strength-to-tensile ratio can allow less material to be used which in turn can lead to lower costs.As these new materials enter the market,this can allow redesign of vehicle structures and manufacturing processes to take advantage of their material properties.Figure 1 shows an example of how advanced materials can be leveraged by engineering decisions in vehicle design to both reduce weight and cost.Engineering decisions point to another avenue of cost reduction.As discussed in the round tables,material margin21 is vital for affordability there is room for cost reduction outside of just materials.Figure 1.Engineering decisions to reduce cost,provided by U.S.Steel Technological advances play a pivotal role in affordability.The CAR roundtable discussion highlighted the importance of efficiency in manufacturing.Next generation manufacturing processes and design,such as modular manufacturing,can create cost savings.Modular design allows for more flexibility and parallel processing of parts leading to a reduction in manufacturing time and costs.Teslas unboxed manufacturing takes this even further.Caresoft,a leader in automotive benchmarking and cost reduction consulting,estimates that unboxed manufacturing could lead to a 25%lead time reduction in general assembly and can significantly reduce the footprint and investment required for a new vehicle assembly plant22.Tesla claims these next generation manufacturing efficiencies can lead to a 50%reduction in cost23.Other advanced technologies can aid in achieving efficiency in manufacturing.Computer aided engineering,modeling,and 21 Material margin is the revenue minus material costs this is the portion of the total price related to non-material costs such as manufacturing costs,overhead,and profit 22 From roundtable discussion 23(Armstrong,2024)CENTER FOR AUTOMOTIVE RESEARCH 10 artificial intelligence can all play a role.For example,constructing a digital twin of the factory floor can be used to uncover inefficiencies,predict and work to avoid machine failures,or trial alternative layouts and processes.Digital twins of vehicles can aid in the early stages of conceptualization all the way through sales and service24.Acknowledging the potential need for some upfront capital investment,EWI,a provider of advanced engineering services,discussed the application of AI and simulations to accelerate development and reduce costs and potentially energy consumption.One example:modeling crash worthiness.Also discussed at the roundtable,highlighted by NIRA Dynamics,was the importance of software and the opportunity to reduce costs through replacing hardware with software.An example of how technological advancements in manufacturing processes and materials can help solve EV affordability challenges is seen in Figure 2.CAR estimated the impacts of applying the new manufacturing process of gigacasting,application of unboxed manufacturing,reductions in battery material cost,and finally federal tax incentives on the cost of a Tesla Model 3.This shows the potential for a multifaceted approach to affordability achieving the$25,000 EV.Figure 2.A possible scenario of Tesla Model 3 path to$25,00025 24(Sharma&George,2018)25 CAR estimate based on(Fox,2021)and(Anderson,2024)Gigacasting-$2,800Battery-$2,400Unboxing-$1,30030D Tax credit-$7,5002024 Tesla Model 3 Base Price$39,000Total$25,000$0$5,000$10,000$15,000$20,000$25,000$30,000$35,000$40,000$45,000Tesla 2024 Model 3 base model doesnt qualify CENTER FOR AUTOMOTIVE RESEARCH 11 In order for automakers and suppliers to ramp up EV production and reach economies of scale,leading to decreasing costs,expectations must be justified.Automakers and suppliers have made record investment announcements in recent years.The CAR Book of Deals,which tracks the automotive industrys capital investments across North America,shows that automakers have announced over$160 billion tied to electrification projects since 2021.Tracked suppliers similarly announced record investment,planning over$80 billion in electrification projects since 202126.The threat to this historic investment in EV and battery-related technology and projects?Uncertainty.Citing softer-than-expected EV adoption among consumers,some automakers have delayed or reduced initial investment plans,reduced EV production forecasts,and even delayed debuts of new EV models.This uncertainty in EV adoption faced by automakers leads to more uncertainty further up the supply chain as automakers are reluctant to place long term offtake agreements as EV adoption wavers and government EV incentives face risk,suppliers cannot rely on large orders to help fund the retools necessary to make the transition to electrification.For suppliers,and particularly smaller and lower-tier suppliers,large and long-term orders are key for amortization of investments.Without this assurance,suppliers view heightened risk in the EV transition as automakers adapt investment plans to match market conditions.Further complicating this uncertainty facing automakers and suppliers is the rapid pace of technological change in the race for affordable EVs components and materials in current EV models may need altering or may even become irrelevant as new technologies and battery chemistries enter the market.To combat some of the uncertainty between automakers and suppliers,which can lead to more affordable EVs in the long run,robust relationships are key.Unlike the traditional way of automakers developing a roadmap that is provided to suppliers,Nissan highlighted the importance of end-to-end supplier integration.Bringing in suppliers at the beginning of development processes enables more robust relationships along with increased supplier confidence and involvement in the decision making helping in the amortization of capital expenditure and tooling.Furthermore,efforts to standardize parts and materials can go a long way in helping suppliers reach economies of scale and reduce production costs though,as discussed at the supply aspect of affordability round table,standardization and indeed the act 26(Center for Automotive Research,2024)CENTER FOR AUTOMOTIVE RESEARCH 12 of establishing standards at all is a challenge as technology advances at a rapid pace.Another avenue of increasing supply and lowering prices is the entrance of new competition there has been progress on EV affordability along this road.Tesla is a prime example of this in the United States.Tesla began selling EVs in 2008,however,their first EV cost a little more than$100,000 not an affordable car for the masses.Since then,Tesla has dominated the US EV market,capturing over 50%of new EV sales year-to-date through May of 202427.They have also arguably sparked the EV price war and race for the$25,000 EV,with the average transaction price of a Tesla dropping by nearly 20%in 202328.But other automakers are also contributing to this path towards affordability an estimated 25 new EV models are expected to debut in 202429.Here too lies risk the threat of Chinese EVs entering the US market.Undoubtedly,the flow of Chinese EVs into the market would lower the average transaction price of EVs and would represent a huge step toward solving the lack of affordable EVs in the market but letting Chinese EVs flood the US market comes with other risks,not the least of which would be the very survival the US automotive industry.Automakers and suppliers face multiple challenges in supplying an affordable EV.In addition to those discussed already in this section,the automotive industry faces precarious battery mineral supply and potential key battery material shortages;geopolitical tensions and conflict threatening supply chains;and uncertainty in state and federal policy and incentives meant to aid in the transition to electrified propulsion.While some of these challenges can and will be overcome by industry,there is room for legislators to help.These opportunities and risks are discussed in more detail in the Policy section of this paper.However,for any of these challenges,the largest hurdle is consumer adoption.The benefits of economies of scale can only be achieved if and only if there is widespread acceptance of EVs among consumers.The affordability challenges faced by consumers,and potential opportunities,are discussed in the next section.27 CAR analysis of Wards Intelligence US Light Vehicle Sales,May 2024 release 28(Cox Automotive,2024)29(Phillips,2024)CENTER FOR AUTOMOTIVE RESEARCH 13 Demand factors Robust consumer demand for EVs is necessary for a healthy(i.e.,profitable)EV market.To understand the current demand for EVs,it is useful to understand who owns EVs today.A CAR analysis of data from the 2022 National Household Travel Survey(NHTS)confirmed two assumptions regarding EV ownership:an EV is a second car,and EVs are a luxury for the relatively well off.The 2022 NHTS shows that of households that own a BEV or a plug-in hybrid electric vehicle(PHEV),roughly 87%are multi-car households.Furthermore,the median household income was around$75,000.For EV owners,the median household income is over$150,000.Figure 3 shows a comparison of household income distribution of the general population versus that of households that own EVs.The data shows household income for EV owners is shifted right implying that households that own EVs are likely to be more well off than the median household.Figure 3.Household income distribution:all households vs.households owning an EV Notably,the above analysis shows that the median EV-owning household has over twice the income as the median US household.Adopting$25,000 as the recently targeted industry benchmark for an affordable EV,Figure 4 shows the new vehicle models available in the US market with manufacturer suggested retail prices(MSRP)below that price point.Of these only three are 0%5 %05%Share of householdsHousehold incomeHouseholds with BEV or PHEVAll Households CENTER FOR AUTOMOTIVE RESEARCH 14 EVs,all of which only make the sub-$25,000 cut after EV tax credits are applied.Figure 4.Available new vehicles in the US market under$25,000 MSRP 30 The race to a$25,000 EV will be an arduous one.The vehicle producer price index,which measures the change in prices vehicle producers receive for their output,had been slowly trending upward since 2015,but saw rapid growth in the wake of the COVID-19 pandemic.This is seen in Figure 5,which tracks the vehicle producer price index against the seasonally adjusted annualized rate of light vehicle sales.This shows that prices have climbed quickly in the aftermath of the global pandemic and,while having recovered slightly,vehicle sale volumes remain below pre-pandemic levels.30 CAR analysis of E data$0$5,000$10,000$15,000$20,000$25,000EV price after 30D tax credit CENTER FOR AUTOMOTIVE RESEARCH 15 Figure 5.US light vehicle sales and vehicle producer price index(1982=100),2015 2024 Figure 6 shows this march towards higher vehicle prices.Review of data from the National Automobile Dealers Association(NADA)and JD Power shows the increase in new vehicle average transaction price as well as the comparison of vehicle price inflation to that of general consumer prices.The average price consumers pay has increased significantly,by about 25%compared to 2019.Figure 6.NADA/JD Power new vehicle average transaction price by year31 31 CAR analysis of NADA/JD Power data 46,055-0.7%4.5%-5%0%5 %-5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000Vehicle Price Inflation Vehicle Price,$NADA/JD Power Retail PriceVehicle price inflationCPI Inflation CENTER FOR AUTOMOTIVE RESEARCH 16 As prices for vehicles soared,regardless of powertrain technology,it is interesting to consider the potential impact of a car like the BYD Seagull entering the US market.EV prices have already been dropping in the US increased competition and higher inventory levels have driven down costs by 11.6%to 12.8%year-over-year(February and January 2023 compared to the previous year).Even premium EVs like Tesla Model Y and Model 3 have seen price reductions(16.2%and 12%respectively).Despite this progress,EVs remain nearly 19%pricier than mainstream non-luxury gasoline-powered cars in terms of sticker price.However,even with these gains in affordability,competition with a Chinese EV entrant would be an uphill battle.The BYD Seagull could be priced$10,000 lower than traditional gasoline-powered vehicles in the same segment.But it is important to also consider consumer preferences.Would an average consumer be interested in a BYD Seagull type of EV,even with its affordable price tag?Passenger cars only account for about 20%of new car sales in the US small cars,most of which are larger than the Seagull,only account for around 7%of new car sales as seen in Figure 7.However,even though the Seagull would enter the market in a relatively low-share segment,it cannot be understated how such an entrant with a price point$10,000 cheaper than even the current low-cost ICE vehicles could radically change the US light vehicle market.Figure 7.2023 US light vehicle market share breakdown by segment32 CARs earlier discussion and analysis uncovered a bit about who currently owns an EV,what affordable(i.e.,sub$25,000)vehicles are currently available,and where such an affordable car may enter the market.Essential to the 32 CAR analysis of Wards Intelligence US Light Vehicle Sales,December 2023 release 0.6%4.7%5.1%6.0%7.0%7.4%9.3%9.4.4.9!.2%0%5 %Large CarVanLuxury CarLarge CUVSmall CarMiddle CarSmall CUVSUVLuxury CUVPickupMiddle CUVMarket Share CENTER FOR AUTOMOTIVE RESEARCH 17 affordability question is identifying whether the$25,000 EV is indeed affordable.To answer this question,CAR conducted an analysis of transportation costs using household income estimates from the 2022 US Census Bureau and US Bureau of Transportation Statistics data.Figure 8 depicts the share of after-tax household income typically spent on transportation costs.While cost encompasses more than just motor vehicle payments,including other aspects of transportation like fuel,insurance,and transportation services such as buses and airfare,it does illustrate an upper-bound to vehicle affordability.What this shows is that household expenditure on transportation,as a share of household income,has remained relatively constant since 2008,with roughly 15%of after-tax household income spent in this category.Figure 8.After-tax household income expenditure on transportation,2008 2022(left)and by major expense category,2022(right)33 CAR estimates that this translates to roughly 10%of pre-tax household income spent on transportation.Using this as a baseline,forming an upper bound for affordability in terms of the share of households that can afford a particular price is achievable.CAR analyzed the percentage of households that could afford a particular auto loan at three different maturity terms at an 8%interest rate34.As expected,as the price of vehicle/loan amount increases,the percentage of households who can afford it falls.Higher loan durations,resulting in lower monthly payments,can increase what auto loan is considered affordable.These results can be seen in Figure 9.Interestingly,33 CAR analysis of Bureau of Transportation Statistics data 34 This assumes no down payment or trade-in,10%of pre-tax income spent on auto loan payments Housing,29.2%Transportation,14.8%Food,11.2%Personal insurance and pensions,10.5%Healthcare,7.0%Entertainment,4.2%Other,10.7%0%2%4%6%8 0820092010201120122013201420152016201720182019202020212022Percentage CENTER FOR AUTOMOTIVE RESEARCH 18 with a 48-month maturity,an estimated 51%of households can afford a$25,000 auto loan.This increases to 59%with a 60-month loan and 64%with a 72-month loan.This breakdown can be seen in .This suggests that an 8%interest rate on a 48-month loan auto loan of$25,000 may be affordable to just over half of US households.Figure 9.Percent of households that may afford an auto loan based on 10%of pre-tax income and an 8%interest rate35 Figure 10.Percent of households that may afford a$25,000 auto loan based on 10%of pre-tax income and an 8%interest rate36 35 CAR analysis of Census Bureau Current Population Survey data 36 CAR analysis Census Bureau data 0102030405060708090100$-$10,000$20,000$30,000$40,000$50,000$60,000$70,000$80,000$90,000$100,000Percent of households that may affordAuto Loan Amount48-month60-month72-month51IH-month duration on a$25,000 auto loan59A-month duration on a$25,000 auto loan646r-month duration on a$25,000 auto loan CENTER FOR AUTOMOTIVE RESEARCH 19 The above analysis considers the upfront cost of buying a vehicle.When considering affordability,another,and potentially more accurate,measure is not the sticker price of a vehicle,but the total cost of ownership(TCO).This considers more than purely the transaction price,considering factors such as resale value,incentives,and operation costs.JD Power considered this more holistic view of affordability,comparing the cost of a five-year purchase of a Tesla Model Y versus a compact premium SUV with an ICE powertrain.By these metrics,accounting for additional EV costs such as lower resale value and EV benefits such as fuel savings,JD Power posits that EVs have already reached parity and are now more affordable than comparable ICE vehicles,in TCO terms.In the previous example concerning the Tesla Model Y,JD Power estimates that the EV is around$4,500 cheaper than its ICE counterpart after five years of ownership.JD Powers affordability index can be seen in Figure 11-showing that total EV affordability reached parity with ICE vehicles in August of 2023.Figure 11.JD Power EV Affordability Index:The tipping point of affordability37 37 J.D.Power conveyed data to CAR 80859095100105110115Jul-22Nov-22Mar-23Jun-23Aug-23Dec-23JD Power EV Affordability IndexTotal affordability IndexMainstreamPremiumScore of 100 implies EV at parity with ICE CENTER FOR AUTOMOTIVE RESEARCH 20 Policy factors There is ongoing regulatory effort to electrify the US car parc.The Massachusetts Institute of Technologys Climate Portal calls EVs a“part of a suite of tools for clean transportation.”38 US regulators have implemented rules in effort to green the nations fleet.The Department of Transportation(DOT)finalized Corporate Average Fuel Economy(CAFE)standards requiring an industry-wide fleet average of about 50.4 miles per gallon(MPG)in model year 2031 for light vehicles39.The Department of Energy published the final rule for the petroleum-equivalency factor(PEF),revising the methodology and procedure for calculating the petroleum-equivalent fuel economy for EVs(used to calculate compliance to the DOTs CAFE standards)effectively lowering the MPG equivalency of EVs40.The Environmental Protection Agency(EPA)finalized greenhouse gas(GHG)emissions standards,projecting that 56%of new vehicle sales would need to be BEV and 13%PHEV in 2032 for compliance41.These regulations and rules,among others,are aimed at reducing motor vehicle GHG contributions.However,consumer adoption of EVs is a significant requisite to achieve these goals.One hurdle to widespread EV adoption is affordability.CAR considered four scenarios with varied effects of affordability on EV adoption and subsequent GHG reduction.In the first scenario,affordability challenges remain an issue,regardless of powertrain,and EV adoption remains low.In this case,the fleet relies on used ICE vehicles,having the lowest impact on GHG reduction.In scenario two,consumers are able to purchase new ICE vehicles that are more efficient than used ICE vehicles,but EV adoption remains low.Here,the newer and more efficient ICE vehicles replaced the used fleet,having a mild impact on GHG reduction.In the third scenario,EV adoption is higher,but affordability remains an issue;EV penetration is slow as many consumers that want EVs must wait for them to transition into the used market,leading to a moderate impact on GHG reduction.Finally,the fourth scenario considered assumes that there is high demand for EVs and new EVs are affordable.Here,EV penetration would be fastest and have the highest impact on GHG reduction,38(Keith&Krol,2023)39(National Highway Traffic Safety Administration,2024)40(Petroleum-Equivalent Fuel Economy Calculation,2024)41(Multi-Pollutant Emissions Standards for Model Years 2027 and Later Light-Duty and Medium-Duty Vehicles,2024)CENTER FOR AUTOMOTIVE RESEARCH 21 of these four scenarios.Scenario four is the ideal scenario if policy goals are to have the greatest impact on vehicle GHG emission reduction.However,for scenario four to be realized,both high consumer demand for EVs and affordable price points for EVs must be true.Policymakers can have an impact here.EV penetration,however,is not the sole objective of EV policies in the US.Another objective is to protect US jobs and manufacturing in the future of mobility.These two objectives,increasing EV penetration and protecting US automotive manufacturing,are often at odds with each other.The fastest way to an affordable EV,which may lead to wider adoption,is to open the market to lower-cost imports a strategy that could be detrimental to US manufacturing.Figure 12 depicts potential scenarios considering the two objectives:EV affordability and adoption,and protection of the US automotive industry.The ideal scenario is in the top-left quadrant.Affordable EVs are available,leading to increased adoption,and are manufactured profitably in the US.In the worst-case scenario,EVs are kept out of the market,through policy or lacking consumer demand,and the US automotive industry does not transition to electric vehicles.In this worst-case scenario,EV adoption is minimal,and the US automotive industry becomes globally uncompetitive as the rest of the world electrifies.With these dual EV policy objectives in mind,CAR explored current policies in place that impact EV affordability while also considering areas of opportunity for policy initiatives to play a further role.EV Affordability and Adoption Win Lose US Automotive Industry Win Affordable EVs produced profitably in the US and are widely adopted Affordable EVs kept from market;Automakers produce high-margin/high-price vehicles Lose Affordable EVs imported and are widely adopted;US automotive footprint diminished as imports take over market Affordable EVs kept from market or EVs are not adopted,US automakers become uncompetitive globally and automotive footprint is diminished Figure 12.Challenge of policy support affordable EV adoption AND protect US automotive manufacturing CENTER FOR AUTOMOTIVE RESEARCH 22 Starting with the demand side of the equation,the most obvious policy to encourage EV affordability and adoption is EV tax credits.Available at both the federal and,in some cases,state level,tax incentives for those who purchase an EV are a straightforward way to increase vehicle affordability.State incentives for EV purchases can be significant.A 2023 analysis compiled by the Tax Foundation found that“Nineteen states including Washington DC offer an additional incentive beyond the federal credit ranging from a$1,000 incentive in Alaska and Delaware to a$7,500 credit in California,Connecticut,and Maine.”42 These state incentives appear to be effective contrasting this list of states against EV market share data from the Alliance for Automotive Innovations Electric Vehicle Sales Dashboard43,nine of the top ten states in terms of light-duty EV market share in 2023 offered such incentives.Though these state incentives are substantial and effective in making EVs more affordable,they vary by state.CARs subsequent analysis focuses on federal incentives.On the demand side,the flagship federal incentive also takes the form of an EV tax credit.The Inflation Reduction Act(IRA),signed into law on August 16,2022,has provisions covering clean energy initiatives,climate mitigation and resilience,agriculture,conservation,as well as healthcare and corporate tax reforms.This includes provisions directly related to EV affordability and adoption,including section 30D,the New Clean Vehicle Credit44.Section 30D provides incentives of up to$7,500 for the purchase of a new clean vehicle,inclusive of BEVs,PHEVs,and fuel cell vehicles.There are requirements for eligibility not just for the vehicle but also the buyer.For the buyer,eligibility is predicated on income limits and intended use.Vehicle eligibility is determined on the vehicle identification number(VIN)level,including manufacturer suggested retail price(MSRP)caps and manufacturing requirements including battery capacity,vehicle weight,and final assembly location.On top of these criteria,vehicles must also meet critical mineral and battery component requirements which become stricter over time.Figure 13 depicts these increasing requirements for vehicles to qualify for New Clean 42(Jaros&Hoffer,2023)43(Alliance for Automotive Innovation,2024)44 There are two other IRA tax credits that reduce the price of the vehicle.The Previously Owned Clean Vehicles Credit(Section 25E)and the Qualified Commercial Clean Vehicles Credit(Section 45W)both provide incentives to boost EV adoption through making EVs more affordable and are important when considering EV affordability.However,for the intent of this paper,which is focused on new EV sales in the US,Section 30D is the most directly applicable.CENTER FOR AUTOMOTIVE RESEARCH 23 Vehicle Credits and denotes when the foreign entity of concern applies to both battery components and critical minerals.Section 30D is a perfect example of the dual policy objectives.The$7,500 credit helps to lower the price of EVs for consumers and the MSRP caps help limit EV prices while the final assembly requirement(final assembly in North America)and the increasingly strict critical mineral and battery component requirements are designed to support on-and near-shore manufacturing.However,Section 30D is also a perfect example of how these dual policy objectives can be at odds with one another.Figure 13.IRA section 30D new clean vehicle credit increasing sourcing requirements by year The vehicle eligibility requirements,while encouraging investment in North America,can also render the incentive less impactful for encouraging EV adoption.Figure 14 shows sales volume of EVs in the US in the first half of 2024.As of this writing,only 21 of the 99 EV models sold in the first half of 2024 were potentially eligible for 30D credits.These potentially eligible vehicles account for roughly 58%of EVs sold through June of 2024.Note that this is a high-end estimate a disclaimer on the www.fueleconomy.gov site listing eligible vehicles cautions that“not every version of the models listed below will necessarily qualify.Please check with the dealer/seller to determine the eligibility of your specific vehicle.”45 As sourcing requirements for critical minerals and battery components intensify in coming years,fewer models may remain eligible for this incentive in the future.Further 45(Office of Energy Efficiency and Renewable Energy,2024)30Pp0 23202420252026202720282029Share of NA Value(NA FTA for minerals)Battery ComponentsCritical MineralsForeign entity of concern applies to critical mineralsForeign entity of concern applies to battery components CENTER FOR AUTOMOTIVE RESEARCH 24 complicating eligibility is the implementation of foreign entity of concern restrictions which,if this requirement is not met,can disqualify the vehicle for the entire 30D credit.US Geological Survey estimates that China,designated as a foreign entity of concern,produced roughly 65%of the worlds supply of natural graphite46 a critical mineral for EV batteries.IEA,the International Energy Agency,estimates that China accounted for over 90%of the worlds refined graphite in 2023 and 65%of the worlds refined lithium another critical mineral47.Figure 14.US EV sales in the first half of 2024,potential 30D eligibility by model The 30D tax credit can and has increased affordability of EVs in the US.However,vehicle price is only one aspect of demand consumers have other concerns that need to be met before widespread EV adoption and economies of scale can be reached.Policy can have a role to play here as well,although progress has been slow.The Infrastructure Investment and Jobs Act(IIJA),also known as the Bipartisan Infrastructure Law,was signed into law on November 15,2021.The IIJA created the National Electric Vehicle Infrastructure(NEVI)program with the intent to build a nationwide network of 500,000 EV chargers by 2030 as of June 2024,NEVI funding has only 46(U.S.Geological Survey,2023)47(International Energy Agency,2024)020,00040,00060,00080,000100,000120,000140,000160,000180,000200,000Units sold78 of the 99 BEV/PHEV models do not qualify for 30D tax credit Potentially Eligible Not Eligible CENTER FOR AUTOMOTIVE RESEARCH 25 supported eight charging stations nationwide48.However,the number of public chargers has shown improvement,with the number of level 2 public charging ports growing by 58%since November of 2021 and the number of DC fast charging ports growing by over 110I.Policy to expand access to EV charging is critical the J.D.Power 2024 U.S.Electric Vehicle Consideration Study finds that the top five reasons cited by consumers unlikely to consider an EV are mostly related to charging concerns,including charging station availability50.On the supply side,the dual policy objectives of EV adoption and protecting the US automotive manufacturing industry are even more entwined.As discussed above in relation to the IRAs New Clean Vehicle Credit,provisions to support and encourage EV manufacturing investment in the US can potentially undermine the goal of making EVs more affordable.If affordability and adoption were the only goals of policy,all EVs would qualify for these credits.However,the IRA,and other policy initiatives,do include programs to help lower costs for the EV supply chain in the US.For example,expanding the Advanced Energy Project Credit which supports projects including the production of advanced vehicles;the new Advanced Manufacturing Production Credit supporting domestic manufacturing of components,battery cells and modules,and critical minerals processing;the Advanced Technology Vehicle Manufacturing Loan Program for loans to manufacture clean vehicles and their components;and Domestic Manufacturing Conversion Grants to help fund retooling of production lines for clean vehicles51.All these programs can lower the costs for manufacturers engaged in EV production and its supply chain while supporting investment in the US.The IIJA also provides support for domestic manufacturers.The NEVI program discussed earlier requires at least 55%of the component costs for federally funded chargers to be manufactured domestically52.In addition to the NEVI funding,the IIJA set aside$43 billion in flexible spending to support“battery manufacturing,grid updates,retooling auto industry facilities,and retraining and rehiring existing auto workers.”53 However,roundtable 48(Joint Office of Energy and Transportation,2024a)49(Joint Office of Energy and Transportation,2024b)50(J.D.Power,2024)51(The White House,2023)52(Smith&Friedman,2024)53(Christianson,2023)CENTER FOR AUTOMOTIVE RESEARCH 26 discussions suggest these programs are long term solutions.In the short term,the Biden Administration expanded on tariffs imposed by the Trump Administration to protect US manufacturers from the potential of low-cost Chinese EVs entering the market.This increased the China Section 301 tariffs on EVs from 25%to 100%,increases the 7.5%tariffs on lithium-ion EV batteries and battery parts to 25%,and imposed a new 25%tariff on most critical minerals54.This is another example of the policy challenge with the dual objectives of EV adoption and supporting the US automotive industry while these tariffs can provide protection for domestic manufacturers as they work to become more competitive in the transition to EVs,they can also lead to increased costs for the US consumer.A final policy to mention is the trade agreement that replaced the North American Free Trade Agreement(NAFTA),now known as the US-Mexico Canada Agreement(USMCA).During the CAR roundtable discussions,USMCA rules of origin were highlighted as a driver of manufacturing investment in North America.In fact,some investment announcements captured in the CAR Book of Deals in 2024 cited compliance with these rules of origin as a driving factor in why a particular location was chosen.Roundtable discussion of the policy aspect of EV affordability identified a few other areas where policymakers can have an impact.Participants reiterated the necessity for robust EV charging infrastructure before widespread adoption of EVs.On the EV charging front,the challenge of how to provide equitable charging access for consumers living in a multifamily home and addressing the cost differential of public charging versus home charging is an area where policy can play an influential role.The importance of rebate programs,both for EV purchases and for manufacturers was also highlighted especially in conjunction with tariffs.Participants from REMI,a provider of state,local,and national macroeconomic policy analysis models,demonstrated that their model forecasted job losses with the implementation of tariffs alone protecting the automotive industry;however,the model forecasted net job gains in the event tariffs were accompanied by rebate incentives.On the manufacturing front,while there are some programs available,supporting small and medium sized manufacturers during this historic propulsion technology transition is necessary.As noted in the supply discussion,suppliers can not rely on large orders from automakers in the face of uncertainty in the market creating even more uncertainty for 54 USITC presentation to CAR,June 2024 CENTER FOR AUTOMOTIVE RESEARCH 27 small and medium sized manufacturers in the supply chain that rely on large orders to amortize retool investments.Here too there is an opportunity for policymakers to help remove uncertainty and risk further up the supply chain.Building on potential roles for policymakers to reduce uncertainty in the EV transition,and in turn leading to more affordable EVs,the CAR roundtable discussion stressed the need for support to de-risk startups and entrepreneurs and support robust research and development budgets.As also discussed in the supply aspect of EV affordability,technological advancement is critical in the path toward affordability.Policies to de-risk startups and entrepreneurs can facilitate faster time to market for cutting edge technologies or new manufacturing processes that can reduce product cycle times that ultimately reduce costs in future EVs.Another area of uncertainty where policy can have great influence is in general EV incentives and EV regulations.Commitment to policy initiatives in the long run provides more certainty and confidence for automakers and suppliers as they announce record-high investment in the transition to electrification.Furthermore,standardization or harmonization of regulations across not just states but internationally can lead to reduced costs for automakers.Finally,and perhaps most importantly,CAR engagement with industry and policymakers has indicated the need for manufacturers to actively communicate with legislators to inform policy making.Healthy industry-policymaker relationships are critical to establishing a robust communication pipeline,helping to inform and create effective policy initiatives informed by the realities of the automotive environment.Conclusion Vehicle affordability is a nuanced concept.In the context of EVs,affordability is critical for the industry to meet climate goals put forth by policymakers.Furthermore,as the global automotive industry transitions toward electrification,affordability may be critical for domestic manufacturers to remain competitive in the future of electrified mobility.CAR explored three aspects of affordability:supply,demand,and policy all of which are intertwined and necessary to meet the dual objectives of widespread EV adoption and maintaining a robust automotive manufacturing industry within the US.CENTER FOR AUTOMOTIVE RESEARCH 28 The automotive industry has coalesced around an affordable price point the$25,000 EV.CAR analysis supports this benchmark of affordability,suggesting that half of US households may be able to afford such a vehicle.Advances in battery technology and chemistries,the introduction of new materials,and implementing engineering decisions and manufacturing efficiencies all have a role in lowering production costs and,therefore,could lead to more affordable sticker prices.Strong automaker-supplier relationships are essential and can help provide certainty for small and medium sized manufacturers weighing the risks of investing in the tooling and talent necessary in the transition to support EV manufacturing.The largest source of uncertainty facing the supply side,i.e.,manufacturers,in the transition to electrification?Consumer adoption.To reach economies of scale that can lower supply side costs,widespread demand must exist in the market.While tax incentives like the new clean vehicle tax credit can make EVs on the market more affordable,sticker price is not the only hurdle to widespread adoption.Robust charging infrastructure is paramount to consumer adoption and both the private and public sector have a role to play.Another key consideration the$25,000 EV-must be a vehicle consumers want to drive and one that fulfills the utility needs of the household.Challenges from both the supply and demand side of the EV affordability equation can be mitigated in part through thoughtful policy.While some effective initiatives are already in place,roundtable discussions highlighted the difficulty of policy meeting the dual goals of both widespread EV adoption and supporting a robust domestic automotive industry.Expanding charging access in an equitable way can lead to greater consumer acceptance of EVs.Policies that de-risk startups,entrepreneurs,and research and development investments can incentivize innovation that could lower costs.There is a role for policymakers to facilitate electrification.Clear and consistent policy can lessen uncertainty faced by the industry in this historic transition.But the burden does not fall solely on policymakers relationships are critical and open communication channels between legislators and manufacturers can lead to informed policy initiatives that understand the realities of the market faced by the industry.This analysis focused on identifying and describing dimensions of affordability of new EVs in the US market.EV affordability,and vehicle CENTER FOR AUTOMOTIVE RESEARCH 29 affordability regardless of powertrain,is multifaceted and warrants further discussion.The concept of total cost of ownership(touched on in the demand discussion)including maintenance and repair costs,the used vehicle market and EV leasing,and the interplay of affordability with the growth of advanced driver assistance systems and autonomous driving technologies are all areas that require further thought and discussion.CAR remains engaged on this topic and looks forward to further research,dialogue,and collaboration with the automotive industry enabling a more viable and sustainable automotive ecosystem.CENTER FOR AUTOMOTIVE RESEARCH 30 Citations ACEA.(2023,April 13).New data reveals that many Europeans struggle to afford electric cars.https:/www.acea.auto/news/new-data-reveals-that-many-europeans-struggle-to-afford-electric-cars/Aeppel,T.(2024,April 11).Soaring insurance costs hit as US buyers get a break on car prices.Reuters.https:/ for Automotive Innovation.(2024).EV Dashboard Data dashboard.https:/www.autosinnovate.org/EVDashboard Anderson,B.(2024,April 5).Teslas New Unboxed Assembly Could Slash$25,000 EVs Production Costs By 50%.Carscoops.https:/ 8).Unboxing Innovation:How Teslas New Manufacturing Method Will Transform the Industry.Not a tesla app.https:/ Bureau of Labor Statistics.(n.d.).CPI for all urban consumers:All items less food and energy,2020-2024 Data set.Retrieved May 31,2024,from http:/data.bls.gov Center for Automotive Research.(2024).Book of Deals(June 2024 release).Christianson,M.(2023,October 30).Tracking Electric Vehicle Investments in the Infrastructure Investment and Jobs Act and Inflation Reduction Act.Environmental and Energy Study Institute.https:/www.eesi.org/articles/view/tracking-electric-vehicle-investments-in-the-infrastructure-investment-and-jobs-act-and-inflation-reduction-act Cox Automotive.(2024,May 14).After Three Months of Declines,New-Vehicle Prices Reversed Course in April,According to Latest Kelley Blue Book Estimates.https:/ 8).2026 Chevy Bolt EV:Everything We Know And Expect.GM Authority.https:/ 18).Low Cost Ford EV Arrives In Late 2026 With$25K MSRP:Report.Ford Authority.https:/ FOR AUTOMOTIVE RESEARCH 31 Fox,E.(2021,February 11).Tesla Giga Press Major Advantages Recognized by JPMorgan,Could Further Disrupt Industry.Tesmanian.https:/ Gerner,C.,Martin,J.,&Choate,J.(2023,November 29).Fuel for Thought:The vehicle affordability crunch.S&P Global Mobility.https:/ GlobalData.(2024,June 14).Hyundai&LGES to establish battery swapping network.Yahoo!Finance.https:/ Hodder,R.(2024,May 22).Average age of U.S.vehicles reaches new heights;total vehicles in operation continues to rise.Automotive News.https:/ International Energy Agency.(2024,May).Global Critical Minerals Outlook 2024.https:/ J.D.Power.(2024,May 16).EV Purchase Consideration Ebbs While Charging Concerns Continue to Grow,J.D.Power Finds.https:/ Jaros,B.&Hoffer,A.(2023,September 20).How Are Electric Vehicles Taxed in Your State?.Tax Foundation.https:/taxfoundation.org/data/all/state/electric-vehicles-ev-taxes-state/Johnson,P.(2024,March 8).Kia will beat Rivian and Tesla into affordable mass-market EVs.electrek.https:/electrek.co/2024/03/08/kia-beat-rivian-tesla-affordable-evs/Johnson,P.(2024,May 29).Jeep is launching a$25,000 EV in the US very soon to revamp the rugged SUV brand.electrek.https:/electrek.co/2024/05/29/jeep-launching-25000-ev-us-very-soon/Joint office of Energy and Transportation.(2024,May 23).Q2 2024 NEVI Quarterly Update.https:/driveelectric.gov/news/q2-2024-quarterly-nevi-update Keith,D.&Krol,A.(2023,July 24).Electric Vehicles.MIT Climate Portal.https:/climate.mit.edu/explainers/electric-vehicles Kelley Blue Book.(2019,May 1).Average New-Car Prices Up 2 Percent Year-Over-Year for April 2019,According to Kelley Blue Book.https:/ CENTER FOR AUTOMOTIVE RESEARCH 32 Levin,T.(2024,July 24).Teslas New Affordable EV:Everything We Know.InsideEVs.https:/ 119).GM Wants A Level Playing Field With Chinese EV Makers.GM Authority.https:/ Emissions Standards for Model Years 2027 and Later Light-Duty and Medium-Duty Vehicles.89 F.R.27856(final rule April 18,2024)(to be codified at 40 C.F.R.85,86,600,1036,1037,1066,and 1068).https:/www.govinfo.gov/content/pkg/FR-2024-04-18/pdf/2024-06214.pdf National Highway Traffic Safety Administration.(2024,June 7).Corporate Average Fuel Economy.U.S.Department of Transportation.https:/www.nhtsa.gov/laws-regulations/corporate-average-fuel-economy Office of Energy Efficiency and Renewable Energy.(2024).Federal Tax Credits for Plug-in Electric and Fuel Cell Electric Vehicles Purchased in 2023 or After.U.S.Department of Energy.https:/fueleconomy.gov/feg/tax2023.shtml#requirements Parekh,N.,Campau,T.(2024,May 30).Fuel for Thought:Average age of vehicles in the US hits new record.S&P Global Mobility.https:/ Petroleum-Equivalent Fuel Economy Calculation.89 Fed.Reg.22041(March 29,2024)(to be codified at 10 C.F.R.pt.474).https:/www.federalregister.gov/d/2024-06101/p-170 Petropoulos,A.,et al.(2024,April).Batteries and Secure Energy Transitions.International Energy Agency.https:/ Phillips,D.(2023,December 21).What to expect from automakers in 2024.Hint:Its EVs.Automotive News.https:/ Phillips,M.(2022,July 14).Lower production is driving up new car prices and automakers profits.Axios.https:/ Sharma,M.&George,J.P.(2018).Digital Twin in the Automotive Industry:Driving Physical-Digital Convergence White Paper.Tata Consultancy Services.https:/ CENTER FOR AUTOMOTIVE RESEARCH 33 Smith,J.&Friedman,J.(2024,July 2).Historic Investments in Electric Vehicle Batteries and Chargers are Expanding Opportunities in Communities with High Poverty Rates.The Center for American Progress.https:/www.americanprogress.org/article/historic-investments-in-electric-vehicle-batteries-and-chargers-are-expanding-opportunities-in-communities-with-high-poverty-rates/Strong,M.(2023,March 15).VW Tells the World Itll Produce a$25K EV.The Detroit Bureau.https:/ White House.(2023,January).Building a clean energy economy:a guidebook to the inflation reduction acts investments in clean energy and climate action(version 2)White Paper.https:/www.whitehouse.gov/wp-content/uploads/2022/12/Inflation-Reduction-Act-Guidebook.pdf U.S.Department of Transportation,Bureau of Transportation Statistics,Transportation Economic Trends,available at www.bts.gov/product/transportation-economic-trends.U.S.Geological Survey,2023,Mineral commodity summaries 2023:U.S.Geological Survey,210 p.,https:/doi.org/10.3133/mcs2023.Venditti,B.(2023,October 15).Visualized:How Much Do EV Batteries Cost?.Visual Capitalist.https:/ 24).The$10,000 BYD Seagull EV is scaring the U.S.auto industry.Teslarati.https:/
2024-12-29
33页
5星级
Critical Minerals and the Future of the U.S.Economy FEBRUARY 2025An edited volume by the Critical Minerals Security ProgramEDITORSGracelin BaskaranDuncan WoodCONTRIBUTORSMorgan Bazilian Rohitesh DhawanFrank FannonAlexandra HelfgottAdam JohnsonJoseph MajkutChris MichienziJane NakanoMeredith SchwartzSeaver WangKellee WickerGregory WischerMatthew D.ZolnowskiCritical Minerals and the Future of the U.S.Economy FEBRUARY 2025An edited volume by the Critical Minerals Security ProgramEDITORSGracelin BaskaranDuncan WoodCONTRIBUTORSMorgan Bazilian Rohitesh DhawanFrank FannonAlexandra HelfgottAdam JohnsonJoseph MajkutChris MichienziJane NakanoMeredith SchwartzSeaver WangKellee WickerGregory WischerMatthew D.ZolnowskiIIcritical minerals and the future of the u.s.economy /gracelin baskaran and duncan woodABOUT CSISThe Center for Strategic and International Studies(CSIS)is a bipartisan,nonprofit policy research organization dedicated to advancing practical ideas to address the worlds greatest challenges.Thomas J.Pritzker was named chairman of the CSIS Board of Trustees in 2015,succeeding former U.S.senator Sam Nunn(D-GA).Founded in 1962,CSIS is led by John J.Hamre,who has served as president and chief executive officer since 2000.CSISs purpose is to define the future of national security.We are guided by a distinct set of valuesnonpartisanship,independent thought,innovative thinking,cross-disciplinary scholarship,integrity and professionalism,and talent development.CSISs values work in concert toward the goal of making real-world impact.CSIS scholars bring their policy expertise,judgment,and robust networks to their research,analysis,and recommendations.We organize conferences,publish,lecture,and make media appearances that aim to increase the knowledge,awareness,and salience of policy issues with relevant stakeholders and the interested public.CSIS has impact when our research helps to inform the decisionmaking of key policymakers and the thinking of key influencers.We work toward a vision of a safer and more prosperous world.CSIS does not take specific policy positions;accordingly,all views expressed herein should be understood to be solely those of the author(s).2025 by the Center for Strategic and International Studies.All rights reserved.Center for Strategic&International Studies1616 Rhode Island Avenue,NWWashington,DC 20036202-887-0200|www.csis.orgIIIcritical minerals and the future of the u.s.economy /gracelin baskaran and duncan woodBLOOMSBURY ACADEMICBloomsbury Publishing Inc,1385 Broadway,New York,NY 10018,USABloomsbury Publishing Plc,50 Bedford Square,London,WC1B 3DP,UKBloomsbury Publishing Ireland,29 Earlsfort Terrace,Dublin 2,D02 AY28,IrelandBLOOMSBURY,BLOOMSBURY ACADEMIC and the Diana logo are trademarks of Bloomsbury Publishing Plc.First published in the United States of America,2025Copyright Center for Strategic and International Studies,2025Cover design:Leena MarteCover image Adimas/Adobe StockAll rights reserved.No part of this publication may be:i)reproduced or transmitted in any form,electronic or mechanical,including photocopying,recording or by means of any information storage or retrieval system without prior permission in writing from the publishers;or ii)used or reproduced in any way for the training,development or operation of artificial intelligence(AI)technologies,including generative AI technologies.The rights holders expressly reserve this publication from the text and data mining exception as per Article 4(3)of the Digital Single Market Directive(EU)2019/790.Bloomsbury Publishing Inc does not have any control over,or responsibility for,any third-party websites referred to or in this book.All internet addresses given in this book were correct at the time of going to press.The author and publisher regret any inconvenience caused if addresses have changed or sites have ceased to exist,but can accept no responsibility for any such changes.ISBN:PB:979-8-7651-9836-0ePub:979-8-7651-9837-7ePDF:979-8-7651-9838-4Printed and bound in the United States of AmericaFor product safety related questions contact .To find out more about our authors and books visit and sign up for our newsletters.IVcritical minerals and the future of the u.s.economy /gracelin baskaran and duncan woodACKNOWLEDGMENTSThe editors hope that this volumes findings,analysis,and policy recommendations will help inform the efforts of the U.S.presidential administration and Congress to build the secure and resilient minerals supply chains essential for U.S.national,economic,and energy security.The editors would like to thank the authors and a series of individuals for their valuable contributions to this project.They would like to thank Meredith Schwartz for her exceptional editorial support and Caroline Smutny for her administrative support.The editors would also like to thank Alex Kisling in the CSIS External Relations department;Phillip Meylan,Hunter Hallman,Kelsey Hartman,and Madison Bruno on the CSIS Publications team for their thoughtful feedback during the publication process;and Leena Marte and Will Taylor in the CSIS Dracopoulos iDeas Lab for bringing this to life for digital and print publication.This volume is made possible through general support to CSIS and the Critical Minerals Security Program.No direct sponsorship contributed to this book.We are grateful to our donors,whose generosity made this important and timely undertaking possible.Vcritical minerals and the future of the u.s.economy /gracelin baskaran and duncan woodCONTENTS1|Introduction 1SECTION 1Crucial Industries Rely on Critical Minerals to Remain Competitive 102|Powering Technology:Critical Minerals for the Semiconductor Industry 113|Securing the Nation:Mineral Needs for the Defense Industrial Base 174|Driving Innovation:Critical Minerals and the Automotive Industry 255|Fueling the Transition:The Role of Critical Minerals in Renewable Energy 34SECTION 2Progress Under the Biden Administration:Important but Incomplete 396|An Evaluation of the Inflation Reduction Act 407|An Evaluation of the CHIPS and Science Act 508|An Evaluation of the Defense Production Act 569|An Evaluation of the Minerals Security Partnership 65SECTION 3Addressing Challenges and Outstanding Questions in theCritical Minerals Industry 7110|Modernizing Mine Permitting in the United States 7211|Closing the Midstream Gap in U.S.Critical Minerals Supply Chains 8312|A Strategy for Minerals Diplomacy in Emerging Markets 9013|Mining the Deep Sea:A New Minerals Frontier 10114|Pursuing Responsible Mining for a Brighter Future 10915|A Comprehensive U.S.Critical Minerals Plan 11616|Conclusion 124About the Editors 132About the Contributors 133Endnotes 134 1critical minerals and the future of the u.s.economy /gracelin baskaran and duncan woodCHAPTER 1IntroductionBy Gracelin Baskaran introduction /gracelin baskaranYuichiro Chino via Getty Images2introduction /gracelin baskaranMining is an inextricable part of the American story.What starts as rock in the ground goes on to become the inputs that build Americas homes and buildings,transportation systems,energy generation and transmission,defense systems,and technological capabilities.Mining is the foundation that allowed the United States to be a military leader,providing the minerals needed to manufacture tanks,missiles,fighter jets and warships.It is the reason computers,phones,and iPads exist.Mining is the reason we have energy and can turn on lights every morning.Today,the United States is 100 percent import reliant for 12 of the 50 minerals identified as critical by the U.S.Geological Survey(USGS)and over 50 percent import reliant for another 29.China is the top producer for 29 of these critical minerals.1 This dominance is the result of decades of minerals-centered domestic industrial strategy and foreign policy.China has repeatedly shown its willingness to weaponize these minerals.Over the last two years,China has rolled out export restrictions,including complete bans,on antimony,gallium,germanium.2 Furthermore,China has a stranglehold on minerals processing,refining between 40 and 90 percent of the worlds supply of rare earth elements,graphite,lithium,cobalt,and copper.Reducing reliance on China and creating resilient mineral supply chains is one of the most bipartisan priorities in Washington,D.C.This is demonstrated by the efforts of the last two administrations.In 2017,President Donald Trump issued Executive Order 13817,intending to improve the management of critical minerals needed for economic prosperity and energy security.In 2021,President Joe Biden issued Executive Order 14017,which led to a review of U.S.critical minerals and material supply chain vulnerabilities.The assessment released by the Biden administration discovered that the overreliance on adversarial countries posed a threat to national and economic security.3Geopolitical tension and war have motivated the advancement of critical minerals policies for nearly a century.At the start of World War II,the United States adopted the Strategic and Critical Materials Stockpiling Act of 1939.4 In his letter to Congress,President Franklin D.Roosevelt noted both that commercial stocks of vital raw resources in the United States were low and that“In the event of unlimited warfare on sea and in the air,possession of a reserve of these essential supplies might prove of vital importance.”5 By 1942,non-essential gold mining was restricted by the U.S.government so that it could free up mining companies capacity to focus on more critical minerals needed for the war effort.6 Less Figure 1:Share of Top Three Producing Countries in Mining of Selected Minerals,2022Rare earthsGraphiteLithiumCobaltNickelCopper0102030405060708090100United StatesRussiaChinaAustraliaChileDemocratic Republic of CongoIndonesiaPhilippinesMozambiquePeruMadagascar2019 top 3 sharePercentageSource:This is a work derived by CSIS from IEA material and CSIS is solely liable and responsible for this derived work.The derived work is not endorsed by the IEA in any manner.3Source:This is a work derived by CSIS from IEA material and CSIS is solely liable and responsible for this derived work.The derived work is not endorsed by the IEA in any manner.Figure 2:Share of Top Three Processing Countries of Selected Minerals,2022Rare earthsGraphiteLithiumCobaltNickelCopper0102030405060708090100ChinaRussiaChileIndonesiaJapanFinlandCanadaArgentinaMalaysiaEstonia2019 top 3 sharePercentageintroduction /gracelin baskaranthan a decade later,the Defense Production Act of 1950 was passed in response to the Korean War and provided authority for allocations to source strategic minerals needed to manufacture defense technologies.7 While conflict and uncertainty have been the biggest drivers of advancing policies to build secure minerals supply chains,demand for minerals has largely been driven by industrialization,technological advancements,decarbonization,and economic growth.For example,in 1975,the United States required that catalytical convertors be installed into automobiles to reduce emissions.These catalytic convertors drove the long-term demand of platinum group metals and have single-handedly made American air cleaner and more breathable,reducing harmful exhaust gases from automobiles by over 90 percent.8 Copper is another example.It is a necessary material for many of the advanced technologies that are essential to the modern global economy,including in infrastructure,clean energy,electronics,and automotives,and copper wires connect electrical grids,integrated circuits,and telecommunications systems.In order to meet net-zero carbon emissions by 2050,annual copper supply would need to double by 2035.9 The artificial intelligence(AI)industry is putting additional pressure on copper demand.The data centers that process AI applications could demand up to 200,000 metric tons of copper per year between 2025 and 2028,adding another 2.6 million metric tons to the copper deficit in 2030.10 Copper reached its highest ever price$11,000 per metric tonon the London Stock Exchange in 2024.11As technologies advance and become cleaner,and as demand for them grows,the mineral needs of the U.S.economy intensify.The competitiveness of the U.S.domestic automotive,energy,technology,and defense industries will be key to determining the United States standing as an economic powerhouse and global superpower in the decades ahead.The United States will need to strengthen both its mission clarity and its execution.At present,the U.S.government has yet to agree on a single critical minerals list.Because copper is not on the USGS list,it has been ineligible for investment incentives from the Inflation Reduction Act(IRA).Additionally,there is no centralized agency or department to coordinate mining activities or execute 4Accordingly,the first part of this book delves into the mineral needs of four key industries to U.S.economic competitiveness:semiconductors,defense,automobiles,and renewable energy.SemiconductorsSemiconductors are foundational to virtually every part of modern life,powering technologies that drive innovation,connectivity,and efficiency.They are used in smartphones,computers,military applications,medical devices,and automotives.Semiconductors are mineral intensivesmall but essential quantities of gallium,germanium,palladium,silicon,arsenic,titanium,and other elements are needed to produce the array of semiconductors required for such diverse applications.The production of these resources is largely concentrated in foreign adversaries,exposing a severe national security risk.USGShas estimatedthat just a 30 percent supply disruption of gallium could cause a$602 billion decline in U.S.economic output,amounting to a 2.1 percent loss of gross domestic product(GDP)a significant economic impact.13 Semiconductor supply chains will not be secure until the necessary mineral supply chains are secured.In Chapter 2,Gracelin Baskaran and Meredith Schwartz assess the minerals needs of the semiconductor industry and provide recommendations on developing appropriate incentives and leveraging research and development.Defense IndustryMinerals are the bedrock of the defense industry.They are used in a wide array of defense applications,including military weapons systems,ammunition,and aerospace technologies.China is rapidly investing in munitions and advanced weapons systems,acquiring new systems roughly five to six times more quickly than the United States.14 While China is operating with a wartime mindset to enhance military readiness,the United States has maintained a peacetime approach.Even before new restrictions,the U.S.defense industrial base struggled with insufficient capacity and surge capability to meet production demands for defense technologies,many of which are highly minerals intensive.Restrictions on critical mineral supplies will further widen the gap,enabling China to advance its capabilities more effectively than the United States.In Chapter 3,Matt Zolnowski describes Department a strategy.There are 15 government departments and agencies working on critical minerals,including the Departments of the Interior,Commerce,Energy,Defense,State,Labor,Homeland Security,Treasury,Agriculture,and Education;the Export-Import Bank;the U.S.International Development Finance Corporation;the U.S.Agency for International Development;the Environmental Protection Agency;and the National Aeronautics and Space Administration(NASA).12 The Bureau of Mines,which was initially opened in 1910 to coordinate all mining activities,was closed in 1996 and never reopened.Most of these departments and agencies are working on their own critical minerals efforts,with little interagency collaboration.Ultimately,strengthening coordination within the U.S.government must be a priority.This book has three sections.Section 1 provides an evaluation of the critical minerals needs of four vital industriessemiconductors,defense,electric vehicles,and renewable energyand provides recommendations for strengthening the resilience of these supply chains.Section 2 evaluates key Biden-era initiatives related to minerals supply chainsthe IRA,CHIPS and Science Act,Defense Production Act,and the Minerals Security Partnershipand provides recommendations for reforming.The final section provides an analysis of key issuesdomestic permitting,building midstream processing capacity,commercial diplomacy for minerals,deep sea mining,responsible mining,and government coordinationand provides concrete recommendations for how the United States can strengthen its performance in these areas to be a competitive and credible global leader.SECTION 1CRUCIAL INDUSTRIES RELY ON CRITICAL MINERALS TO REMAIN COMPETITIVESafeguarding the supply chains for advanced technologies in strategic industries is an economic and national security imperative.Policymakers now face the immense task of fortifying supplies of everything from lithium and graphite for advanced battery chemistries to tungsten and rare earth elements for the next generation of warfighting technologies.introduction /gracelin baskaran5six-fold increase.Therefore,the domestic auto industry now faces the daunting task of sourcing minerals from reliable and responsible partners amid a shifting policy landscape and swiftly evolving battery technologies.In Chapter 4,Duncan Wood and Alexandra Helfgott look at EV trends in the United States,assess the battery landscape,and examine how the United States should provide support to sustain an innovative and competitive domestic EV industry.Renewable EnergyRenewable energy technologies will be key to unlocking new,cleaner sources of energy.In the United States,wind and solar together provide 15 percent of electricity generation,with both sectors poised for substantial growth.In 2023,there was$248 billion in clean energy investments.This is over a three-fold increase from 2018.17 Today,the renewable energy industry employs 8 million people in the United States.18 Southern states have been the biggest beneficiaries of clean energy investments,receiving of Defense(DOD)actions to mitigate critical minerals vulnerabilities and advises how the department can update war-planning assumptions and stockpiling programs to prepare for a future crisis.Electric VehiclesElectric vehicles(EVs)are a major driver of innovation in the auto industry and are shaping the future of mobility.While the EV industry is important for the clean energy transition,it is also of vital importance to the U.S.economy.Domestic automakers began the commercial production of hybrid EVs in 1997.15 They have spent decades investing in the development of the EV industry.EV investments in the United States over the last nine years reached$199 billion and created 201,900 EV-related jobs.By June 2024,automotive manufacturing jobs reached their highest levels since 1990.16 EVs require significant quantities of minerals.While a traditional internal combustion engine(ICE)requires an average of 32 kg of critical minerals,an EV needs an average of 210 kgover a Figure 3:U.S.Import Reliance on China by Mineral Type(as Percent of Consumption)TungstenMagnesiumGermaniumNickelBauxiteZincCobaltTitaniumTantalumManganeseGraphiteGalliumArsenic0102030405060708090100Rare EarthsChina is Primary Import Source China is Secondary or Tertiary Import Source China is Not a Significant Import Source PercentageSource:USGSintroduction /gracelin baskaran6industrial base,and initiated the Department of States Mineral Security Partnership to further international cooperation.These policy measures have been impactful in stimulating private sector investment as well as changing the narrative in policy circles around what qualifies as a strategic industry and what the role of government should be in securing supply chains.But these policy measures also have some significant gaps when it comes to the upstream mining and minerals industries.The new administration will be tasked with determining how these initiatives under the Biden administration can be modified,improved,and strengthened to better fit the mining industrys needs.Inflation Reduction ActThe IRA is the Biden administrations flagship climate initiative,providing unprecedented levels of government incentives in the form of tax credits,grants,and loan guarantees for the clean energy industry.The bill includes provisions designed to address the entire circular clean energy supply chain,from the production of lithium and graphite to the manufacturing of EV batteries and wind turbines to the recycling and recovery of materials from end-use technologies.While the IRA has driven unprecedented investment in clean energy supply chains,sourcing critical minerals remains a critical limitation.In Chapter 6,Gracelin Baskaran and Meredith Schwartz score the IRA on how well it has achieved its objectives thus far and give recommendations as to how the minerals-related provisions may be altered and expanded upon to better meet the needs of industry and national security.CHIPS and Science ActThe CHIPS Act,signed into law in August 2022,was an amalgamation of a number of legislative efforts to address both a rising China and the United States desire to firm up access to semiconductors following the pandemic supply chain shock that froze consumer access to a wide range of products.Although this bill addressed a wide range of science and technology areas relevant to U.S.competitiveness,it did not prioritize securing American access to critical minerals.As a result,the CHIPS Acts focus on critical minerals$428 billion between the first quarter of 2018 and second quarter of 2024,followed by Western states($327 billion),Midwestern states($149 billion),and Northeastern states($90 billion).19 While this renewable energy buildout promises greater energy security,lower costs,and reduced emissions,it will depend heavily on secure mineral supplies.Wind farms and utility-scale solar facilities require far more mineral inputs than conventional power plants.Both technologies rely on critical minerals for their advanced electronics and components.In Chapter 5,Joseph Majkut highlights two materials especially imperiled due to rising demand and a lack of supply chain diversificationrare earth elements and polysiliconwhich are essential for wind and solar power,respectively.China currently dominates the supply chains for both.SECTION 2PROGRESS UNDER THE BIDEN ADMINISTRATIONImportant but IncompleteIn recent years,Washington has come to the realization that crucial U.S.industries and technologies are reliant on supply chains that are heavily concentrated in foreign adversaries,namely China.Advanced semiconductors designed in the United States are being manufactured and packaged in Taiwan.American automakers are producing EVs using Chinese battery chemistries.Domestically produced solar panels are made with Chinese solar cells and polysilicon.Over the course of decades and with the assistance of state-led industrial policies and billions of dollars in subsidies,China has grown to dominate the manufacturing sector for the cutting-edge technologies that the modern economy relies on.The risk this poses to U.S.national and economic security is untenable.To that end,diversifying supply chains and boosting American manufacturing and ingenuity was a central objective of the Biden administration.To achieve these goals,President Biden enacted major pieces of legislation like the IRA and the CHIPS and Science Act,invoked the DODs Defense Production Act to boost the introduction /gracelin baskaran7endures in a new administration.In Chapter 9,Jane Nakano suggests several modifications to the MSP that could accord more dynamism and long-term durability.SECTION 3ADDRESSING CHALLENGES AND OUTSTANDING QUESTIONS IN THE CRITICAL MINERALS INDUSTRY The minerals industry faces a number of unique challenges that policymakers must address in the coming years if they wish to substantially shift mineral supply chains and improve U.S.industrys access to non-Chinese mineral sources.The third part of this volume delves into some of the biggest issues and questions facing the industry,from how to expedite the domestic mine permitting process to whether deep sea mining is the future of minerals extraction.Domestic PermittingMining is the first step in the critical minerals supply chain,yet permitting a mine is a major hurdle in domestic critical mineral production that has yet to be overcome.On average,it takes 29 years to build a mine in the United States,the second-longest time in the world.Obtaining permission to operate a mine in the United States today involves securing federal,state,and local permits.A project can require up to 30 permits,many of which are duplicative.20 Policymakers on both sides of the aisle are calling for a modernized permitting system that facilitates the development of domestic mining projects.In Chapter 10,Morgan Bazilian and Gregory Wischer review the history of permitting policy in the United States and provide actionable policy solutions to streamline the process.Building Processing and Refining CapacityIn the next stage of mineral production,also known as the midstream,mined mineral ore must be processed and refined into the high-purity metals and materials used in end products.This stage of the supply chain is where China truly dominates.The dependence on access is minor,with the majority of funding going toward research and development for chip innovation,workforce development programs,and,above all,attracting investment in semiconductor fabrication,assembly,testing,and advanced packaging.Congress needs to act to explicitly address minerals relevant to semiconductor production,as they have for minerals used for EVs and clean tech.In Chapter 7,Kellee Wicker analyzes the impacts and shortcomings of the CHIPS Act and provides recommendations for strengthening the legislation.Defense Production ActThe Biden administration also invoked the Defense Production Act(DPA)of 1950 to secure critical minerals for the defense industrial base.The DPA authorizes the president to ensure the availability of U.S.and Canadian industry for U.S.defense,essential civilian,and homeland security requirements.DPA Title III,Expansion of Productive Capacity and Supply,includes incentives for the DOD to develop,maintain,modernize,and expand production capacity or critical technologies.DPA Title III funds cannot be used if other funding(e.g.,private investment or funding from other agencies)can be secured.Given the private sectors reluctance to make investments in critical minerals projects due to market price volatility for these materials,the DPA has proven to be a vital financing mechanism.In Chapter 8,Christine Michienzi details how the DPA has been used so far to support the critical minerals industry in the United States and Canada and gives recommendations as to how the new administration can best leverage the program.Minerals Security PartnershipThe Minerals Security Partnership(MSP)is a multilateral State Department initiative uniquely focused on minerals security.Since its inception in 2022,the MSP has mobilized a coalition of market-led democracies,primarily Western developed nations,with India as the only developing nation with membership.By 2024,the MSP supported nearly 30 minerals projects around the world and has brought additional mineral-rich countries to the table in the MSP Forum.But many unknowns and questions still remain as to how efficacious the MSP is and how it introduction /gracelin baskaran8finalized.Still,China continues to make strides in developing the necessary technologies and exploration licenses to capture deep sea resources first.In Chapter 13,Seaver Wang provides insight into the status of the deep sea mining industry and the opportunity to change the calculus around mineral supply chains by expanding tax incentives to cover minerals mined from the sea,strengthening support to seafloor minerals research to improve environmental management approaches,and providing financing to strategic demonstration projects.Responsible MiningMining is an industry with a complicated,and often negative,reputation due to all-too-frequent incidents of environmental degradation,human rights violations,social unrest,and devastating workplace accidents.Therefore,responsible mining standards are a nonnegotiable to ensure that U.S.and allied mines operate under best practices.As a major consumer and increasingly important producer of mined materials,the United States has a critical role in promoting responsible mining practices.In Chapter 14,Rohitesh Dhawan offers insight into how permitting reform can be done in a way that promotes responsible mining practices and advantages projects that follow high standards,how responsible mining standards can be used as a criterion for public procurement of metals or metal-based products,and how green premiums can be leveraged to financially incentivize responsible mining.A Comprehensive U.S.Strategy for Minerals SecurityMinerals policy has shifted quite significantly since 2010.The Obama,Trump,and Biden administrations all approached the critical minerals challenge based on their respective times and the policy tools at their disposal.America has learned much from these experiences.Reflecting on those experiences,Frank Fannon provides a suite of recommendations in Chapter 15 for the new administration to retake the commanding heights of the new economy:developing a single point of accountability to oversee and coordinate the administrations multiple lines of minerals policy efforts,reforming financing tools such as the DFC and Export-Import Bank(EXIM),undertaking permitting reform,and eliminating provisions that allow firms with any Chinese ownership from receiving taxpayer subsidies.Successful action will Chinese processing creates strategic vulnerabilities,exposing the United States to potential supply disruptions due to geopolitical tensions,export restrictions,and price manipulations.To reduce these risks and bolster national security,it is essential to enhance U.S.midstream processing capabilities.In Chapter 11,Adam Johnson explains the importance of building domestic mineral processing capacity and provides recommendations on developing the workforce,leveraging strategic reserves,and streamlining permitting to accelerate the development of midstream capabilities.International EngagementOver the past 30 years,China has emerged as a key player in mineral supply chains through strategic international engagement.Although it produces only 10 percent of the worlds lithium,cobalt,nickel,and copper,China imports sufficient quantities to process 65 to 90 percent of the global supply of these metals.This dominance is the result of years of industrial planning and foreign policy initiatives from Beijing.Given the United States limited domestic reservesincluding less than 1 percent of the worlds reserves of commodities such as cobalt,nickel,and graphite,and less than 2 percent of manganese and rare earth elementsit must develop a strategy to reduce its dependence and enhance its mineral supply security.In Chapter 12,Gracelin Baskaran provides a novel framework for determining which international partners to prioritize and gives recommendations for how policymakers should engage in commercial diplomacy.These efforts should prioritize financing minerals security needs,leveraging soft power through infrastructure development and geological mapping,and developing carrots and sticks to drive market-based activity aligned to U.S.government interests.Deep Sea MiningWhile todays EVs and semiconductors are manufactured with minerals from land-based mines,this may not always be the case.Minerals that are found in nodules at the depths of the ocean,including manganese,nickel,copper,and cobalt,offer immense untapped resource potential.However,the environmental impacts of extraction from these sources remain largely unknown,and a set of international regulations has yet to be introduction /gracelin baskaran9require an“all-of-the-above”approach.Looking AheadThe mission we undertook in compiling this book was to provide a comprehensive analysis of the indispensable role critical minerals play in the modern economys most strategic industries,and to more fully understand and address the vulnerabilities the United States faces in securing the minerals upon which it so clearly depends.Furthermore,this volume is rich in policy proposals for the new administration,laying out a path forward for the most pressing challenges facing the critical minerals supply chain,from extraction to processing and refining to end use.These challenges are real and profound and require urgent attentionbut as the chapters in this book demonstrate,they are not insurmountable.introduction /gracelin baskaranSECTION 1Crucial Industries Rely on Critical Minerals to Remain Competitive11powering technology/gracelin baskaran and meredith schwartzCHAPTER 2Powering TechnologyCritical Minerals for the Semiconductor IndustryBy Gracelin Baskaran and Meredith Schwartz Narumon Bowonkitwanchai via Getty Images12produced no arsenic,no gallium,less than 2 percent of the worlds refined germanium,3 percent of its silicon,and less than 1 percent of its titanium.27 The concentration of global critical minerals supply chains in the hands of adversaries presents a major security challenge for Western chipmakers.The chance of prolonged and widespread supply disruptions for semiconductor minerals is high,as China has already demonstrated its ability to restrict the flow of key minerals in the global economy.In July 2023,China announced export restrictions on gallium and germanium.28 A year and a half later,China cut off the United States from Chinese gallium and germanium entirely through complete export bans on these materials targeted specifically at the United States.29 The semiconductor industry is too central to U.S.economic and national security to allow such an evident vulnerability in its supply chain.To truly secure the Western semiconductor industry,policymakers should address mineral supply chain vulnerabilities,not just vulnerabilities in downstream chip manufacturing.THE IMPORTANCE OF MINERALS TO ADVANCE SEMICONDUCTOR TECHNOLOGY The critical minerals necessary for semiconductor production hold the key to furthering innovation in the industry.A concept commonly known as Moores Law stipulates that the density of a semiconductor(i.e.,the number of transistors that can fit on a 1-square-inch microchip)will continue to rise every year,equating to more computing power,higher speed,and more complex applications.30 For decades,silicon has been the wafer material of choice for most semiconductors due to its abundance in nature and thermal stability,making it a cheaper choice well suited to the early electronics industry.However,silicon alone may be close to reaching the physical limits of Moores Law.31 Rather,gallium and germanium are essential additions and alternatives to unlocking more advanced chipmaking.Gallium and germanium have certain advantages over silicon that make them ideal materials for increasingly Semiconductors are the fundamental building blocks of modern technology,necessary for everything from smartphones and laptops to communications and energy-storage systems to military and aerospace applications.21 These integrated circuits are called“semiconductors”due to being partial conductors,a unique property that enables them to control the flow of electrons by acting as both conductors and insulators.22 Therefore,semiconductors rely on small but essential quantities of specific minerals with these properties to function.Silicon,gallium,and germanium are the most common semiconductor materials used to form wafers,with different chip applications calling for different materials.23 However,a myriad of other critical minerals come into play during the manufacturing stages and doping processin which additional metals are introduced to slightly alter the chips conductivityto create just one integrated circuit.24 Palladium,arsenic,iridium,titanium,copper,and cobalt are just some of the additional minerals that are necessary for semiconductor plating,wiring,doping,and packaging during production.25 The critical minerals most central to semiconductor production have high-risk supply chains largely concentrated in China.China produces 98 percent of the worlds refined gallium and controls 68 percent of refined germanium production,79 percent of the worlds silicon,40 percent of its arsenic trioxide,and 67 percent of its titanium.26 The United States,meanwhile,is reliant on imports to access the materials needed for high-performance semiconductors.In 2022,the United States The success of the Western semiconductor industry depends on reliable access to the critical minerals that are responsible for continuous advancements in the industry.powering technology/gracelin baskaran and meredith schwartz1375 percent of the worlds bauxite due to its leading aluminum industry.38 This access to feedstock has also positioned China well to lead in germanium and gallium recovery.Aided by government subsidies,Chinese firms were able to flood the market with mineral oversupply in the 2010s.39 As prices dropped,Western competitors could not remain economically viable,allowing China to emerge as the world leader in semiconductor minerals.40 In contrast,the United States has small bauxite reserves of 20 million tons(less than 1 percent of global totals)and limited zinc reserves of 76.6 million tons(3 percent of global totals).41 The country currently has limited mining activity and produces only small amounts of germanium from zinc deposits in Alaska and smelting operations in Tennessee.Some new domestic projects may be in the works:In 2023,Dutch company Nyrstar announced a$150 million investment to expand its existing zinc operations in Tennessee to add a gallium and germanium processing facility.42 However,the project has yet to secure investor funding,and the company has faced market challenges that led it to temporarily suspend zinc mining operations in October 2023.43 In the near term,domestic investments will evidently not be enough to secure gallium and germanium supply chains.U.S.allies and strategic partners will be key to sourcing bauxite and zinc and producing gallium and germanium.For example,although Australia is the top producer of bauxite and home to the largest zinc reserves in the world,it lacks midstream processing capacity,leading it to send over 50 percent of its zinc exports and 97 percent of its bauxite exports to China.44 And Peru,a U.S.free trade partner with the largest zinc smelting plant in Latin America,currently produces no germanium or gallium.45 Australia and Peru hold vast potential for alternative gallium and germanium sourcing for the semiconductor industry,but without investment by Western firms into midstream processing and refining,these resources will remain untapped.THE CHIPS AND SCIENCE ACTBut What About the Critical Minerals?In the spring of 2020,at the peak of the Covid-19 pandemic,the United States experienced firsthand how debilitating semiconductor shortages can be.An estimated 169 sectors and consumer advanced semiconductors.Germaniums high electron mobility allows it to conduct electrons nearly three times faster than silicon,translating into faster device performance.32 Semiconductors with germanium channels,known as complementary metaloxide semiconductor(CMOS)circuits,are used today for quantum computers.Gallium similarly offers greater conductive potential for higher power density and energy efficiency.33 High-performance chips made with gallium nitride(GaN)and gallium arsenide(GaAs)are used in advanced defense applications from satellite communications to missile detection systems.Production of GaN chips is expected to grow more than 25 percent annually through 2030,with defense applications driving this increase.34Gallium and germanium are indispensable materials for the future of the semiconductor industry.But with current supply chain challenges and no U.S.sourcing alternatives,these materials are increasingly difficult to obtain.The next generation of chipmaking requires policymakers to devise and execute a critical minerals strategy that ensures the industry will have a reliable supply of needed materials.MINERAL SOURCING CHALLENGESGallium and germanium are especially rare in the Earths crust,at only 19.0 and 1.6 parts per million(ppm),respectively.Copper,in comparison,is estimated at 60 parts per million.35 These concentrations of minerals are too widely dispersed to be recovered directly from the Earth.Rather,the only economically viable way to source gallium and germanium is to recover them as byproducts from the mining and processing of other minerals.Gallium is sourced from bauxite ores through aluminum smelting,and germanium is primarily recovered from zinc smelting.Even so,less than 10 percent of the gallium in bauxite and 5 percent of the germanium in zinc can be recovered.36 These materials must then go through a complex refining process to produce gallium and germanium at the needed purity levels of over 99.99 percent.37 China has several advantages in gallium and germanium sourcing.The country has rich zinc deposits and imports powering technology/gracelin baskaran and meredith schwartz14justified the escalation of the tech war by claiming that such measures were necessary for national security.Meanwhile,the Western semiconductor industry was paying the price.In August and September 2023,China exported no refined gallium and only 1 kg of refined germanium,compared to nearly 8,000 kg and 6,900 kg,respectively,in the preceding July.52 In total,Chinas gallium exports for 2023 were over 50 percent lower than exports for 2022;as of February 2024,gallium exports had yet to return to pre-restriction levels,and it remains unclear when Chinas exports will return to their previous peaks.53 Continued restrictions and the implementation of gallium and germanium export bans in January 2025 will have a significant effect on the U.S.economy.The U.S.Geological Survey(USGS)has estimated that a disruption to just 30 percent of gallium supply could cause a$602 billion drop in U.S.economic output,equivalent to 2.1 percent of gross domestic product.54Prices for these materials have risen markedly over the past year.In April 2024,gallium prices were at their highest level since 2011.Assessed prices for gallium have nearly doubled since the restrictions were imposed,and germanium prices have also climbed over 70 percent,to$2,280 per kilogram.55 China has demonstrated its ability to control the materials market for semiconductors and has only tightened U.S.access to these materials with newly implemented exported bans.Continued and additional bottlenecks in critical minerals supply present an ongoing threat to the resilience of the U.S.semiconductor industry.RECOMMENDATIONSCreating Better Policy for Semiconductor Mineral Supply Chains The CHIPS and Science Act,as well as the current policy focus on downstream chip manufacturing,will not be enough to secure semiconductor supply chains.As long as China controls critical minerals supply chains,the U.S.semiconductor industry will be vulnerable to export restrictions,bottlenecks,and price volatility.One policy recommendation that is frequently cited as a solution to shortages of base metals is to revamp lines were impacted by semiconductor supply disruptions,including the electronic,automotive,communications,and healthcare industries.As a result,Western firms faced lower production volumes,the cancellation of new product lines,and delayed breakthroughs in technologies such as artificial intelligence(AI)and the Internet of Things(IoT).46 Policymakers realized just how fragile current semiconductor supply chains are,due to a highly complex and specialized production process largely concentrated in Asia.In August 2022,President Joe Biden signed the Creating Helpful Incentives to Produce Semiconductors(CHIPS)and Science Act into law,with the goal of strengthening U.S.semiconductor manufacturing and supply chains.This act included over$280 billion in support for advanced chip manufacturing,packaging,and workforce development.47 To address the supply chain vulnerabilities experienced during the pandemic,the bill focused on onshoring downstream capabilities,including by developing fabrication facilities for legacy chips used in communications and defense applications.48 The legislation also introduced significant government grant funding,which has been awarded to companies such as Intel and Micron to enable them to build and expand their chip-manufacturing capacity.49 However,the CHIPS Act overlooked a major national security vulnerability in semiconductor supply chains:critical minerals.The bill did not include any provisions to incentivize the diversification of critical minerals supply chains for semiconductors.EXPORT RESTRICTIONS HIGHLIGHT SUPPLY CHAIN VULNERABILITIESThe United States quickly realized just how big an oversight the exclusion of critical minerals from the CHIPS Act was.On August 1,2023,Chinese export restrictions on gallium and germanium went into effect in retaliation for Washington banning exports of advanced semiconductor technologies to China.50 Due to the restrictions,gallium and germanium exporters in China are now required to apply for an export license for each shipment of material,providing the government with details on the overseas buyer and end use.51 Beijing powering technology/gracelin baskaran and meredith schwartz15that addresses upstream critical minerals mining and midstream processing and refining.Just as the CHIPS and Science Act focused on incentives to boost domestic semiconductor manufacturing and the Inflation Reduction Act(IRA)incentivized investments in EV and clean energy technologies,an upstream and midstream critical minerals incentives package would ensure that U.S.fabs manufacturing the next generation of semiconductor technologies have reliable access to the critical minerals they need.With billions of dollars being invested in chips foundry facilities,their success hinges on access to needed input materials.61 Ensuring the security of the critical minerals supply chain is common-sense policy that supports the ambitious industrial goals of the CHIPS and Science Act and IRA.This package should include investment and production tax credits such as those covered in Sections 48C and 45X of the IRA.Such incentives programs would encourage companies to make the necessary investments in critical minerals recovery and refining facilities amid uncertain and volatile market conditions.Midstream projects like Nyrstars gallium and germanium recovery plant are struggling to secure financing in the face of steep competition from Chinese firms that have a history of pricing out Western competitors.62 Federal tax credit programs signal to the private sector that the government is supportive of the industry and offer an additional cash incentive boost to projects that may otherwise stall.These incentives should apply to both domestic projects as well as ones in strategic allied countries that have high potential for gallium and germanium production,such as Australia and Peru.An incentives package should also include grant funding similar to the large dollar amounts currently being awarded by the CHIPS Program Office within the Department of Commerce for onshoring semiconductor fabs.The U.S.government can incentivize mining companies to make significant investments in gallium and germanium recovery and refining facilities and infrastructure by alleviating some of the capital burden.Just as semiconductor manufacturing facilities require an immense amount of capital,standing up domestic gallium and germanium mining,processing,government stockpiling efforts through the National Defense Stockpile under the Strategic and Critical Materials Stock Piling Act of 1939.The United States currently stockpiles no gallium and only about 14,000 kg of germanium,or half of the countrys annual consumption.56 However,stockpiling semiconductor metals to address critical minerals supply chain vulnerabilities will be challenging due to their price volatility and the small quantities needed for the industry(relative to the electric vehicle industry,for example,which requires significant quantities of base metals).57 In addition,gallium has a shelf life of only around one year due to its low melting point.58 Stockpiling efforts are therefore not the best solution to addressing supply chain concerns.Instead,the United States should consider the following actions:Invest in building the technological know-how for gallium and germanium refining.Refining these minerals to needed purity levels of over 99.99 percent for the semiconductor industry requires specific technology,infrastructure,and expertise,all of which are currently lacking.The United States has only one company that refines high-purity gallium and one operation for germanium.59 A research and development laboratory could boost innovation to increase processing capacity and produce minerals in a more cost-effective way.The Department of Energy already funds laboratories focused on critical minerals for electric vehicles(EVs)and clean energy,but there is less focus on semiconductor minerals such as gallium and germanium.For example,the Critical Minerals Innovation Hub at the Ames National Laboratory in Iowa and the Minerals to Materials Supply Chain Research Facility(METALLIC)network bring together the expertise of several leading national laboratories to find solutions to critical minerals supply challenges for clean energy industries.60 The Department of Commerce should fund similar initiatives focused on minerals for the semiconductor industry.National laboratories can help develop the capabilities,technologies,and skills needed to produce refined semiconductor minerals at scale.Put together a comprehensive incentives package powering technology/gracelin baskaran and meredith schwartz16and refining infrastructure will require massive investment.These projects are not only essential to boosting supply chain security for the high-tech industries downstream that depend on critical minerals,but they will also create jobs,onshore manufacturing capacity and niche skills,and help revitalize mining communities that have been economically left behind.CONCLUSIONThe success of the Western semiconductor industry depends on reliable access to the critical minerals that are responsible for continuous advancements in the industry.The CHIPS and Science Act of 2022 sought to build a domestic ecosystem for a thriving semiconductor industry that is invulnerable to the supply chain risks of the past.But this strategy was incomplete,as there has been no U.S.policy to date addressing the mineral needs of chips manufacturers.As China imposes mineral export restrictions and squeezes supply,policymakers can no longer afford to overlook mineral security.A comprehensive incentives package is needed to build research and development institutions and boost the upstream and midstream capacity needed to onshore and friend-shore gallium and germanium production.powering technology/gracelin baskaran and meredith schwartz17securing the nation /matthew d.zolnowskiCHAPTER 3Securing the NationMineral Needs for the Defense Industrial BaseBy Matthew D.ZolnowskiAnton Petrus via Getty Images18assumptions about the conflicts in which the DOD may be called to fight.Though defense planners historically focused on protracted conflict,the DOD has drifted toward a more optimistic policy baseline:a single-year conflict followed by a multiyear reconstitution period.Even under this more optimistic baseline,the DOD has identified significant supply deficits to defense requirements during a national emergency scenario,covering 69 materials and valued at$2.41 billion.63 In addition to the large-scale industry investments previously noted,these findings have prompted the DOD to embark on wide-ranging reforms to its critical minerals stockpiling law,as well as to tighten procurement restrictions to reduce reliance on adversarial nations for critical minerals.Though the DOD has made significant strides in modernizing statutory authorities and deploying an array of programs to address its critical minerals needs,many of its planning processes related to requirements generation and industrial mobilization remain rooted in the immediate postCold War period.Maintaining the positive progress to date,while reviewing and updating those policies and programs that have not kept pace,should be the DODs next area of focus.THE SPECTRUM OF MILITARY ACTIVITIES REQUIREMENTS GENERATIONThe spectrum of activities undertaken by the U.S.Armed Forces is vast.They conduct military-to-military diplomacy,peacekeeping operations,and potential combat operations,ranging from raids by special operations forces to the deployment of a multinational force for large-scale conventional war.Amid this extreme variability,the DOD has developed a structured process to collect critical minerals data and evaluate which minerals are necessary for both essential civilian and defense industries across a range of scenarios.The DOD has made no public report of its critical minerals needs since 2015,but the results of its assessments are disseminated across the U.S.government every two years.64As the furthest upstream tier of defense supply chains,critical minerals support virtually all Department of Defense(DOD)activities and platforms,whether through indirect consumption,such as a rare earth catalyst for petroleum refining,or direct consumption,such as aluminum and titanium parts in an aircraft.In some cases,the critical minerals supporting a defense system are indistinguishable from those used in civilian products;in others,critical minerals are converted into military-unique formulations that enable a weapon systems cutting-edge performance.However,this critical minerals consumption pattern is a constant for all military organizations throughout human historywhether using bombs and bullets,shot and pike,or sling and stone.Therefore,incorporation into a weapon system is not,by itself,sufficient reason for critical minerals to be deemed essential to national defense.This type of usage certainly would not justify the DODs deployment of over$1 billion since 2019 under the Defense Production Act(DPA)of 1950 and other authorities to expand domestic and allied production of critical minerals.With this contradiction in mind,this chapter aims to describe the process by which the DOD determines whether a critical mineral rises to the level of a national defense requirement,as well as how the DOD and industry are addressing such needs.In its simplest form,the DODs assessment of the“criticality”of a critical mineral is directly connected to the National Defense Strategy and its policy The defense industrial base is at risk of critical minerals shortages in an emergency,with industrial mobilization doctrine and program execution mired in a peace dividend posture.securing the nation /matthew d.zolnowski19demonstrated by multi-decade counterinsurgency campaignsand that an industrial base specialized toward a small,highly sophisticated fighting force will struggle to grow in a protracted conflict.In the“long war”argument,important factors such as where and how U.S.Armed Forces may fight remain highly uncertain.Ultimately,this uncertainty drives hedging behavior,using stockpiles to mitigate demand for conflict surge items or minerals until new wartime production can come online.From the initial promulgation of the Strategic and Critical Materials Stock Piling Act,the combination of World War II and Korean War experiences led U.S.government planners to favor a“long war”planning construct.A five-year war scenario drove the creation of large NDS inventories and broad industrial mobilization activities under the DPA.As the Cold War progressed,subsequent administrations embraced more optimistic war-planning and economic policy judgments,each driving the U.S.government toward smaller critical minerals stockpiles and industrial preparedness efforts.67The“short war”planning construct adopted at the end of the Cold War remains the DODs baseline for critical minerals requirements generation todaya one-year conflict,followed by three years to reconstitute the U.S.Armed Forces.68 Based on these results,the DOD has implemented an array of critical minerals mitigation programs,principally focused on aerospace,operational energy,and armor needs(see Table 1).69Notwithstanding the breadth of critical minerals mitigation programs underway,the unclassified summary of the“base case”results from the Strategic and Critical Materials 2023 Report on Stockpile Requirements identifies ongoing critical minerals requirements in a national emergency.This recent DOD study identified shortfalls to defense requirements for 69 materials,valued at$2.41 billion,and shortfalls to essential civilian demand for 24 materials,valued at approximately$12.21 billion.70More simply,these results suggest that substantial portions of the DODs“short war”critical minerals needs remain unaddressed.At a high level,this process begins with the collection of economic and technical data related to critical minerals markets.This data is integrated by the Defense Logistics Agency(DLA)Strategic Materials,the administrator of the National Defense Stockpile(NDS),for analysis through a series of economic models.These models project the anticipated supply and demand of critical minerals over a given period,after which supply and demand are perturbed.These perturbations are driven by policy judgments related to the execution of a military conflict scenario used for DOD budgetary and planning purposesunderpinned by the National Defense Strategy.The elements described in this scenario include the following:the duration of the conflict the military force deployed combat losses military,industrial,and essential civilian demand shipping losses the availability of foreign supply domestic industrial mobilization civilian austerity measures65Each of these elements is highly subjective,and historically these parameters have been hotly debated between defense planners concerned about a protracted war and those who expect conventional wars involving the U.S.Armed Forces to end quickly.66In its Cold War iteration,advocates of a“short war”planning construct argued that a potential conflict between the United States and the Soviet Union would be extraordinarily violent in its initial phases or might rapidly escalate to the nuclear level.In its contemporary iteration,advocates note the overwhelming conventional advantage of the U.S.Armed Forces over most threatsably demonstrated in the First Gulf Warsuggesting conflicts involving U.S.conventional forces are likely to be very short.In either case,industrial preparedness and stockpiling of any kind would be unnecessary,as the conflict may end before these efforts could impact its outcome.In contrast,the legacy“long war”proponents argue that an asymmetry of conventional military power is an unreliable indicator of conflict durationably securing the nation /matthew d.zolnowski20have remained on autopilot since the end of the Cold War,the industrial base mitigation tool kitand the DOD doctrine governing ithas remained largely unchanged.More specifically,JP 4-05 is almost word-for-word identical from 1995 to the present,and shortcomings in doctrine and practice have yet to be addressed.ContractingDPA Title I requires a U.S.company,and any of its suppliers,to prioritize fulfilling a DOD order over any commercial one.The DOD estimates that it issues approximately 300,000 DPA Title I-rated contracts annually.72 The DOD can also request that DPA Title I ratings be applied to foreign sources,contingent upon local laws and the execution of a“Security of Supply Agreement”with the host government.73 Theoretically,the flowdown of DPA Title I ratings throughout the supply chain should provide the DOD with both traceability and the first“call”on any critical minerals necessary for defense procurement.Despite the“paper”strength of DPA Title I,this authority has significant limitations in practice,all of which would hamper the DODs ability to direct critical minerals supplies to national needs in an emergency.GOVERNMENT AND INDUSTRY MITIGATION TOOLS Given the massive gap between current industrial base capabilities and postulated DOD requirements,the DOD pulls multiple levers to address day-to-day and future planning for critical minerals supply chain risk mitigation.Many of these levers are described in Joint Publication 4-05:Joint Mobilization Planning(JP 4-05),and in its most recent iteration,the principal industrial mobilization tools listed by the DOD include the following lines of effort:actively employ DPA Title I to prioritize DOD contracts or allocate scarce materials to defense contracts expand military production and supporting sectors(e.g.,workforce development)draw upon Canadian industrial capacity to supplement U.S.production obtain other allied weapons production support obtain waivers or exemptions from U.S.environmental laws to facilitate the above71However,just as planning assumptions for NDS functions Table 1:Critical Minerals Mitigation ProgramsMineralSample Use CaseAluminumAerospace alloys(lightweighting),armorAntimonyAmmunition,fire retardantsBerylliumAerospace alloys(lightweighting,non-sparking)BoronArmorCobaltBatteries,aerospace alloys(engines)GermaniumSpace-based solar cellsGraphiteBatteriesLithiumBatteriesMagnesiumAerospace alloys(lightweight)ManganeseBatteriesNickelBatteriesNiobiumAerospace alloys(engines),shipbuilding steelSteelArmorTinElectronicsTitaniumAerospace alloys(structural and engines)TungstenAmmunition,cutting implementsRare earth elementsControl and actuation systems,ceramic materialsSource:Authors analysis of awards under Catalog of Federal Domestic Assistance(CFDA)12.777 Defense Production Act Title III,retrieved from USASpending.gov.securing the nation /matthew d.zolnowski21rule,”only one of the four covered critical minerals may utilize domestic recycled feedstock.77 StockpilingSurprisingly,stockpiling is hardly mentioned in JP 4-05.The limited references include one-off statements that(1)DPA Title I can compel delivery to stockpile contracts;(2)stockpiles should exist;(3)stockpiles should be released once mobilization begins;and(4)stockpiles should be rebuilt once the mobilization period ends.No other analysis or discussion of stockpile planning or management appears.Though this brevity is refreshing,it also highlights a significant gap between DOD doctrine and NDS planning.As previously noted,NDS planning is driven by a short-war requirement,plus a long-term reconstitution phase.However,DOD doctrine calls for rapid in-crisis stockpile releases,with an indeterminate reconstitution phase.Put another way,the NDS stockpile sizing construct focuses on replacement once the fight is over,while Joint Staff doctrine wants to buy time during the emergency until other industrial base expansion programs come online.Although the requirements generation process for stockpiling and overall doctrine have remained static,the underlying Stockpiling Act has not.The DOD requested significant reforms to this law for the FY 2023 National Defense Authorization Act(NDAA),and Congress has proceeded to implement these changes across the FY 2023 and FY 2024 NDAAs.Among other elements,this reform aims to infuse private sector best practices into stockpile management while removing statutory barriers to more efficient government operations by:consolidating multiple DOD critical minerals policy oversight boards into a new“Strategic and Critical Materials Board of Directors”authorizing multiyear procurements and general acquisition of shortfall materials authorizing off-take agreements from DPA Title III industrial base investment projects supporting feasibility studies for new critical minerals projects expanding the scope of potential NDS research project applicants to include U.S.allies78For example,DPA Title I ratings only apply to U.S.companies and,by request,select U.S.allies.Any nation outside this circlean adversary or otherwiseis under no obligation to support the DODs needs.As indicated by the volume of DPA Title I ratings,contracting and the incorporation of critical minerals sourcing requirements into such contracts is the most common tool for managing supply chain risk.Two of the most well-known critical minerals sourcing regulations are(1)the“specialty metals clause,”the colloquialism for a 1973 rule requiring the purchase of aerospace alloys and steel from U.S.or allied sources,and(2)the“sensitive materials rule,”a 2019 rule that prohibits the purchase of refractory metals and rare earth permanent magnets from China,Russia,North Korea,and Iran.74Historically,defense contractors have been at odds with the metals and mining sector over these procurement rules.Broadly,the domestic metals and mining sector tends to favor rules that may drive defense spending toward their facilities,which may be more costly than foreign ones.Defense contractors,on the other hand,tend to oppose rules that may complicate subcontract management and compliance costs.Particularly when a subcontractor principally serves the commercial market,DOD-unique critical minerals sourcing rules may deter participation in defense contracts.Whenever Congress has required the DOD to implement a new critical minerals sourcing rule,the timeline for implementation has been lengthy and subject to intense advocacy campaigns.For example,reaching a final rule on the“specialty metals clause”was the subject of ongoing regulatory and legislative advocacy for almost a decade.75 A similar battle is currently underway over the“sensitive materials rule.”76These two rulesthe“specialty metals clause”and the“sensitive materials rule”also highlight the well-intentioned but often inefficient promulgation of new critical minerals sourcing mandates.For example,samarium-cobalt permanent magnets are covered under both the“specialty metals clause”and the“sensitive materials rule,”but since the DODs implementation of the newer“sensitive materials rule”is executed on a contract-by-contract basis,ensuring contract compliance is highly complex and costly.Similarly,recycling is an important source of domestic production of critical minerals,but under the“sensitive materials securing the nation /matthew d.zolnowski22projects funded by the Industrial Base Fund(i.e.,the Innovation Capability and Modernization(ICAM)program),feasibility or commercial scaling projects funded by the Defense Production Act Fund,and various military servicespecific organic industrial base funds.81Historically,industry has expressed its frustration with the DODs inability to bridge the“Valley of Death,”where the DOD supports early-stage development of an innovative technology or product but cannot transition it to procurement by a program of record.This frustration has also been directed toward the aforementioned industrial base investment programs.However,the DOD has several recent case studies in the critical minerals sector that provide reason for optimism,with multiple companies successfully transitioning from early-stage research to commercial-scale production with or through the DOD(see Table 2).In alignment with JP 4-05,the DOD also has awarded defense industrial base investment funds to Canadian companies,who have been considered a“domestic Prior to these changes,the Stockpiling Act had remained largely untouched since 1979,and the DOD is only beginning to implement many of these reforms.79 On the other hand,though the NDS is authorized to carry out these new functions,new funding has slowed to a trickle.After a significant one-time appropriation of$125.0 million in FY 2022 and$93.5 million in FY 2023,FY 2024 funding collapsed to only$7.6 million.These funding increments are wholly insufficient to meet the shortfall requirements for defense($2.41 billion)and essential civilian needs($12.21 billion)in a national emergency.80 Industrial Base Investment ProgramsPivoting to industrial base investment,the DOD offers an array of programs to foster the development of new critical minerals production technologies,sources of supply,and end use items for the military services.Among these are Small Business Innovation Research(SBIR)programs,basic research and qualification projects funded by the NDS,pilot or prototype demonstration Table 2:Critical Minerals Transition ProgramsCompanyDevelopment ProgramScaling ProgramRare Earth Salts Separations&Refining LLC DLA:($8.4 million)Rapid Innovation Fund demonstration DLA:($0.2 million)basic R&D study DPA Title III:($4.2 million)terbium recycling programMP Materials Corp.ICAM:($0.6 million)heavy rare earth demonstration ICAM:($35.0 million)heavy rare earth scalingLynas USA,LLC ICAM:($0.6 million)heavy rare earth demonstration ICAM:($258.2 million)heavy rare earth scalingNoveon Magnetics Inc.DLA/SBIR:($1.0 million)magnet recycling and production demonstration DLA/SBIR:($1.6 million)qualifying magnets for Excalibur,Peregrine,JDAM,and Small Diameter Bomb DPA Title III:($0.8 million)magnet inventory demonstration DPA Title III:($28.8 million)magnet productionGraphite One(Alaska)Inc.DPA Title III:($37.3 million)feasibility study Department of Energy,Loan Program Office:($201 million)direct loan applicationPerpetua Resources Idaho Inc.DPA Title III:($59.2 million)feasibility study Army/DLA:($15.7 million)qualification study Export-Import Bank:($1.8 billion)direct loan letter of interestTalon Nickel(USA)LLC DPA Title III:($20.6 million)nickel resource development Department of Energy,Manufacturing and Energy Supply Chains:($114.8 million)nickel processingSource:Authors analysis of awards posted at FPDS-NG and USASpending.gov and press releases by the DOD and company awardees.securing the nation /matthew d.zolnowski23antimony project in Idaho and South32s zinc-manganese project in Arizona.89 Given the limited dataset,it is not possible to determine whether inclusion on the FAST-41 dashboard provides a meaningful benefit to project development or whether other factorssuch as a U.S.government award from the DOD or another agencyare more decisive.RECOMMENDATIONSFirst,the Joint Staff and DOD critical minerals programs need to update their war planning assumptions.Senior DOD leadership,civilian and military,has clearly stated that the DOD must begin to prepare for a protracted conflict,but this view has not been reflected in the warfighting scenarios that the NDS uses for requirements generation.90 Without needed updates to war planning,DOD base budget requests will continue to grossly underestimate critical minerals needs.Therefore,the Joint Staff should develop a war-planning scenario suitable for NDS planning to reflect DOD policy and generate more realistic estimates of defense requirements for critical minerals.Second,the Joint Staff and DOD industrial investment and stockpiling programs should realign doctrine and program execution.The industrial base management sections of the mobilization doctrine generated by the Joint Chiefs of Staff,JP 4-05,have not changed since 1995.The document does not reflect lessons learned from(a)industrial base expansion efforts to respond to the Covid-19 pandemic or provide military assistance to Ukraine,(b)related medical or war reserve inventory distribution challenges,or(c)the management of DPA Title I allocations of scarce materials to the domestic market.91 Moreover,the objectives established in the current doctrine(i.e.,provide in-crisis response)are not matched by the NDS requirements generation process(i.e.,provide for reconstitution of forces).Therefore,the Joint Staff and civilian components of the DOD responsible for industrial mobilization should update JP 4-05 or develop new doctrine to reflect how the department is likely to respond to a mobilization event.Third,the DOD should stabilize funding for critical minerals in the base budget.The DOD has made significant progress in supporting the upstream supply source”since 1992.82 Additionally,Congress amended the DPA to expand the scope of eligible foreign allies to include the United Kingdom and Australia.83 Though a handful of Canadian firms have received DPA Title III awards,the legislative change for the United Kingdom and Australia is sufficiently recent that no such companies have received a DPA Title III award to date.84Notwithstanding this apparent success in supporting critical minerals development through the Trump and Biden administrations,70 percent of DOD funding for critical minerals projects$778 million of$1.1 billionhas been derived from supplemental appropriations.85 In other words,Congress is the principal driver behind the DODs investments in critical minerals,not the DODs bottom-up requirements generation and budgetary process.To that end,recent DOD budget requests suggest that critical minerals investment funding will fall to approximately$30 million per year.86 Based on recent DPA Title III awards for critical minerals,this level of funding is sufficient to execute perhaps one or two“feasibility study”projects per year.Waivers or Expediency Under Other Domestic LawsWith respect to other authorities to waive domestic laws or otherwise expedite critical minerals projects,the DOD does not appear to have pursued or received authorization under extant pathways for regulatory relief in U.S.environmental laws.These include,for example,national security or paramount interest pathways under the Endangered Species Act and the Clean Air Act.87 However,additional information on DOD recommendations regarding U.S.environmental laws may be forthcoming through the FY 2025 NDAA.88 Namely,the U.S.House of Representatives included a requirement for the DOD to report on the impact of the National Environmental Policy Act on the largest defense industrial base projects.Environmental regulation aside,the DOD also does not appear to have actively pursued or promoted other nonregulatory pathways to streamline permitting activities for its projectscritical minerals or otherwise.Of note,only two DOD industrial base investment projects are included on the FAST-41 Covered Projects Dashboard:Perpetua Resources securing the nation /matthew d.zolnowski24in defense or essential civilian industry needs in a postulated wartime scenario.However simple that question may be,the answer is highly susceptible to subjective policy judgments,which flow directly from the DODs National Defense Strategy.Over the past seven decades,U.S.defense policy has trended toward a more optimistic appraisal of the availability of foreign sources and the severity of a conflict involving the U.S.Armed Forces.This pendulum is now swinging in the opposite direction,with a greater focus on protracted conflict.DOD planning and posture are beginning to change for the better,particularly for rare earth elements and battery minerals.However,the preponderance of the DODs efforts is funded by out-of-cycle supplemental appropriations acts.Critical minerals have not yet become a mainstay of the departments base budget,nor has DOD doctrine and program execution materially evolved from its immediate postCold War posture.On balance,the DOD and defense industry have notched major accomplishments to secure their supply chain for critical minerals.Fully addressing this challenge,though,is a marathon,not a sprint,and the work of the DOD,Congress,and industry in this realm has only just begun.chain across numerous minerals.Though these efforts only began in earnest in 2019,DOD prime contractors and major subcontractors are already integrating new domestic sources into DOD programs of record.92 However,most of this success is being carried by one-off supplemental appropriations acts,which do not provide predictability to industry or the DOD for investment planning.Therefore,the congressional defense committees should continue to provide discrete program increases or“functional transfers”for critical minerals projects within industrial mobilization programs,such as the Defense Production Act Fund,the Industrial Base Fund,and the National Defense Stockpile Transaction Fund.Fourth,the DOD should streamline critical minerals sourcing rules.Given rising concerns related to the United States reliance on adversarial sources,Congress continues to legislate mandates for the DOD to restrict sources of supply for critical minerals and end-use items containing critical minerals.In some cases,the same mineral is covered under multiple sourcing rules simultaneously,with nonsensical exception structures.93 This constantly shifting regulatory regime places a significant cost burden on all tiers of the defense industrial base,with the compliance burden especially acute at the prime contract level,given that noncompliance occurs many tiers removed from the prime contractor.Therefore,the DODs Office of Defense Pricing,Contracting,and Acquisition Policy should undertake an acquisition reform study focused on critical minerals sourcing.At a minimum,this study should identify the extant Defense Federal Acquisition Regulation Supplement rules and their underlying legislation for critical minerals products,describe these rules use and exception structures,and then develop a streamlining legislative proposal for Congress.As appropriate,this proposal also should include requests for funding to support the development of military specifications,standards,or other industry-led initiatives to validate sub-tier supplier compliance.CONCLUSIONAs explored in this chapter,the central question regarding the“criticality”of a critical mineral to national defense is whether the DOD finds a classified shortfall securing the nation /matthew d.zolnowski25CHAPTER 4Driving InnovationCritical Minerals and the Automotive IndustryBy Duncan Wood and Alexandra Helfgottake1150 via Adobe Stockdriving innovation /duncan wood and alexandra helfgott26driving innovation /duncan wood and alexandra helfgottMoreover,the uncertainty currently affecting the EV industry in the United States has a knock-on effect on the global market for critical minerals,particularly regarding U.S.and allied countries investments in the critical minerals supply chain.This chapter will examine the drivers of growing demand for EVs,the knock-on effects on demand for critical minerals,and the challenges facing the supply chain.It will also highlight the importance of innovation in the EV battery sector to reduce the industrys vulnerability to interruptions and shortcomings in the critical minerals supply chain.A combined approach of reducing demand for critical minerals through innovation,boosting domestic supply of those minerals,and working closely with allies to secure U.S.supply chains will provide certainty and stability for the market,protecting U.S.investments,jobs,and competitiveness.THE IMPORTANCE OF THE AUTOMOTIVE MARKET IN THE UNITED STATES AND NORTH AMERICAThe auto industry is a cornerstone of North American trade,accounting for 22 percent of total trade under the United States-Mexico-Canada Agreement(USMCA).94 It supports a staggering 42.2 million jobs across the region,both directly and indirectly.95 In the United States,the industry directly employs 9.7 million people and supports an additional 11 million indirect jobs,highlighting its critical role in the nations economy.96 In Mexico,the sector provides 1 million direct jobs and contributes to 20 million indirect positions,underscoring its importance in driving economic development.97 Canada,while smaller in scale,still benefits significantly,with 500,000 jobs tied to the industry.98 This interconnected workforce demonstrates the auto sectors immense economic impact and its role as a vital driver of prosperity across North America.In 2023,North America produced approximately 3.6 million EVs,and the industry created over 200,000 direct EV-related jobs across manufacturing,battery production,and infrastructure development.99 It is The development of the electric vehicle(EV)industry has been the single biggest driver of critical minerals demand growtha trend that is expected to continue for years to come.This demand growth has been fueled by government incentives at both the national and subnational levels globally.However,given the inherently international nature of the EV supply chain,U.S.EV manufacturers are concerned about disruptions stemming from rising geopolitical tensions.The EV industrywhich has mobilized significant investment and created nearly 100,000 jobs in recent yearswill require uninterrupted access to the materials needed to produce batteries and motors.As the Trump administration takes office,the future of the EV industry is clouded by uncertainty,with serious questions regarding the outlook for existing consumer and production incentives.The proximity of Tesla CEO Elon Musk to U.S.president Donald Trump may influence this decision,but more important will be the rationale for continued support in the context of economic security,strategic competition with China,and U.S.jobs.It is clear that U.S.automakers are already committed to the transition to EVs and hybrid vehicles,having invested billions of dollars over the past four years in building gigafactories across the United States and the rest of North America.Uncertainty for the sector also stems from shifts in consumer preferences and interest rates,technological advancements in battery chemistries,and a slower-than-expected expansion of the charging network.The single biggest determinant for key minerals such as lithium,graphite,cobalt,nickel,and manganese is consumer demand for EVs themselves.27processed in these countries will increase from 40 percent in 2023 to 80 percent by 2027.105 Starting in 2025,batteries utilizing critical minerals mined or processed by foreign entities of concern(primarily referring to Chinese-owned firms)will not be eligible for the tax credit.The other portion of the EV credit applies to vehicles with batteries manufactured or assembled in North America,with the percentage of components manufactured in the region set to increase over timefrom 50 percent in 2023 to 100 percent by 2029.106 The inclusion of this requirement in the IRA underscores the regions importance in the auto industry and emphasizes the critical role of regional integration in strengthening the industry.Recent TrendsSince the passage of the IRA,the United States has seen considerable growth in EV sales,reaching 7.9 percent of total sales in 2023.107 Driven largely by these incentives,sales of EVs have risen significantly in recent years in the United States.Despite a slow year in 2023,sales of EVs in the United States have rebounded rapidly in 2024.In the third quarter of 2024,EV sales increased by 11 percent year-on-year,while EVs as a share of all automotive sales in Q3 reached 8.9 percent.108 The EV industry will soon account for a tenth of all auto sales in the United States.However,progress has been far from linear.According to the U.S.Energy Information Administration,sales of hybrid,plug-in hybrid,and battery electric vehicles(BEVs)grew to over 16 percent of total new light-duty vehicle sales in the United States in 2023.109 In the first part of 2024,however,EV sales declined,with nearly a 1 percent decrease in hybrids,plug-in hybrids,and BEVs sold in the first quarter of 2024 compared to the fourth quarter of the previous year.110 This decrease in demand for EVs in 2023 and 2024 has pushed automakers to rethink their strategies,particularly as hybrid vehicles gain more traction.Despite the fact that sales of EVs have risen significantly in the United States,these figures are disappointing compared to global numbers.In China,BEVs are projected to account for 50 percent of all light vehicle sales by the end of 2024an impressive total with far-reaching implications for the global important to note that much of this production relies on cross-border,tariff-free trade under the USMCA.Growing DemandThe single biggest determinant of demand for key minerals such as lithium,graphite,cobalt,nickel,and manganese is consumer demand for EVs themselves.This demand has grown substantially in recent years,with EV sales reaching nearly 14 million cars globally in 2023.100 The International Energy Agency(IEA)estimates that global demand for critical minerals driven by EV production was under 2 million metric tons in 2020 but is projected to exceed 30 million metric tons by 2030,representing approximately 75 percent of the minerals required for clean technology(cleantech).By 2050,EV demand alone is expected to account for over 130 million metric tons,or roughly 90 percent of the total mineral demand for cleantech.However,this growth is mostly concentrated in the United States,Europe,and Chinacountries where the use of personal vehicles is more commonthough EV sales in Southeast Asia and Brazil are picking up speed,largely due to government subsidies and the availability of low-priced Chinese EVs.101 In the United States,major decisions by auto companies to produce more EVs,or even shift to 100 percent EV production,have begun to fundamentally alter the market.General Motors 2021 announcement of plans to transition to 100 percent EV production by 2035 marked a watershed moment for the domestic industry.102 President Joe Bidens goal of having 50 percent of auto sales be electric by 2030 was another signal to the market that demand will grow significantly.103 However,the major factor driving the EV market in recent years has been the Inflation Reduction Act(IRA).The IRA,which is discussed in detail in Chapter 6,provided important tax credits for new EV sales.Section 30D of the IRA includes a$7,500 tax credit specifically for light-duty EVs for individuals earning less than$150,000 or families earning less than$300,000.104 Half of the tax credit is allocated for batteries manufactured with materials mined in the United States or countries with which the United States has a free trade agreement.Notably,materials recycled within North America are also eligible.The percentage of the value of critical minerals mined or driving innovation /duncan wood and alexandra helfgott28important for investors and policymakers to understand that progress will involve leaps forward and some steps back before a more widespread shift to EVs occurs.THE EV SUPPLY CHAINThe first phase of the EV battery supply chain,often referred to as the upstream portion of the supply chain,is raw mineral extraction.This phase is arguably one of the most important,as it forms the fundamental basis of the EV battery.The list of critical minerals essential for EV battery manufacturing is extensive and includes manganese,graphite(and graphene),lithium,nickel,and cobalt,among others.The midstream phase of the EV battery supply chain entails the processing and refining of raw materials.This typically requires high-heat or chemical-based treatments to transform the raw materials into what will eventually be cathode and anode active battery materials.Rare earth metalsa group of 17 elementsare used in various clean energy technologies for their oil and critical minerals markets.According to the Alliance for Automotive Innovation,Chinese EV manufacturing is comparable to the entire output of the U.S.auto industry.111 The story of EV sales in Europe is less straightforward.After rapid growth in 2021 and 2022,2023 saw a slowdown in global EV sales due to rising inflation and the end of government subsidies,particularly in Europe.This was most notable in Germany,where sales dropped by 37 percent in July 2024 following the governments termination of EV subsidies.112 Registrations for hybrid vehicles in Europe reached 24 percent in July 2024,while EV registrations were just 13.6 percentnearly a full percentage point lower than during the same time period the previous year.113 The slowdown in Europe continued throughout the first half of 2024,but EV sales saw an increase in the third quarter.What these statistics show is that linear development of the EV industry is not guaranteed.Although numbers continue to rise,much work remains to drive consumer demand and ensure the industrys sustainability in the United States.While long-term growth is expected,it is Source:Monica Abboud,“U.S.share of electric and hybrid vehicle sales increased in the second quarter of 2024,”U.S.Energy Information Administration,August 26,2024,https:/www.eia.gov/todayinenergy/detail.php?id=62924.Figure 1:Quarterly U.S.Light-Duty Vehicle(LDV)Sales by Powertrain,January 2014June 2024driving innovation /duncan wood and alexandra helfgott29Larger electric car models have a significant impact on battery supply chains and critical mineral demand.In 2023,the sales-weighted average battery electric SUV in Europe had a battery almost twice as large as the one in the average small electric car,with a proportionate impact on critical mineral needs.If all electric SUVs sold in 2023 had instead been medium-sized cars,around 60 GWh of battery equivalent could have been avoided globally,with limited impact on range.Accounting for the different chemistries used in China,Europe,and the United States,this would be equivalent to almost 6,000 tonnes of lithium,30,000 tonnes of nickel,almost 7,000 tonnes of cobalt,and over 8,000 tonnes of manganese.117According to the IEA,copper,cobalt,nickel,lithium,rare earth elements,and aluminum are the minerals in highest demand.118 Demand for these critical minerals is projected to grow fourfold under the IEAs Sustainable Development Scenario by 2040.119 However,this projection is subject to three key external factors:evolving technology,the development and implementation of governments clean energy policies,and the demand for EVs.120 All three factors are currently experiencing a high degree of uncertainty.The two-way connection between the EV market and critical minerals prices is exemplified by the recent collapse in lithium prices,which has impacted the competitiveness of EVs in automotive markets.After peaking at over$79,637 per ton in December 2022driven by soaring demand for EVslithium prices fell to less than$11,000 per ton by September 2024.121 This decline was caused by several factors,including high interest rates,a weak Chinese economy,and market manipulation.Additionally,new resources coming into production globally and lower-than-expected EV sales following the initial surge in the United States,China,and Europe were significant contributors.Stagnating EV sales in 2023 had a profound and rapid impact on the lithium market.For instance,earlier in 2024,Ganfeng Lithium Group reported a net loss of$107 million and announced plans to limit capacity expansions as a“glut of supply overwhelmed slower-than-expected demand growth from electric-vehicle makers,drivingspot carbonateprices to a three-year low.”122“permanent magnetic properties.”114 In the specific case of EVs,they are primarily used in magnets for EV motors and as catalysts for battery fuel cells.Critical minerals processing tends to be regionally concentrated,and it is more common than not for extraction and refining to occur at separate facilities.The third stage in the EV battery supply chain,the downstream phase,involves assembling battery cells into modules,which include battery management systems,electronics,and sensors.These modules are then packaged and sold to automakers,although some manufacturers produce and install their own battery packs.The final process in the EV battery supply chain is reuse and recycling.Reuse entails“disassembly of the pack,testing module/cells,and repackaging.”115 Pyrometallurgy,hydrometallurgy,and direct recycling are currently the three most viable options for lithium-ion battery recycling,though new technological advances are emerging.Both reuse and recycling are logistically challengingnot only from an economic and regulatory standpoint but also in terms of the basic logistics of transporting the batteries.Moreover,the manufacturer-specific nature of the batteries adds to the cost of recycling.EV DEMAND AND THE CRITICAL MINERALS SUPPLY CHAINIt is abundantly clear that the shift from traditional internal combustion engine(ICE)vehicles to EVs will require significantly increased quantities of critical minerals for EV production.Whereas a traditional ICE vehicle uses an estimated 34 kg of critical minerals,an EV uses approximately 200 kg,primarily for the electric motor and battery.116 However,this is likely to change over time as battery size,battery chemistry,modularity,and consumer preferences continue to change.While larger battery sizes may increase mineral demand,shifts in battery chemistry will impact the mix and proportions of metals required in those batteries.The IEA makes the important point that the percentage of electric sport utility vehicles(SUVs)being sold has a significant impact on the critical minerals supply chain:driving innovation /duncan wood and alexandra helfgott30charging network.Persistent consumer concerns about locating charging stations,charging speeds,and the maintenance and distribution of these stations are often grouped under the term“range anxiety.”However,as EV ranges improve with advances in battery technologies,it may be more accurate to discuss charging convenience.Potential EV buyers in urban areas face unique challenges regarding access to charging infrastructure.For example,availability in their neighborhoodsor,more specifically,in apartment buildingsmay be limited.Drivers who lack garages and rely on street parking face even greater concerns about convenience.The Biden administrations National Electric Vehicle Infrastructure program allocated$7.5 billion to the construction of 30,000 charging ports across the United States,with a particular focus on Alternative Fuel Corridors.These funds are intended to be distributed through state governments.However,as of November 12,2024,only 102 charging ports at 25 charging stations in nine states had been opened.128 Several factors have contributed to this slow rollout,but a significant portion of the total fundingaround$4 billionhas already been committed to the states.Consequently,the buildout will accelerate over the next few years,as these funds cannot easily be rescinded by the federal government.THE ROLE OF TECHNOLOGICAL INNOVATIONInnovation in battery chemistry and design is likely to play a crucial role in shaping the demand for critical minerals in the EV industry.While the internal combustion engine evolved slowly over the past 150 years,the EV industry is seeing rapid,profound,and unparalleled advances in battery chemistry,design,and efficiency.Mineral demand for EV batteries depends on the cathode and anode chemistries of the batteries but is ultimately influenced by evolving technologies that have the potential to alter the mineral composition of EV batteries.For example,an NMC(nickel manganese cobalt oxide)battery uses half as much nickel as an NCA(nickel cobalt aluminum oxide)battery but requires Some experts predict that the current oversupply of lithium will last until 2027.123 In the interim,there is hope that new extractionand,more importantly,processingprojects will come into operation around the world,particularly in the United States and U.S.-friendly countries.The difficulty in estimating demand projections is further exacerbated by governments evolving approaches to clean energy policy development and implementation.For example,changes in administrations in the United States and a potential move away from the incentives outlined in the IRA will play a significant role in determining short-term demand.Other factors influencing future EV demand include local-and state-level incentives and regulations.Just as the IRAs clean vehicle tax credits boosted demand for EVs after 2022,Californias rapid shift toward an EV-friendly regulatory framework and higher gasoline prices had a similar effect.While California has the best-known incentives,many other states have followed suit.124 Consumer financing innovations also have the potential to incentivize higher EV sales and end-of-life recycling.In the United States,the IRA succeeded in driving new financing from auto firms such as Hyundai,whose vehicles were not eligible for IRA tax credits.In response,Hyundai implemented its own financing mechanisms to match the value of these credits.At the industry level,there is room for even greater innovation.For example,a recent paper on the cobalt supply chain proposed a“lease-to-recycle”model for batteries to drive EV adoption and enhance the potential for recycling battery metals.125 Private sector funding for EVs and battery facilities has significantly shaped the industrys development in the United States.Between 2018 and 2024,the private sector has announced investments of$90 billion in battery facilities and$33 billion in EV facilities.126 Notably,states with Republican governors have been more successful in securing this funding,with the southern region of the United States receiving over$68 billion in regional investments.In comparison,the Northeast received just$300 million,while the West Coast garnered$13.3 billionwell below the Souths total.127 One additional factor influencing the demand for critical minerals for EVs is the buildout of the driving innovation /duncan wood and alexandra helfgott31density and improved safety by replacing liquid electrolytes with solid materials.The development of solid-state technology will reduce the need for cobalt and nickel but continue reliance on lithium and possibly new solid electrolytes,like lithium metal.b.Graphene-Based Batteries:A technology still in development,graphene batteries involve the integration of graphene into the cathode and anode to significantly improve energy density,charging speeds,and battery life.Often considered a“wonder material”due to its lightweight nature and superior performance in various applications,graphenes high conductivity allows for faster charge transfer,and its durability supports longer-lasting batteries,making it a promising material for future EV battery advancements.A shift to this technology would increase demand for graphite and graphene,the latter being essentially the building block for graphite.c.Sodium-Ion(Na )Batteries:An emerging alternative to Li-ion batteries,Na batteries use sodium instead of lithium as the primary charge carrier.They can be cheaper and more sustainable than lithium(due to the natural abundance of sodium),but they have lower energy density.Na batteries have potential applications in stationary energy storage and some EVs.Growth in their use would reduce dependence on lithium.d.Lithium-Sulfur(Li-S)Batteries:This emerging subset of lithium-ion chemistries has the potential for very high energy density but faces issues with durability and lifespan.Li-S batteries have a higher energy density than traditional Li-ion batteries and rely on sulfur,which is abundant and inexpensive,instead of nickel and cobalt.132Battery design is also an important factor.Currently,EV batteries are relatively standardized across the industry.However,experts anticipate that future developments will introduce modular designs,enabling customers to tailor their batteries to meet specific needs,such as prioritizing extended range or enhanced performance.133 eight times more cobalt.LFP(lithium iron phosphate)batteries,by contrast,require 50 percent more copper than NMC batteries but do not use nickel,cobalt,or manganese.129 NMC batteries typically last around 2,000 cyclesa battery cycle is the process of a battery being fully charged and then discharged
2024-12-29
169页
5星级
DAIRY AND SOCIO-ECONOMIC DEVELOPMENTWhat evidencedoes the datahold?with the support ofDAIRY AND SOCI.
2024-12-29
68页
5星级
09 October 202404Tropical cyclones:A looming threatAllianz ResearchThe global economic ripple 20Buil.
2024-12-29
27页
5星级
18 November 202404Mapping the uneven terrain of social unrestAllianz ResearchLittle fires everywhere.
2024-12-29
27页
5星级
Global Macro Trends June 202414.3InsightsOpportunity KnocksMid-Year Outlook for 2024 Contents 3 Introduction 11 What Is Changing or Being Amplified?14 Six Areas Where We Differ From Consensus 17 Asset Allocation and Key Themes 17 Picks and Pans 23 Buying Complexity,Selling Simplicity in the Equity Markets 24 Collateral-Based Cash Flows 25 Productivity 26 Security of Everything 26 Intra-Asia 27 Intersection of AI and Energy Supply 28 Demographic Challenges to Retirement Security 29 Global/Regional Economic Forecasts 30 U.S.36 Europe 40 China 43 Japan 46 Capital Markets 46 S&P 500 48 Global Interest Rates 49 U.S.Interest Rates 51 Europe Interest Rates 52 Oil 54 Frequently Asked Questions 54 Where do you see relative value in Credit?55 Do you still believe in a higher resting heart rate for inflation?59 How are you thinking about the U.S.election,including impacts on fiscal policy and the Treasury market?61 What is the outlook for U.S.consumer spending?64 How are you thinking about expected returns and portfolio construction going forward?67 EM:Do you still favor EM Debt over EM Equities?69 Key ConclusionsHenry H.McVeyHead of Global Macro&Asset Allocation,CIO of KKR Balance S David McNellis Frances Lim Aidan Corcoran Changchun Hua Paula Campbell Roberts Racim Allouani Kristopher Novell Brian Leung Rebecca Ramsey Tony Buckley Bola Okunade Rachel Li Thibaud Monmirel Yifan Zhao Ezra Max Miguel Montoya Asim Ali Patrick Holt Patrycja Koszykowska Koontze Jang Allen Liu Insights|Volume 14.3 3Opportunity KnocksMid-Year Outlook for 2024Despite intensifying political uncertainty,heightened geopolitical tensions,and volatile commodity prices,we continue to see compelling investment opportunities across the global macro landscape.Accelerating AI demand for electricity,reorientation of global supply chains,improving labor productivity,and retirement security all represent important macro themes behind which to invest.We also remain really encouraged by the technical backdrop,as net issuance of Equities and Credit remains well below trend.However,it is definitely not business as usual in the world of macro and asset allocation,as our Regime Change thesis requires a different approach to portfolio management.To build upon this view,we have done more analysis to underscore the value of adding more non-traditional assets to ones portfolio.Indeed,unlike in the past,todays volatility in portfolios is being driven by stock-bond correlation,not by single asset volatility.Importantly,most of todays CIOs have not invested in this type of environment.In terms of areas to lean in,we think that the current vintage will be a strong one for Private Equity,especially opportunities linked to value creation by operational improvement and/or corporate carve-outs.Meanwhile,we continue to pound the table on many parts of Real Assets,including Real Estate Credit,Infrastructure,and Asset-Based Finance.Finally,we see a lot of potential in Opportunistic Credit and Capital Solutions.On the risk side,we believe higher rates especially if productivity should tail off are a more challenging scenario than lower rates and slower earnings.We are also keeping an eye on employment trends.Our bottom line:Opportunity Knocks,as we still think the current economic cycle has further to run,a backdrop that should accrue to the benefit of long-term investors,especially ones who have dry powder to lean into the inevitable periodic dislocations that are likely to occur during a Regime Change.A pessimist complains about the noise when opportunity knocks.Oscar Wilde,Irish poet and playwrightInsights|Volume 14.3 4We are often asked,especially heading into the second half of 2024,if we still believe that the glass is half full for global allocators when it comes to deployment opportunities,particularly in an environment of heightened complexity,sticky inflation,and higher for longer interest rates.(See Glass Half Full Outlook for 2024).With an uncertain presidential election around the corner in the United States,and many other important elections taking place across the world,there is certainly a lot to consider.On the more cautious side,equity markets are now nicely higher,and credit spreads are now sharply tighter since late December 2023 when we laid out our thesis that investors might regret looking at the glass as half empty.In fact,our KKR proprietary market-implied default model suggests HY spreads are pricing in about a two percent default rate today,compared with about three percent at the beginning of the year and a historical average of 5.7%.Exhibit 1:Equity Markets Have Withstood Substantial Volatility to Enjoy Glass Half Full Returns and Then Some in the 1H2415.6.9.1.7%Nikkei 225NasdaqS&P 500Euro StoxxEquity Performance Across Regions,YTD PerformanceData as at June 7,2024.Source:Bloomberg.Indeed,unlike in the past,todays volatility in portfolios is being driven by stock-bond correlation,not by single asset volatility.Exhibit 2:While Investors Have Also Gotten More Optimistic About the Outlook for Credit,High Yield in ParticularOct-0214.7%Jun-070.8%Oct-1111.2b-1611.0%Mar-2014.8%Jul-226.7%0%2%4%6%890199419982002 2006 2010201420182022 2026U.S.High Yield Implied Default Rate,%Implied Default RateAvg(5.7%)May-241.8ta as at May 24,2024.Source:Bloomberg.Exhibit 3:Risk Assets Have Responded Favorably to the Idea That There Will Be Fewer Tightenings and More EasingsSep-0668%Mar-2112%Oct-2284%0 0Pp 032004200520062007200820092010201120122013201420152016201720182019202020212022202320242025Consensus Forecast:%of Global Central BanksHiking RatesHiking rates is defined as an increase in rates over the past three months.Data for U.S.,JP,CN,AU,CA,E2,NZ,NO,SE,GB,JP,CH,IN,ID,KR,PH,TW,TH,VN,BR,CL,ZA,TR,IL,CZ,HU,PL.Data as at May 31,2024.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.Insights|Volume 14.3 5Exhibit 4:Overall,Our Models Still Favor Credit,But Now Only at the MarginApr-241.0%1.1% 1stdev-1stdev-3%-2%-1%0%1%2%3 102012201420162018202020222024Relative Value:Equities vs.Credit,Internal Rate ofReturn for Equities vs.HY YTWU.S.Equity vs.U.S.HY CreditPost-GFC AveragePrefer U.S.HY CreditPrefer U.S.EquityData as at May 24,2024.Source:Bloomberg.However,perhaps more important for long-term investors,there are a lot of political and social crosscurrents that are increasingly bleeding their way into markets.Not surprisingly,the introduction of social media into our political process has created more discord.This type of disruption is like other post-industrial revolutions where technological change ushered in periods of social and political unrest.As our colleague Ken Mehlman explains,just as the invention of the printing press around 1440 introduced years of political,religious,social,and scientific disruption,the combination of the Internet and social media is a Gutenberg 2 moment that has produced and portends similar disturbances.At the same time,complicated issues around immigration and inequality are also driving tense debates across the Western world that increasingly seem to push the left and right further apart.See Section IV,question#3 for a full discussion,but the upcoming U.S.presidential election only increases our conviction that policy from either a Trump or a Biden administration is likely to maintain an inflationary bent(which further heightens discord),given the threat of tariffs and the need for security spending,contributing to an increasing normalization of wider than usual deficits.Finally,great power rivalries around the globe have intensified notably in recent quarters.As such,investors should expect more barriers to trade and capital flows in the coming years under almost all scenarios.Key to our collective thinking is that the intensifying focus on homeland economics is a post-COVID,post-Ukraine global phenomenon that is likely to continue almost regardless of electoral outcomes in most countries.Exhibit 5:After Two Years of Being in Late Cycle and Contraction,Our Proprietary KKR Cycle Indicator Is About to Move Into Its Early Cycle PhaseApr-24-0.31-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.5199019921994199619982000200220042006200820102012201420162018202020222024KKR Cycle Indicator(1990-Present,Z-Score)ContractionEarly CycleMid CycleLate CycleData as at April 30,2024.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.Exhibit 6:We Think Earnings Growth Is Set to Broaden Beyond Mega Cap Technology and Become More Balanced in Coming Quarters,Driven by Positive Operating Leverage and Margin Growth in Other Sectors-15%-5%5%5EU%S&P 500 EPS Growth Disagregation2022(1Q-4Q)2023(1Q-4Q)2024(1Qe-4Qe)DeceleratingMega-CapTech EPSAcceleratingEPS across restof S&P 500 Data as at April 30,2024.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.Insights|Volume 14.3 6Exhibit 7:Long Periods of Equity Outperformance Have Been Driven by Productivity and/or Central Bank Intervention.Productivity vs.Equity MarketsLabor Productivity,%QoQ,SAARS&P 500 Average Annual ReturnAverage U.S.Budget Deficit as a%of Nominal GDPAverage Fed Balance Sheet as a%of Nominal GDPHigh Productivity Period1960s3.3%8.4%-1.0%5.490s-2000s3.1%8.8%-0.8%6.0%Low Produc-tivity Period1970s1.0%-0.9%-2.3%6.4 10s1.0.8%-4.8 .9%All Periods1958-20182.1%7.20%-2.6%8.3%Today4Q22-1Q242.2%8.5%-5.7).8%Note:1960s and 90s-00s are the high productivity growth(3%)periods,referring to 1958-1968 and 1995-2005,respectively.1970s and 2010s are the low productivity growth(6%Vintage IRR vs.5Y S&P Total ReturnCapital Markets Liquidity(IPO High Yield Bond Leveraged Loan Issuance)as a%of GDPPrivate Equity Outperformance Across LiquidityRegimes,1997-2023Capital MarketsLiquidity Is Currentlyat 2.3%of GDP,WhichSuggests Strong PE PerformancePE returns from Preqin on a 5-year forward returns from 1997 2019 basis.Data as at December 31,2023.Source:Preqin,Bank of America,Bloomberg,KKR Global Macro&Asset Allocation analysis.Insights|Volume 14.3 8Against this unique macroeconomic backdrop,however,we continue to argue that as investors we are experiencing a Regime Change.There remain four pillars to our original thesis:ongoing fiscal stimulus,heightened geopolitics,a messy energy transition,and stickier wages(driven largely by a shortage of skilled workers).If we are right,then global allocators and macro investors need to view their portfolios through a different lens.In particular,we think that more diversification across asset classes as well as less dependence on global sovereign bonds is warranted,especially given correlations between stocks and bonds have turned decidedly positive(Exhibit 14).Exhibit 13:While Inflation Should Continue to Cool,We Dont Think It Will Return to Previous Levels.As a Result,We Maintain Our Regime Change ThesisInflationHighGrowthLowHighLow20212024-20252010-20162017-20192022-2023Low and High Growth and Inflation RegimesData as at June 14,2024.Source:KKR Global Macro&Asset Allocation analysis.So,where do we land as we look ahead to the second half of the year and into 2025 and beyond?Most importantly,we retain our optimistic viewpoint for the following four reasons:1.We think that we have entered a structurally higher level of productivity in the United States,a backdrop that we believe will benefit capital markets globally.We were not around for the 1960s,but the surge in productivity that followed tech investment in the 1990s is likely an apt parallel,we believe.Importantly,this increase in productivity will at least partially offset some of our concerns about wider deficits in the near-term.As we detail below in Section II,we are also raising our long-term run rate for U.S.GDP to two percent from 1.5%,signaling a structural improvement in growth that we believe warrants investor attention.2.We think that central banks,especially the Bank of Japan and the U.S.Federal Reserve,have adopted policies that are actually not that restrictive from a historical perspective.For one thing,the Fed and other central banks steady states for balance sheets are still plump relative to history(Exhibit 15).If we are right that U.S.real rates peak at two percent in the coming quarters and decline below one percent over time(note:we forecast one Fed cut in 2024 and an additional four in 2025),then this Fed tightening cycle will have been a fairly mild one by historical standards.One can see this in Exhibit 16,which shows that,if our forecasts are correct,the real fed funds rate will not spend a very long time in truly restrictive territory this cycle(i.e.,at or above the level of potential GDP growth).Exhibit 14:Despite Inflation Falling on a Cyclical Basis,the New Positive Relationship Between Stocks and Bonds Remains Strong0%1%2%3%4%5%6%7%8%9%-40%-20%0 0b-20Apr-20Jun-20Aug-20Oct-20Dec-20Feb-21Apr-21Jun-21Aug-21Oct-21Dec-21Feb-22Apr-22Jun-22Aug-22Oct-22Dec-22Feb-23Apr-23Jun-23Aug-23Oct-23Dec-23Feb-24U.S.Stock-Bond Correlation and U.S.CPI,%Rolling 24 Months Stock-Bond Correlation(LHS)CPI YoY inflationData as at March 31,2024.Source:Bloomberg,KKR GBR analysis.Insights|Volume 14.3 9Exhibit 15:Despite Record Tightening at the Front End,Central Bank Balance Sheets Will Remain Plump With AssetsDec-1836%Sep-2155c-2342c-2438c-2536 %05EPU 122013201420152016201720182019202020212022202320242025G4 Central Bank Balance Sheets as%of GDP,Dollar-WeightedG4=Federal Reserve,the ECB,the Bank of England,and the Bank of Japan.Data as at September 30,2023.Source:Haver Analytics,national central banks and statistical agencies,KKR Global Macro&Asset Allocation analysis.Exhibit 16:We Think The Fed Will Bring Real Rates to Two Percent This Cycle,But No Higher-1%0%1%2%3%4%5%6%1Q232Q233Q234Q231Q242Q243Q244Q241Q252Q253Q254Q251Q262Q263Q264Q26GMAA Base Case:Real RatesFed FundsCore CPIReal RateTwo-Percent ThresholdData as at June 12,2024.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.Exhibit 17:Annual Spending on the U.S.Debt Service Burden Is Now More Than Spending on National Defense or Medicare,and More Than the U.S.Spends on Veterans,Education,and Transportation Combined$514$498$463Net InterestNational DefenseMedicareOverall Spending,US$BillionsData as at April 30,2024.Source:CBO.Traditional Macro Relationships Are No Longer Behaving the Same as in the Past1Japan is experiencing inflation,while China has disinflationary headwinds.2U.S.Treasuries and the Japanese yen are no longer the risk-off assets of choice.They are,in fact,driving much of the volatility in the capital markets during periods of uncertainty.3European growth is coming from the periphery,not the core,this cycle.4The interest rate easing cycle has started in Europe,not in the U.S.,for the first time.5We have actually raised our long-term forecast for U.S.GDP growth,despite an inverted yield curve and a low savings rate.In the past,these two macro variables were recession signals.6It is the government,not the consumer or corporates,that is most leveraged this cycle.At the same time,we think that many investors are still actually underweight their target allocations,including holding too much Cash at a time when most central banks have finished raising rates.Insights|Volume 14.3 103.Third,we think that the employment market holds up better this cycle.Some of our optimism is actually driven by demographics,especially given the exit that we have seen of aged 55 workers from the workforce since the onset of COVID.While we do expect immigration in the U.S.to create more slack in some sectors,we think this is a positive development for growth as unemployment from excess supply feels very different from the typical cyclical dynamics of over-hiring and layoffs.Exhibit 18:The U.S.Has Been Able to Grow Its Workforce Through Demographic Growth;Meanwhile,Europe and Japan Have Offset Aging Populations by Improving Participation Rates.Looking Ahead,We Think That Aging Demographics Will Require a Rethink of Both Workforce Participation and Immigration Contributions to Workforce Growth,MillionsU.S.EuropeJapan1Q2010 Workforce153.7159.865.7 Demographics11.3-3.0-3.4 Change in Participation2.714.87.0 Change in Prime-Age Male Participation-0.30.10.0 Change in Prime-Age Female Participation1.33.02.7 Change in 55-64 Participation0.59.62.0 Change in 65 Participation1.22.22.34Q23 Workforce167.8171.569.4Europe data based on the Euro-Area 19 subset of E.U.members.Latest available data as at December 31,2023.Source:U.S.Bureau of Labor Statistics,Eurostat,Japan Statistics Bureau.4.Finally,consistent with our Regime Change thesis,and because we are mostly living in a higher nominal GDP environment,we retain our conviction that a hard landing is not in the cards.The most cyclical areas of the global economy already dipped in 2022-23 and are now improving from below-trend levels.We are becoming more constructive around the potential for cyclical wage dynamics,as well as structural considerations related to technology and automation,to drive higher and faster nominal GDP growth globally.Exhibit 19:Besides China,Most Economies Are Experiencing Higher Nominal GDP This Cycle14.9%1.6%-0.5%3.9%5.7%6.0%3.1%6.5%ChinaEuropeJapanU.S.Annual Nominal GDP Growth, 11-20122022-2024E-9.2% 4.3% 3.6% 2.5 24 are KKR GMAA estimates.Data as at May 31,2024.Source:China National Bureau of Statistics,Statistical Office of the European Union,Cabinet Office of Japan,U.S.Bureau of Economic Analysis,KKR Global Macro&Asset Allocation analysis.Against this unique macroeconomic backdrop,however,we continue to argue that as investors we are experiencing a Regime Change.There remain four pillars to our original thesis:ongoing fiscal stimulus,heightened geopolitics,a messy energy transition,and stickier wages(driven largely by a shortage of skilled workers).Insights|Volume 14.3 11Exhibit 20:Pent-Up Demand in Key Pandemic-Affected Services Sectors Continues to Fuel Above-Average Job Growth in the U.S.-3%-9%-7%-7%-6%-6%-5%-3%-3%-2%-2%-2%0%0%0%3%4%-12%-10%-8%-6%-4%-2%0%2%4%6%AverageLeisure&HospitalitySupport SvcsConstructionMgmtPriv.EducationNondur.Goods MfgFinanceTotalDur.Goods MfgRetail TradeHealthcareGovernmentTransportationInformationWholesale TradeProf.ServicesEmployment vs.Pre-COVID Trend,May-24Pre-COVID trend based on linear extrapolation of 2014-19.Data as at May 31,2024.Source:U.S.Bureau of Economic Affairs,Haver Analytics,KKR Global Macro&Asset Allocation analysis.As our colleague Ken Mehlman explains,just as the invention of the printing press around 1440 introduced years of political,religious,social,and scientific disruption,the combination of the Internet and social media is a Gutenberg 2 moment that has produced and portends similar disturbances.However,while our longer-term thesis remains largely intact,we are constantly refining and evolving our convictions.To this end,we wanted to highlight whats changed since December and why we think adding more ballast to portfolios is warranted,particularly given the optimism being priced by markets during an asynchronous cycle where some sectors are slowing more quickly and inflation remains too sticky.So,as part of the next chapter of our Regime Change framework,we note the following:What Is Changing or Being Amplified Since Our Outlook for 2024?1Increasing Importance of Non-Correlated AssetsAfter two major deep dive surveys across the Family Office and Insurance universes,we have even greater conviction in our thesis around owning more non-correlated assets.Key to our thinking is that,in a world where the efficient frontier for expected returns is now flatter,the importance of diversification increases.As a result,CIOs need more diversifiers in their portfolios so that they do not get whipsawed,especially when short-term performance can be quite volatile.One can see this in Exhibit 27.If we are right,then our insight has significant implications for allocators,particularly CIOs who have embraced long-duration bonds and/or VC on the equity side,or that do not believe in linear deployment.Insights|Volume 14.3 122Portfolio Volatility Is Increasing Because of the Changing Relationship Between Stocks and Bonds,Not an Increase in Single-Asset VolatilityThere is another important influence to consider as well.Specifically,given all the movement around interest rates these days,the changing nature of government bonds in a portfolio,and greater use of concentrated ETFs by market participants(e.g.,40%of the High Yield market is now daily liquidity),the volatility of most benchmarks we track is surging to the upside,which increases the risk that a portfolio allocation change can be made at the wrong time.Some great work by Racim Allouani and Rachel Li suggests that todays heightened portfolio volatility is actually driven more by stock/bond correlation than by a surge in single-asset volatility,which was typically the case pre-COVID.This new reality is a big deal as it adds risk to a typical 60/40 portfolio,and it speaks to our view that we are indeed in a Regime Change when it comes to portfolio construction.3We Are More Focused On the Positive Path of Productivity,Especially in the U.S.Given increasing debt loads amidst larger government deficits,we are now extremely focused on the one catalyst that is best equipped to keep stagflation at bay:Productivity.As we detail in Exhibits 7 and 49,the best decades of equity performance are usually linked to periods of strong productivity gains.Against todays backdrop of stickier wages,we think that strong productivity will be needed to allow corporate margins to hold.Were productivity to slip,we likely would take a more defensive stance on risk assets,a reality that is new to our macro thinking in 2024.4The Mismatch Between Energy Supply and Demand Is More PronouncedThe mismatch between energy demand and energy supply seems even bigger than our previously bullish view.Demand is once again rising on electrification trends for EVs and heat pumps and the explosive growth in energy-intensive users such as data centers,semi fabs,EV battery plants,and steel mills.In the U.S.,for example,overall electricity demand is poised to grow 2.4%annually,compared to essentially zero in prior years.We believe as much as one-third of this growth could come from data centers,and that data centers could account for 7-10%percent of total electricity demand in the next few years,compared to two to three percent at the end of 2023.While demand is increasing,our work shows that most developed market economies dont have the infrastructure in place to meet this need.Moreover,a lot of the power demand is not where the power supply is currently located.We view this current set-up as a major opportunity for investors,especially on the Infrastructure side.5A Broadening of Earnings Growth Across Sectors and GeographiesAs we show in Exhibit 76,we have raised our 2024 and 2025 S&P 500 EPS forecasts to$250 and$270,respectively.What is changing in our data is that corporate earnings growth is set to broaden beyond mega-cap Insights|Volume 14.3 13Tech in coming quarters.We think this shift will represent more balance in the equity markets,and as a result,we are raising our 2024 target to 5,700 from 5,400 previously,which is roughly 10ove the top-down consensus estimate of 5,172.Our 2025 target of 6,130 implies about 13%of upside from todays level of around 5,414.Meanwhile,in Europe,we think the economy is bottoming at a time when most investors are underweight the region.Stronger tourism,rebounding sentiment,and an increase in real wages(at last)will lead to a perkier consumer in the coming quarters.As part of this improvement in growth,the services economy is accelerating nicely.Additionally,the end of quantitative easing breathed life back into,and produced strong returns for,the financial services sector.We expect this trend to continue as valuations normalize.6More Sustained Deficits Amid Election Volatility Reinforces Our Regime Change ThesisRegardless of the electoral outcome,the 2024 U.S.election is likely to further strengthen our Regime Change thesis.Though actual fiscal policy under Biden or Trump is not likely to loosen much given the expiration of some 2017 tax cuts or the imposition of tariffs,we continue to think that under either administration the deficit will stabilize at historically wide levels.As a result,we think Treasury term premium will stabilize at wider levels,too which will make it harder for bonds to rally the way they did in past cycles.That said,there are also several policy proposals that could skew inflationary under a second Trump presidency,including writing stimulus checks for households,deporting undocumented immigrants(which would aggravate labor shortages),cutting off Iranian and Venezuelan oil,and potentially pressing for a more dovish Fed.7The Labor Supply and Demand Mismatch Could Create Unprecedented Demand for Worker RetrainingWe think the U.S.labor force is in the early innings of an inflow of about four million additional potential workers amidst a record surge in immigration.However,our best guess is that limited formal skills training means the overwhelming majority of these workers will be competing to fill a small portion(perhaps about two million)of the 8.1 million open jobs in the U.S.As a result,we think the opportunity set for worker retraining may be as large as it has ever been,in part because there will be a lot of pressure to bring unemployed workers from low-skilled sectors(where we expect more of a labor glut in some cases)into high-skilled jobs left open by COVID-era retirements.So,while we certainly believe in the opportunity set and our glass half full perspective,we do want to acknowledge that we are entering a volatile period in the second half of 2024 at a time when spreads are already very tight.To be sure,we are not signaling a more sustained bearish tilt the way we did in 2022(see Walk,Dont Run).Rather if we could steal a page from our Outlook for 2023:Keep It Simple now is not a time to get over-extended when it comes to leverage or liquidity.The current environment,we believe,is more akin to the Oscar Wilde quote when he says that,“A pessimist complains about the noise when opportunity knocks.”Said differently,if Opportunity Knocks in the form of a capital markets draw-down linked to election uncertainty,then you should have your portfolio in position to answer the door.Dont just be the pessimist,particularly when many of todays macroeconomic headwinds can be overcome through a combination of thoughtful asset allocation and directed thematic investing.Insights|Volume 14.3 14Six Areas Where We Differ From Consensus#1:Bumpy,But Faster GrowthAcross all regions,we are again more bullish on growth than the consensus.In the U.S.,stronger assumptions around both job growth and productivity lead us to raise our 2024 forecast to 2.5%,10 basis points ahead of the consensus,and our 2025 forecast at 2.0%,20 basis points above consensus.More importantly,we have raised our long-term forecast for U.S.structural GDP growth to two percent from 1.5%in the past.In Europe,data surprises are no longer lagging the U.S.as economic momentum turns positive.We are increasing our 2024 GDP growth forecast to 0.8%from 0.5%versus a consensus estimate of 0.7%.For 2025,our growth forecast is 1.4%,the same as consensus.We think growth in China is bottoming and likely in the early recovery stage.Our 2024 forecast is at 5.0%versus 4.7%at the beginning of the year and a consensus of 4.9%,while 2025 is at 4.6%,10 basis points above consensus.In Japan,we forecast 0.6%GDP growth in 2024 and 1.2%in 2025,20 basis points and 10 basis points above consensus,respectively.#2:We Are Not as Worried About a Lower U.S.Savings Rate Signaling an Over-Extended Consumer This CycleWhile we do think U.S.consumer spending will slow in coming quar-ters,we are not seeing the type of imbalances that were observed in the run-up to past recessions.Specifically,although savings rates today are at the lowest levels since the GFC(currently around four percent,versus two to three percent in 2005-2006),we think this simple comparison doesnt account for the increase in the 65 population over the last two decades(17%today versus around 12%prior to the GFC).Personal savings rates become sharply negative once households retire,meaning aging demographics likely explain some of the savings pullback.In fact,our estimates suggest that the neutral savings rate has actually fallen to around 5.6%,down from 9-10%in the mid-2000s,implying that savings rates today are just 100-200 basis points below normal,while the savings rates that prevailed before the GFC were actually 700-800 basis points too low.Therefore,while we do expect some retrenchment,households do not look nearly as overspent as they have in the lead-up to past downturns.#3:Bigger Regional Differences in Interest Rates.In the U.S.,Whats the Rush?In the U.S.,we are above consensus on interest rates this year as part of our higher for longer thesis.We see the Fed cutting rates just once this year,to 5.125%(which puts our forecasts about 25 basis points above market forwards)before falling to 4.125%in 2025(also about 25 basis points above market pricing).For the U.S.10-year,we stick to our forecast of 4.25%for year-end 2024 and four percent for year-end 2025,which remains a bit more hawkish than consensus of 4.2%for 2024 and 3.9%for 2025.In Europe,we have the bund at 2.6%for end-2024(above consensus of 2.2%)and 2.8%in end-2025(also above consensus of 2.2%).We think sustained higher inflation volatility means a return to a longer-term average term premi-um of approximately 50 basis points,leading to a long-term bund yield target of approximately 3.0%.In China,by com-parison,we are actually below consen-sus for the 10-year for both 2024 and 2025 at 2.2%vs.2.4%,and 2.0%vs.2.4%,respectively.Against this backdrop,we think FX volatility will remain elevated and will serve as an important source of information for markets alongside the yield on government bonds.#4:Better EPS,Driven By Higher Margins We believe the cycle has further room to run,with margin expansion(as opposed to multiple re-rating)powering the next leg of the recovery.Our 2024 S&P 500 price target of 5,700 remains 10ove the top-down consensus estimate of 5,172.For 2025,our target of 6,130 implies about 13%of upside from todays level of around 5,414.For 2024 and 2025 EPS,our targets are$250 and$270,versus the top-down consensus of$240 and$253,respectively.Our framework linking real GDP growth and unit labor costs to operating margins points to 20-30 basis points of margin expansion this year and next so long as labor productivity stays supportive.#5:Oil$80 is the New$60We expect oil prices to settle in the mid-$70-80s range in 2024 amid slower global demand and better global supply.Longer term,though,we still think$80 is the new$60.As such,our longer-term forecasts remain well above futures,which continue to embed prices falling to the mid-$60-70s in 2025 and beyond.#6:Where Could We Be Wrong?Our base view is that there is an asymmetric risk for the economy and markets if rates go higher versus lower.We still see six percent short rates as somewhat of a tipping point,given this level limits operating cash flow for most levered entities as well as encourages more deposit flight from traditional financial intermediaries.Also,because policymakers did not remove as much stimulus from the markets this cycle,we continue to caution that the currency markets could be a source of unexpected stress for investors to consider in their portfolios.Finally,an extreme spike in unemployment,which is not our base case(as we think unem-ployment stays lower this cycle)would likely be unsettling for both our thesis and the markets,we believe.Insights|Volume 14.3 15What does all this mean from a macro and asset allocation standpoint?In the classic 1975 Steven Spielberg film Jaws,Chief Brody,played by Roy Scheider,proclaims after internalizing the size and power of the shark “youre gonna need a bigger boat”to Captain Quint,who was played by Robert Shaw.Brodys important epiphany was that traditional shark-catching techniques were no longer effective,and as a result,a different approach was warranted.Like Chief Brody,this is how we view asset and security selection in the current macro landscape:another approach is warranted.This viewpoint,since the onset of COVID,served as the backbone of our now well-established Regime Change thesis.As we look ahead,we still have high conviction in this framework,and if anything,we now think that the longer-term implications of our prior work may be even more profound than we had previously understood.We do not make these comments lightly,and to this end,we think that there are several key action items for portfolio managers and CIOs to consider.They are as follows:1.First,we remain of the mindset that a Regime Change(Exhibits 13 and 14)has occurred that requires a different type of portfolio,including more collateral-based cash flows,more upfront yield,and more linkage to the higher nominal GDP environment in which we are operating(Exhibit 19).Importantly,it also means that safe haven assets like government bonds and traditional currency hedges like JPY wont work as well this cycle.If there is good news,it is that our own internal work is showing that wages,which we view as a proxy for sticky services inflation,are moderating from peak levels,though KKRs portfolio company CEOs still see a higher resting heart rate for wages and inflation this cycle.2.Second,given flatter expected returns than in the past,we now think more focus on diversification is warranted.As we detail in Exhibit 21,the five-year forward median return across asset classes we forecast is 80 basis points lower than what we saw over the last five years.That said,we also see more ways to win in this cycle across a wider swath of asset classes.This viewpoint is in direct conflict with what worked before COVID,when concentrating ones assets in long-duration equities(e.g.,VC)and fixed income(e.g.,long-duration Investment Grade Debt)easily bested the benefits of constructing a more diversified portfolio.If we are right then CIOs,similar to what we learned from our proprietary insurance survey,should broaden their exposure and own more non-traditional assets that are less correlated.In addition,allocators will likely need to be more opportunistic to deploy when asset classes,regions and/or sectors periodically fall out of favor.Exhibit 21:Given Flatter Returns,We Think a More Diversified Portfolio Will Perform Better in the Future1.9-0.30.55.45.815.810.912.87.511.110.66.615.73.95.05.36.36.56.66.76.87.37.98.48.812.0Cash(USD)GlobalAg10Yr USTU.S.HYLoansS&P500STOXX600 EuropeMSCIJapanDirectLendingS&P600PrivateInfraPrivateReal EstatePrivateEquityPrivate Market Expected Returns,%Last Five YearsNext Five YearsData as at April 30,2024.Source:Bloomberg,BofA,Cambridge Associates,Green Street,KKR Global Macro&Asset Allocation analysis.Insights|Volume 14.3 16Exhibit 22:The Recent Heightened Portfolio Volatility Is More Correlation Driven Than Single-Asset Volatility Driven.This Backdrop Means That CIOs Need to Find More Assets That Bring Down Overall Portfolio Variance1.13%1.06%-0.22%0.30%0.91%1.36%Avg.2000-2022Avg.202360/40 Portfolio Variance Decomposition Rolling 3-YearSingle-asset VarianceStock/Bond CovariancePortfolio VarianceData as at December 5,2023.Source:Bloomberg,BofA,Cambridge Associates,Green Street,KKR Global Macro&Asset Allocation analysis.3.Third,in our new regime framework,we expect heightened volatility around the fundamental relationship between stocks and bond assets,which have become more correlated.As a result,traditional benchmarks are likely to demonstrate more volatility than in the past.Somewhat ironically,our colleague Chris Sheldon likens the current state of affairs in the global capital markets to self-inflicted wounds,as investors desire for greater liquidity increases volatility given so much of the fixed income market is actually now in equity linked,daily liquidity credit vehicles.One can see this in Exhibit 22,which shows that the increase in stock/bond covariance is leading to higher overall portfolio variance.Importantly,this outcome is occurring despite single asset variance actually declining.Our bottom line:Allocators should consider a shift towards assets that help overcome this increasing correlation between stocks and bonds.Greater communication with boards and end constituents is also likely becoming more important.Otherwise,there is now heightened risk that boards encourage CIOs and their teams to tamp down on certain single asset class allocations at precisely the wrong time,which ultimately could further dent cumulative performance in a world where the investment community is already starting with lower expected forward returns.Our bottom line:Allocators should consider a shift towards assets that help overcome this increasing correlation between stocks and bonds.Greater communication with boards and end constituents is also likely becoming more important.Otherwise,there is now heightened risk that boards encourage CIOs and their teams to tamp down on certain single asset class allocations at precisely the wrong time,which ultimately could further dent cumulative performance in a world where the investment community is already starting with lower expected forward returns.Insights|Volume 14.3 17SECTION IAsset Allocation and Key ThemesPicks and PansAgainst the current macroeconomic setting,we offer our updated Picks and Pans for investors to consider:Public Company Buyouts of Themselves(NEW)We are seeing a growing number of public companies that are essentially taking themselves private through better capital allocation,including aggressive buyback programs.A good example,we believe,is the home building sector.We are also seeing this type of corporate reform behavior in the U.S.home improvement sector as well as in parts of the industrial and energy sectors.In our view,many executives in this area are de-emphasizing the cyclical components of their businesses to create more sustainable companies with greater visibility of earnings and returns.As a result,we think that not only solid buyback activity but also a lower cost of capital could drive valuations materially higher at many of these companies than the consensus now thinks.Exhibit 23:Europe Has Historically Done More Dividends and Fewer Buybacks,But That Is Changing0501001502002010201120122013201420152016201720182019202020212022202320242025Euro Stoxx 600 ex-Financials Gross Buybacks,Billions and GS EstimatesData as at April 24,2024.Source:Goldman Sachs.We are of the view that all-in yields are likely near peak levels,as cooling inflation will give the Fed more conviction on interest rate cuts and easing financial conditions.Insights|Volume 14.3 18Exhibit 24:U.S.Buybacks Have Been Driven by Solid Earnings Growth and Tech Stocks,Contributing Mightily to the Lack of Supply89297802004006008001,0002010201120122013201420152016201720182019202020212022202320242025S&P 500 Annual Gross Buybacks,US$BillionsData as at March 31,2024.Source:S&P,Haver Analytics,KKR Global Macro&Asset Allocation analysis.CLO Liabilities(NEW)We are of the view that all-in yields are likely near peak levels,as cooling inflation will give the Fed more conviction on interest rate cuts and easing financial conditions.While we still like Loans,our preference is to play this idea through higher-quality CLO tranches,as diversification benefits and credit enhancement matter more in an environment where idiosyncratic risks are elevated(particularly when it comes to refinancing).We also think that CLOs fit into our higher for longer thesis on rates relative to pre-COVID.Biotechnology(NEW)We think the recent drawdown in biotech stocks is likely overstated when one compares it to how the rest of the equity market has performed.Just consider that the Nasdaq biotech index is down about 19%from its 2021 peaks,while the S&P 500 has actually climbed about 19%over the same period.Nonetheless,we continue to think biotech remains one of the most compelling secular growth stories in the market,backed by aging populations,increased technological investment,and the fact that a lot of weaker startups have struggled to raise capital/IPO in recent years.Our bottom line:We are turning more bullish on the sector,particularly when one accounts for the fact that valuations in price-to-book terms are now hovering near the lowest levels since the GFC.USD EM Corporate Debt(NEW)While we remain bullish on the growth trajectory for emerging markets,we continue to think that EM Public Equity markets may not be the best way to play this theme,as they are often overweight state-backed enterprises that do not prioritize returning profits to shareholders.By contrast,we like opportunities in the private markets to work alongside local partners to align with key growth themes,as well as opportunities in the public debt markets(particularly as EM default rates are often lower than those for U.S.corporates).At present,we especially like the relative value opportunities in EM Debt to lend to some of the same quasi-governmental enterprises that drag on EM index returns,as these companies carry more protection than typical corporates while offering excess spread relative to their inherent risk.Short Duration European Credit(NEW)Not only does European HY screen cheap to U.S.HY on a spread basis,but we believe historical levels suggest there is more opportunity for high quality senior secured assets to tighten relative to the U.S.Importantly,European HY maturities tend to be shorter,and against this backdrop,we expect fully 35-40%of European HY to mature by the end of 2026.Taken together with ECB rate cuts,this reality offers near-term takeout opportunities for bonds that still have convexity.Moreover,in many instances across Europe,we think that there is some compelling convexity that remains,particularly for any issuers that will try to use future rate cuts as an opportunity to address existing short-term debt.Insights|Volume 14.3 19Exhibit 25:Fully 35-40%of Euro HY Is Maturing by the End of 2026.We See This Refinancing Opportunity as Significant 0%5 %0-11-22-33-44-55-66-77-10 10-30European vs.U.S.HY Maturity,YearsUS HYEU HYData as at April 30,2024.Source:Bloomberg.Japan(REPEAT)We continue to remain constructive on the investing environment in Japan and believe that an economic reawakening is in progress.We see a transition underway in the coming years from the post-COVID,pent-up,demand-driven recovery to a second phase,fueled by real income growth.Capital expenditures remain elevated,which is critical to boosting productivity to offset not only the increase in wages but also the price increases in food and oil.We take comfort that corporate reforms,especially around listed companies,continue to gain momentum under Prime Minister Kishida.We also still see opportunities in corporate carve-outs and significant value in direct public to privates,as we believe the opportunity for operational value creation is meaningful.That said,we do expect the yen to remain weaker for longer and highly volatile,likely only strengthening once the Fed begins its easing campaign.Against this backdrop,we think sound hedging and portfolio construction is only becoming more important.365 Day Lending,Including Fund Financing(REPEAT)If we are right that the Fed cuts rates more gradually than markets expect,then the carry offered by the front end of the curve is going to be an important driver of performance in 2024.We are particularly interested in term subscription lines as an opportunity to receive above-market compensation for exposure to high-quality counterparties in a space where regional banks have pulled back on new lending.Today,a sub-line with less than a 365-day maturity generally yields SOFR 200-250 basis points,which we think could be attractive as a Cash plus surrogate with low default potential.Importantly,this opportunity screens well from a cyclical risk standpoint,as banks are beginning to move back into this market which could tighten pricing in the next few quarters.U.S.Leveraged Loans Refinancing Wave(NEW)Similar to what we are saying about European High Yield,we think the wave of refinancing for leveraged loans will continue,driving better total returns for discounted Leveraged Loans nearing maturity.All told,year-to-date through May,U.S.Leveraged Loan issuance stood at$550 billion,of which fully$198 billion(36%)was driven by refinancing activity.We look for this theme to continue in coming quarters as spreads across risk assets have continued to compress.As our colleague Chris Sheldons recent credit letter suggests,sponsors and issuers are looking to reprice and refinance existing debt,which will continue to provide tailwinds for the asset class and will likely drive spread compression absent new M&A.Insights|Volume 14.3 20Exhibit 26:We Believe Reinsurance Capital Solutions Can in Certain Situations Provide Meaningful Diversification,Reduced Volatility,and Enhanced PerformanceAssetModel Portfolio(Weighting or Ratio)Alternative 1Alternative 2Alternative 3Alternative 4Equities60UUP%Bonds40550%Insurance Assets0%5%5 %Annualized Return5.4%6.3%5.8%6.6%7.9%Volatility13.2.9.3.0.8%Return Risk Ratio0.41x0.48x0.47x0.55x0.73xDifference in Basis PointsModel Portfolio(Weighting or Ratio)Alternative 1Alternative 2Alternative 3Alternative 4Annualized Return5.4% 90 39 129 257Volatility13.2%-27-92-120-239Return Risk Ratio0.41x 0.08x 0.06x 0.15x 0.33xEquities:MSCI ACWI Gross Total Return USD Index;Bonds:Bloomberg Global-Aggregate Total Return Index;Alternative Portfolio:Reinsurance transactions.Data from 1Q18 to 1Q24.Source:KKR GBR analysis.Reinsurance Capital Solutions(NEW)A continuing refrain we heard from our recent survey work was the growing desire to own longer duration,compounding-oriented assets with tax-efficient attributes,especially for family offices/high net worth investors.Importantly,we believe participating in reinsurance transactions(or what we call insurance as an asset class)can be an effective complement to yield-oriented asset classes such as Private Credit and/or Asset-Based Finance.At the same time,the high return on capital attributes of this asset class also enable allocators to play offense with their portfolios.The market potential for insurance as an asset class is quite sizeable,as we increasingly see that a growing number of insurers are looking for partners to reinsure block transactions,or actually exit lines of business.Beyond stable returns and solid yield characteristics,the asset classs low correlation to other more traditional fixed income products is quite compelling if our bigger boat thesis is accurate.Exhibit 27:Which Is In Line With Our Diversification Thesis for Portfolio Construction Model PortfolioAlt 1Alt 2Alt 3Alt 4-2%0%2%4%6%8%5 %Annualized ReturnVolatilityVarious Reinsurance Transaction Portfolios Volatilityand Annualized Return vs.a Traditional 60/40Equities:MSCI ACWI Gross Total Return USD Index;Bonds:Bloomberg Global-Aggregate Total Return Index;Alternative Portfolio:Reinsurance transactions.Data from 1Q18 to 1Q24.Source:KKR GBR analysis.Insights|Volume 14.3 21 Out Year Oil Prices(REPEAT)We expect oil prices to moderate to the mid$70-80 range amid slower global demand and better global supply next year.Longer term,we still think$80 is the new$60.Shale is still the key source of longer-term global supply growth,and producers continue to demonstrate a disinclination to grow supply unless prices center at least around$80.This forecast remains well above futures,which continue to embed prices falling to$60-70 in 2025 and beyond.Exhibit 28:If We Are Correct That Shale Producers Are Now Focused On Generating Attractive FCF and ROEs,We Think Around$80 Is the Long-term Price Level Required to Achieve Those Aspirations201220132014201520162017201820192020202120222023-40%-30%-20%-10%0 00405060708090100110Avg.WTI Oil Px(US$/Barrel)Median ROE of Oily E&Ps*WTI around$80 has beenrequired to generate asustainable 10% ROEMemo:2012-2023Avg.WTI$/bbl:$69Oily E&P ROE:5%Median ROE of Oily E&Ps vs.Avg.WTI Price*Median of COP,EOG,PXD,OXY,FANG,APA,PDCE,MGY,MUR,DEN,CIVI,CRC,SM,CDEV,TALO.Data as at December 31,2023.Source:Bloomberg.Opportunistic Credit(REPEAT)This Pick has multiple threads to it.For starters,we see significant value in opportunistic liquid Credit vehicles that can nimbly toggle allocations across High Yield,Levered Loans,and Structured Credit as well as between sectors and themes,particularly as a repricing of spreads and the risk-free rate create select pockets of relative value.We also think that wider dispersions within Credit asset classes,often driven by indiscriminate ETF buying and/or selling,are creating substantial opportunities that were not available in the past.At the same time,we are seeing some really attractive relative valuation in the bucket we call Capital Solutions Credit to fund acquisitions and/or major capital expenditures including domestic re-shoring initiatives.In particular,it definitely feels to us like there is an upward kink in the efficient frontier that is providing investors in products like Convertible Bonds and Preferred Securities the ability to enjoy some attractive equity upside participation but also retain some downside protection at limited additional costs.Finally,Asia Credit also remains an area of growing interest from investors,as this more nascent market faces less competition from more traditional players.Worker Retraining(NEW)The latest CBO figures imply that total U.S.immigration may be roughly 5.5 million people higher over 2023-2027 than previously expected(or more than double what the CBOs previous forecasts for run-rate immigration had assumed).While that should help alleviate labor scarci-ty,given there are some 8.1 million open jobs in the U.S.,the bad news is that the majority of new workers will be qualified for only about two million of these open posi-tions.Thus,we think there is a massive economic op-portunity to invest in better worker training that can help move many workers into higher-skill job openings across manufacturing,logistics,nursing,etc.,that have been left open as a result of baby boomer retirements or growing needs.Against this backdrop,a rethinking in approach may be warranted.Areas where we see opportunity could include:1)shifting job requirements from a credentials first model to a skills first model.Importantly,we believe this will optimize ROI in education and training and also lead to more employable people;2)reliance on certificates to confirm training of people in areas of specific need and employment relevance;3)a skills first model that allows workers and employers to understand skills adjacency,fa-cilitating the upskilling of existing workers whose jobs have some overlap with or even all of,the skills needed;and 4)expansion of hybrid platform models that provide online credentialing paired with personalized coaching.Insights|Volume 14.3 22Exhibit 29:U.S.Worker Turnover Rates Are Much Higher Than Those in Other Developed Countries1Q245.1%2.8%1.72345678Mar-06Mar-07Mar-08Mar-09Mar-10Mar-11Mar-12Mar-13Mar-14Mar-15Mar-16Mar-17Mar-18Mar-19Mar-20Mar-21Mar-22Mar-23Mar-24Quarterly Job Vacancy Rates by Country,%U.S.EurozoneJapanData as at March 31,2024.Source:U.S.Bureau of Labor Statistics,Eurostat,Bank of Japan,Haver Analytics.Exhibit 30:The U.S.Spends Less On Worker Retraining Than 31 Out of 32 OECD Countries Studied0.01%0.10%0.14%0.14%0.16%0.63%0.66%0.72%0.74%0.77%0.90%1.00%1.01%1.27%2.05%MexicoUnited StatesJapanLatviaIsraelGermanyLuxembourgBelgiumAustriaNetherlandsHungaryFinlandFranceSwedenDenmarkPublic Expenditures on Assistance and Retraining forUnemployed Workers in Top Developed Economiesas a%of GDPBottom FiveTop TenOf the 32 countries included in thedata,the U.S.spends nearly the lowestpercentage,second only to MexicoData as at December 31,2022.Source:U.S.Department of Commerce.Multifamily Real Estate(New)For some time now,we have been advocating an overweight to Real Estate Credit.We now see good value on the equity side,too.Key to our thinking:U.S.rental vacancies are at their lowest levels in about 40 years(except for the pandemic),while run-rate household formation will likely run at a higher rate than rental units can be delivered given the pullback in building starts.Importantly,we think the recent surge in U.S.immigration will only add to these imbalances,as it could potentially double the number of households formed over the next three years.Finally,we think market technicals are becoming more bullish,too,including signs that cap rates have now started to peak(as more transactions are taking place between buyers and sellers)as well as tighter spreads for RE lending(including the CMBS market).So,while we are not yet ready to run when it comes to RE allocations,we think owning some existing multifamily in strategic geographies could be quite fortuitous,particularly in cases where replacement costs are near or above asset values.Fade Fed Rate Cuts When the Market Gets Euphoric(REPEAT)If we are right that we are in a higher nominal GDP environment with increased levels of productivity,then the neutral rate for Fed Funds likely stays higher this cycle.As such,we do not share the consensus view of two or so rate cuts this year.Rather,we stick to our view that inflation is on a cooler path but will not return to the Feds target range of two percent.Therefore,we would use periods of dovish euphoria to hedge out interest rate risks(like the opportunity set that was presented to investors during the banking crisis of 2023).Insights|Volume 14.3 23 Low-Cost Consumer Discretionary(REPEAT)As we have written before,younger and lower-income U.S.consumers have been the most exposed to inflation this cycle,which is weighing on available spending.Moreover,a lot of inflation today is in must-have categories like food,housing,etc.,which is taking wallet share from discretionary spending on nice-to-have budget items like restaurants or recreational goods.Finally,we think the composition of low-income demand is likely shifting away from categories like fast-casual dining as a surge in immigration leads to more competition for both employment and low-cost housing.Against this backdrop,although the consumer in aggregate has mostly recovered from the inflation shock of 2022,we remain cautious about the outlook for nonessential spending among this cohort.FX Risks(NEW)We think the asynchronous experiences of major world economies around inflation and growth will create more volatility in both interest rates and currencies,particularly in cases where countries face tradeoffs between the long-term effects of higher bond yields on budgets versus the impact of weaker currencies on trade balances.To see this,one can consider the divergent experiences of the U.S.and Japan in recent years:U.S.bonds have become quite cheap,while its currency has strengthened sharply.Japanese bonds remain expensive,which should help government deficits,but its currency is at 30-year lows.There are also crosscurrents from geopolitics,including reserve balances and FX interventions,to consider.Our bottom line:betting on currency returns is likely a poor risk/reward for most investors right now,which is why we prefer FX hedge benefits for USD investors to potential currency upside in most cases.Key ThemesWe also think that leaning into themes that serve as foils to todays uncertain landscape is critical.To this end,we are enthusiastic about the following investment trends:1Buying Complexity,Selling Simplicity in the Equity Markets While we still favor simplicity in Credit markets,we are seeing some interesting opportunities around complexity in the Equity markets.In addition to direct public-to-private transactions,we believe that corporate carve-outs are amongst the most attractive ways to find devalued and underappreciated companies in bifurcated markets markets that too often seem to eschew complexity in favor of simplicity at almost all costs.In particular,we still believe the opportunity set to acquire high-quality carve-outs across PE,Infrastructure,and Energy remains outsized in todays markets.In our view,it would not be unreasonable,for example,to expect corporate carve-outs in large markets like the U.S.and Japan to account for a third or more of total deal volume during the next 12-24 months.Importantly,prices for these types of transactions tend to be much more attractive than regular way private-to-private transactions,and the operational upside has also generally been more significant than regular way Private Equity transactions.Insights|Volume 14.3 24Exhibit 31:The Industrials Sector Is Becoming Much More Fragmented536 14 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Top 10 Largest Industrials as a%of S&P Industrials byMarket CapData as at May 31,2024.Source:Factset,Melius Research.Exhibit 32:We Expect Divestments in Japans Corporate Carve-Out Arena to Continue3,3681,217SubsidiariesAffiliatesTop Five Select Japan Conglomerates Number of Subsidiaries and AffiliatesSubsidiaries refer to subsidiaries with consolidated financial statements.Affiliates refer to unconsolidated subsidiaries.Data as at March 31,2022.Source:Company disclosures,KKR Global Macro&Asset Allocation analysis.Just consider that the projected increase in AI electricity demand is roughly equivalent to adding 24 million homes(or 16%of total housing stock)to the grid.2 Collateral-Based Cash FlowsOur research continues to show that many individual and institutional investors are still underweight Real Assets,especially Infrastructure and Energy,at a time when the need for inflation protection in portfolios remains high.Moreover,if we are right about the AI-electricity demand that we are forecasting,then the opportunity set to own growthier Infrastructure assets,especially around data centers,logistics,etc.,is quite compelling,we believe.Just consider that the projected increase in AI electricity demand is roughly equivalent to adding 24 million homes(or 16%of total housing stock)to the grid.Finally,as we show below,the benefits of using Real Assets,especially Infrastructure,Real Estate Credit,Asset-Based Finance,and certain commodity investments,to increase portfolio diversification dovetail nicely with our current macro view about the need to find more diversifiers in ones portfolios.One can see this in Exhibits 33 and 34,respectively.Exhibit 33:We Think More CIOs May Need to Focus on the Diversification Benefits of Non-Traditional Asset Classes,Particularly InfrastructureAsset Class Correlations,Quarterly,Using Last 12 Months Total Return From 2012-2023 IGRMBSCMBSPublic EquitiesStructured CreditPrivate EquityPrivate CreditRE EquityInfraIG100%RMBS920%CMBS960%Public Equities50(D0%Structured Credit35%64p0%Private Equity29(I0%Private Credit7%-17%5xuv0%RE Equity-20%-19%-173RU0%Infra-3%-19%-6F!cUT0ta as at September 30,2023.Source:Cambridge Associates,JP Morgan,Bloomberg,KKR Global Macro&Asset Allocation analysis.Insights|Volume 14.3 25Meanwhile,within Credit,we favor Real Estate Credit and Asset-Based Finance as a play on our Regime Change thesis.Even with inflation cooling and the Fed approaching an easing campaign,we still think higher for longer will remain in play.As a result,we see a potential upward re-rating of structured products that are being used to finance Real Assets such as houses,aircraft,renewable power assets,and warehouses.Importantly,these products also have a degree of inflation linkage,given they are backed by hard assets that tend to rise in value with consumer prices,and they often have floating coupons that may benefit lenders during periods of higher rates.3 Productivity We continue to believe that corporations will need to focus on automation and productivity to offset skills mismatches and labor shortages in certain instances.In our view,many of the most influential technological trends,including automation and digitalization that were in place before the pandemic have now only accelerated,especially on the industrial side of the economy.We think that the recent uplifts in productivity are not anomalies but instead are closely linked to a resurgence in capital investment that began around 2014.To date,the most advanced efforts have been heavily concentrated in the manufacturing industry,which in the United States accounts for less than 10%of total employment but nearly 90%of all robot installations.However,the playbook is starting to shift,as the aging population makes it harder to fill junior roles in service industries;we believe this trend will only accelerate as automation increases in fields like retail,leisure and hospitality,and healthcare.We are also very bullish on trends in worker retraining.Using data and educational techniques to improve student/employee skills to better match the demand by corporations for labor will be a mega-theme,we believe.No doubt,automation and productivity are emerging as some of the most compelling mega-themes this cycle,in our view,and at times have accounted for about 20-25%of our deal teams PE activity since the pandemic.Exhibit 34:Regime Change:We Think That There Is a Need to Shift Ones Asset Allocation Mix Towards More Investments Linked to Nominal GDP60/40PortfolioAlts Enhanced40/30/300%1%2%3%4%5%6%7%8%9%0%5 Year Historical Average Annual Returns 20 Year Historical Annual Volatility20 Year Average Annual Returns and Volatility of RealAssets and 60/40 PortfoliosEfficient Frontier w/Traditional AssetsEfficient Frontier w/Traditional&Private Real AssetsEfficient frontier calculated using quarterly total returns over the last 20 years ending in March 2023.Traditional asset efficient frontier constructed using the MSCI World Index for Global Equities,the Bloomberg Global Aggregate Treasury Index for Global Government Bonds,the iShares TIPS Bond ETF for TIPS,and the Bloomberg Global Aggregate Corporate Index and Bloomberg Global High Yield Index for Global IG and HY Corporates.Efficient frontier with traditional and Private Real Assets uses all of those indices,plus the MSCI U.S.REIT Index for Global REITS,Commodities proxied using the S&P GSCI Spot Index,Global Private Infrastructure is proxied using the Burgiss Global Infrastructure Index,Private Real Estate proxied using the Burgiss Global Real Estate Index,and the Giliberto Levy Commercial Mortgage Index for Private Real Estate Debt.Data as at March 31,2023.Source:Bloomberg,Burgiss,Giliberto Levy,KKR Global Macro,Balance Sheet&Risk analysis.We are also very bullish on trends in worker retraining.Using data and educational techniques to improve student/employee skills to better match the demand by corporations for labor will be a mega-theme,we believe.Insights|Volume 14.3 26Exhibit 35:Overall,Higher Wages Should Lead to Productivity Growth Over Time,Particularly for Skilled Positions-4%-2%0%2%4%6%8%0.5%1.5%2.5%3.5%4.5%Labor Productivity,2-year lagWage inflation,Y/y%Wage Inflation vs.Labor Productivity inU.S.Manufacturing,ta as at April 30,2024.Source:U.S.Bureau of Economic Analysis,U.S.Bureau of Labor Statistics,KKR Global Macro&Asset Allocation analysis.4Security of Everything We remain the maximum bullish on this theme.Against a background of rising geopolitical tensions,cyberattacks,and shifting global supply chains,CEOs around the world tell us that they want to know that they have resiliency when it comes to key inputs such as energy,data,transportation,and pharmaceuticals.In particular,we think that regulators and executives in the financial services industry feel strongly that cyber protection spending should accelerate more meaningfully,especially after the 2023 hack of the Treasury market.This theme also ties into rising temperatures around the world.Companies will need to ensure the security of storage,power,and transportation,and with government spending initiatives/tax incentives like the Inflation Reduction Act(IRA)in the U.S.,a lot more government support will be targeted at the intersection of climate and supply chains.We also think that the defense industry will continue to benefit mightily from this theme.5 Intra-AsiaMultiple trips to Asia since the onset of COVID confirmed for us that a meaningful transition is occurring:Asia is becoming more Asia-centric,with increased trade within the region rather than simply with developed markets in the West.Already,the share of Asian trade with regional partners(versus with the West)has increased massively to 58%in 2021 from 46%in 1990.We believe that more market share gains are likely,particularly when one considers that intra-Europe trade stood at 69%in 2021.All told,we think that intra-Asian trade could hit 65-70%in the next five to seven years.Key areas on which we are focused include transportation assets,subsea cables,security,data/data centers,and energy transmission.Importantly,local banks are taking more of the local market share as part of this build-out.Before the Global Financial Crisis,Western financial firms accounted for two-thirds of the regions overseas lending.Today,by comparison,local Asian banks,led by China,Japan,and Singaporean entities,account for more than half.We also see more countries in the region participating in and robustly benefiting from the Asia global growth engine.Frances Lim believes that India and Southeast Asia in particular stand to benefit from the ongoing changes.In addition to favorable demographics,more multinational companies are expanding their footprints beyond China,which remains an important influence too.This building of resiliency into supply chains has led to opportunities in data centers,logistics,and lower-cost manufacturing in the region.Insights|Volume 14.3 276 Intersection of AI and Energy SupplyIn recent months we spent a substantial amount of time with internal and external constituents digging into whether we have the power supply to handle all the bullish demand sentiment we are now seeing.Our conclusion is that the constraint is on the supply side,not on the demand side,and that this mismatch will be one of the biggest investment stories over the next few years across North America,Europe,and Asia.All told,our best estimate is that power demand in the U.S.will increase at a CAGR of 2.0-2.5%over the next five years,compared to zero for the past five years.As this growth accelerates,data centers alone are expected to account for 7-10%of total energy demand by 2029,compared to two to three percent today.If we are right,then billions of dollars will be required across natural gas,renewables,transmission,and other forms of infrastructure.As part of our thesis,we expect energy efficiency,including cooling procedures,to become a significant area of growth.A recent trip to Spain in early June to drill down on this topic not only reinforced our conviction about the growing demand side of the equation,but also the emerging bottleneck in production that will need to be met in Europe through more supply of renewables as well as additional grid upgrades.All told,our best estimate is that power demand in the U.S.will increase at a CAGR of 2.0-2.5%over the next five years.Exhibit 36:By 2030,Data Centers Could Account for 4.5%of Global Energy Power Generation 0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.000100015002000250020102015202020252030Global Data Center Power Usage Per Year,TWhBase Case:Data Center Power Usuage,LHSAccelerated Case:Data Center Power Usage,LHSBase Case:%of Global Power Generation,RHSData as at March 31,2024.Source:SemiAnalysis.Exhibit 37:Hyperscalers,Which Are the Biggest and Fastest Growing Part of the Market,Require More Energy,Racks,and Cooling Systems010203040506020232024202520262027Rack Density,KW/RackEnterprise and Colocation Data CentersHyperscale Data CentersData as at March 31,2024.Source:JLL.Insights|Volume 14.3 287 Demographic Challenges to Retirement SecurityWhile we believe productivity is in the early stages of an upcycle,we also remain cautious that productivity growth will not be enough to offset the negative impact of a rapidly aging global labor force.Recall that the dependency ratio,or the ratio of the 65 population relative to the working-age population,rose from 18%in 1990 to 30%in 2020 and is expected to rise to 37%by the end of the decade.Said differently,the working-age population is peaking in many parts of the world,while the base of older workers they need to support is growing rapidly.Increased fertility efforts will be required.This challenging demographic landscape will also further incentivize governments and corporations to encourage more domestic savings,including annuities and other tax-deferred savings vehicles in the developed markets.In the emerging markets like India,by comparison,we expect the government to introduce new programs that help shift individuals out of gold and real estate into more traditional capital markets savings vehicles.Exhibit 38:Wealth and Retirement Savings Are Now Greatly Skewed Towards Older Demographics.We Think These Types of Imbalances Will Capture the Interest of Governments Regarding Retirement Security Household Assets by Age Group,US$Trillions and%of TotalAssets,US$TrillionsAs a%of Total AssetsAge202320012023200155 and Older$114$2669Q-54$37$19227%Under 40$15$69ta as at December 31,2023.Source:Federal Reserve.At the same time,existing savings will need to be restructured and/or reorganized,we believe.For starters,just consider that the sizeable wave of retirements experienced in the U.S.and other economies in recent years was linked to financial security that elderly workers enjoyed from rising housing prices,especially post COVID.However,elevated housing prices,combined with structural housing shortages in developed markets,mean that workers will increasingly need to seek alternative vehicles for wealth accumulation going forward.All told,in the U.S.for example,the percentage of total assets owned by the aged 55 age cohort has grown from 51%in 2001 to 69%in 2023 driven in part by a 4x increase in Real Estate assets during that time.One can see this in Exhibit 38.In our view,homeowners will now need to diversify their holdings to create more balanced retirement plans.At the same time non-homeowners,many of whom have had to dedicate more of their current income to cover rental costs,will need to find ways to create catch-up savings,given that they have not benefitted from the home asset price appreciation.In our view,neither task(i.e.,diversification of assets by homeowners as well as much needed catch-up savings for non-homeowners)will be that easy to accomplish without utilization of more professional advice and government incentives.Our final point on retirement security is that we think there will be a blurring between national security and economic security.Simply stated,we expect a greater number of politicians to encourage citizens to keep their savings at home.Indeed,a recent speech by President Macron,for example,identified that Europe is challenged by not having an integrated financial system to ensure that savings are funding innovation and private investment on the continent.Rather,he cited an estimate of 300 billion flowing to U.S.Treasuries,which in his view helped fuel American,rather than European,growth.This vocal viewpoint frankly did not come as a total surprise to us,as to some degree,many political leaders want to lower their cost of capital and reduce dependence on foreign flows,especially in countries that run large deficits.As such,we have seen a notable increase in tax-deferred savings accounts that in addition to the demographic headwinds that countries face help limit some of the anxiety around running large deficits and/or depending on other countries to fund their growth.Insights|Volume 14.3 29SECTION IIGlobal/Regional Economic ForecastsAfter convening our mid-year GBR IC,we left thinking as a team that global growth was actually sturdier than we had originally forecasted.This stronger for longer viewpoint is consistent with some of the work done by Dave McNellis showing that the risk of a recession was overblown.In fact,most recessions he and the team studied were caused by inventory de-stocking and major slowdowns in housing neither of which we see in the cards for 2024(Exhibit 44).Meanwhile,as we detail below,two recent trips to Europe with Aidan Corcoran made us feel better that the region is showing a cyclical upswing in both corporate profit and GDP growth.Finally,within Asia,it also feels a little better than when we did our last update.However,given all the uncertainty in the world,we do continue to create scenario analyses in conjunction with our deal teams to help ensure that our underwriting remains both dynamic and resilient.Meanwhile,as we show in Exhibit 39,on the inflation front we have inflation in line with consensus in both the U.S.and Europe for 2024.However,for 2025,we are modestly below the consensus across every region except the United States,which would represent one of the first times since COVID that we are forecasting a more dovish message,albeit we still do not see inflation levels trending towards central bank targets.The one major outlier to consensus remains China,which we still see experiencing very low inflation amidst declining nominal GDP.After convening our mid-year GBR IC,as a team we left thinking that global growth was actually sturdier than we had originally forecasted.Exhibit 39:Our Forecasts Reflect the Asynchronous Recovery Happening in the Global Economy2024 Real GDP Growth2024 Inflation2025 Real GDP Growth2025 InflationGMAABloombergGMAABloombergGMAABloombergGMAABloombergNewConsensusNewConsensusNewConsensusNewConsensusU.S.2.5%2.4%3.2%3.2%2.0%1.8%2.5%2.4%Euro Area0.8%0.7%2.4%2.4%1.4%1.4%2.1%2.1%China5.0%4.9%0.6%0.7%4.6%4.5%1.3%1.5%Japan0.6%0.4%2.3%2.4%1.2%1.1%1.7%1.8%Note:KKR GMAA estimates and Bloomberg consensus forecasts.Data as at June 7,2024.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.Insights|Volume 14.3 30Exhibit 40:Our Probability Weighted GDP Forecasts Still Tilt Towards Higher Growth and Stickier Inflation Over Time KKR GMAA Real GDP Forecast and Probability,%KKR GMAA Inflation Forecast and Probability,seLowHighBaseLowHighU.S.20242.5%1.0%3.5%3.2%2.5%4.0 252.0%0.0%2.5%2.5%2.0%4.0%Euro Area20240.8%0.3%1.2%2.4%2.0%3.0 251.4%0.3%2.0%2.1%1.2%3.0%China20245.0%4.6%5.4%0.6%0.2%1.0 254.6%4.0%5.2%1.3%0.8%1.8%Japan20240.6%0.2%1.0%2.3%1.8%2.8 251.2%0.7%1.7%1.7%1.2%2.2%Note:KKR GMAA estimates.In the U.S.and Europe for 2024 and 2025,we assign a probability of 60%for the base case,20%for the bear case,and 20%for the bull case.In China for 2024 and 2025,we assign a probability of 60%for the base case,25%for the low case,and 15%for the high case.In Japan for 2024 and 2025,we assign a probability of 60%for the base case,20%for the low case,and 20%for the high case.Data as at May 31,2024.Source:KKR Global Macro&Asset Allocation analysis.U.S.GDPForecasts:Our 2024 U.S.GDP moves down slightly to 2.5%from 2.7%previously.As such,we are now 10 basis points above consensus.The biggest driver of our revision is the slowdown were seeing in discretionary goods spending,particularly among lower income consumers.Meanwhile,an important offset is that TMT investment spending is running even stronger than wed had penciled in,with AI-related investment a key driver.For 2025,we see growth moderating towards two percent,although the key cyclical drivers of GDP growth(i.e.,fixed investment and inventories)should remain supportive.Notably,our forecasts are 20 basis points above the consensus for 2025.Importantly,for 2026 and beyond,we are raising our forecast for run-rate GDP growth to two percent(in line with consensus)up from 1.5%previously reflecting stronger tailwinds from labor force growth and productivity gains.We do not make this statement lightly;however,given the gains we are seeing in productivity as well as some much needed growth in the U.S.workforce,we feel comfortable making this more structural change to our forecast.Commentary:Upward U.S.GDP revision trends are now finally flattening out for the first time in a year.Our U.S.outlook has been consistently more optimistic than consensus ever since the regional banking crisis broke out last spring.Key underpinnings of our constructive outlook have been 1)the ongoing pull of labor market demand,particularly in pandemic-affected services industries,2)the continuing drumbeat of long-tailed fiscal support,3)the health of balance sheets,particularly on the consumer side,and 4)the resilience of the most cyclical areas of the economy,including construction and inventories.Importantly,all of these tailwinds remain in place,though now with a bit less strength on the consumer side,as job trends normalize and revenge spending continues to dissipate,particularly at lower incomes.Overall,this U.S.expansion remains one defined by rolling sector cycles.In 2022,the key headwind to growth was in residential construction.In 2023,it was an inventory correction related to supply chain reopenings.In 2024,the new wrinkle is a slowing in consumer discretionary spending(something weve been expecting,which is why our forecast revision really reflects the timing rather than the severity of a consumer spending pullback this cycle).Importantly,however,each of these sector cycles has been offset by strength elsewhere.In 2024,we think the offsets are persistently wide government deficits,AI-related investment and less drag from inventory normalization.Importantly,for 2026 and beyond,we are raising our forecast for run-rate GDP growth to two percent from 1.5%previously.Insights|Volume 14.3 31Exhibit 41:Our Cycle Indicator Is On the Verge of Moving Towards Early Cycle After Being in Late Cycle and Contraction Period for Almost Two YearsKKR Cycle IndicatorHomebuilderSentimentInventory/Sales RatioKKR IndicatorApr-24Earnings RevisionsM&A VolumeYield CurveISM New OrdersConsumerSentimentCredit SpreadsJobless ClaimsKKR Indicator 2Q22Job Quits-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.53.0Number of Standard DeviationsAbove/(Below)LT TrendNumber of Standard Deviations Above/Below 6M AgoContractionEarly Cycle RecoveryMid Cycle Expansion Late Cycle SlowdownThe KKR cycle indicator is an equal-weighted average of 10 components spanning the labor market,corporate activity,financial conditions,cyclical activity,and the consumer.Data as at April 30,2024.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.As we show in Exhibit 41,our proprietary business cycle indicator is sending a similar message that the U.S.economy will continue to move forward at a decent clip.Indeed,we are encouraged by the fact that the majority of components(six out of 10)are improving on a 6-month rate of change basis.To be sure,we still need to see the breadth of components broaden to 70%to officially enter the recovery phase.However,we think this condition is likely to occur in coming quarters as M&A volumes recover alongside better capital markets liquidity,earnings breadth broadens out in 2024,and/or homebuilder sentiment stops getting worse as rates stabilize.Digging into the sizeable consumer segment of the U.S.economy,the setup is certainly less optimistic than it was during the immediate recovery from COVID.In particular,there is no question that savings rates are currently low at around 3.5-4%,which is below the six-plus percent levels that prevailed pre-COVID and close to the pre-GFC lows of about two to three percent.Importantly,though,what is different from the 2005-2006 period is that the U.S.population has gotten much older.Indeed,recall that personal savings rates go negative when consumers retire;given that over 17%of the U.S.population is now at or above 65(versus around 12fore the GFC)we estimate that the neutral savings rate has actually fallen to around 5.6%today,down from 9-10%in the mid-2000s.When we account for these structural factors,a four percent savings rate today(which is about 100-200 basis points below neutral)is a much less downbeat signal for the consumer than a two-to-three percent savings rate was in the run-up to the GFC(which was about 700-800 basis points too low).Our bottom line:while we do expect consumer retrenchment in coming quarters(and think this may feel quite uncomfortable for certain at-risk consumer subsectors)households do not look as overspent as they have during past downturns,particularly if we are right that immigration and labor force growth will provide more of a tailwind for aggregate consumption going forward.Our proprietary business cycle indicator is sending a similar message that the U.S.economy will continue to move forward at a decent clip.Insights|Volume 14.3 32Exhibit 42:Savings Rates Vary Considerably Over the Consumer Lifecycle,Especially as Citizens Age27!%5%-24%-34%GDP)x(Avg.Fed Funds-GDP Delta)Real Fed Funds vs.Potential GDP and UnemploymentData as at December 31,2023.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.By contrast,the forward curve is about 25 basis points below our forecasts for both years,which we think is too ambitious given how much ground was lost in the Feds disinflation fight in 1Q24.Insights|Volume 14.3 50Meanwhile,we also envision a high case where inflation remains stuck in the mid-three percent range on a multiyear basis,and the Fed responds by pushing real rates above two percent(which would equate to two more interest rate hikes),as well as a bear case where growth and inflation fall sharply in response to a financial accident and the Fed is forced to ease 325 basis points over the next year-and-a-half.Importantly,our base case remains that bond yields are likely to settle in the four percent range over the longer term.Key to our thinking is that the term premium for longer-term U.S.debt i.e.,the extra spread investors demand for holding Treasurys over cash on average has likely increased on a structural basis.One can see this in Exhibits 82 and 83,respectively,which show that a positive stock-bond correlation,a wider deficit,and a lower savings rate have led to structurally higher Treasury yields over time.Given our view for an average short rate in the low-mid three percent range over the next ten years,that term premium should help set a floor for bond yields around four percent,we believe.If there is good news,it is that:1)stock-bond correlations are already elevated;2)deficits are not likely to widen dramatically under the next administration;and 3)savings rates are unlikely to fall further.As a result of all these factors,we do not see bond yields sustaining above the high-four percent range barring a major reset in inflation expectations that we are not currently forecasting.With that said,we expect volatility to remain elevated in this market,given a lack of available market-making capital and the inherent uncertainty as the markets base case toggles between dovish and hawkish rate scenarios.At the same time,from the per-spective of the Feds full em-ployment mandate(i.e.,its de-sire not to overtighten),our base case for a slower decline in core CPI suggests that real rates will not reach the two-percent level until the beginning of 2025.Exhibit 82:Our Term Premium Model Suggests UST Yields Will Reset Structurally Higher Over Time24e70bp25e68bp26e65bp-1.0-0.50.00.51.01.52.02007200820092010201120122013201420152016201720182019202020212022202320242025202610-Year UST Term PremiumActualModelStock-bond correlationand wide deficit keepterm premiumelevated thru 2025Data as at March 31,2024.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.Exhibit 83:Driven by Negative Stock-Bond Correlation and Persistently Wide Fiscal Deficits0-4120-433225121-4914-2257416920-4316-22553670Stock-BondCorrelationQE/QTRiskPremiumSavingsRateDeficitTreasuryVolTotalContributions to Term Premium Model2015-2019Mar-24Dec-24eData as at March 31,2024.Source:Bloomberg,KKR Global Macro&Asset Allocation analysis.Insights|Volume 14.3 51Europe Interest RatesForecasts:We continue to expect a terminal rate of 2.5%for the ECB,with three cuts in 2024 and three in 2025.While consensus expectations had called for a much earlier start to the cutting cycle at the time of our January forecasts with around seven cuts in 2024,those expectations are now about in line with our own,calling for a 3.3%rate at end-2024(compared to our 3.25%)and 2.8%at end-2025(compared to our 2.5%).Further out the curve,we retain a view that is quite differentiated,as we look for the 10-year bund yield to step up from 2.6%at the end of 2024 to 3.0%by 2026.By comparison,consensus expectations are calling for a 2.2-year yield at the end of both 2024 and 2025.Commentary:We are at a historic turning point in the rates cycle,with the ECB cutting rates from an all-time high deposit rate of 4.0%.While we acknowledge the thick fog of war surrounding the ultimate path of rates,we do take issue with consensus forecasts.Specifically,the consensus call for a return to a negative term premium from the ECBs deposit rate to the 10-year bund at end-2025(2.6%vs.consensus of 2.2%)embeds an overly pessimistic view of the growth and inflation prospects of the Eurozone.By comparison,our forecasts call for a return to a positive term premium(2.5%vs.consensus of 3.0%by end-2025),with a base rate that is also positive in real terms,given our long-term inflation forecast of two percent.We view the upcoming period as part of an overall normalization of economic growth and inflation after almost two decades of dislocation post the GFC,the EZ debt crisis,COVID,and the Russian invasion of Ukraine.Further out the curve,we retain a view that is quite differentiated,as we look for the 10-year bund yield to step up from 2.6%at the end of 2024 to 3.0%by 2026.Exhibit 84:The Delta Between Treasuries and the Bund Has Rapidly Widened Over the Past Year,With Treasuries Now Yielding 200 Basis Points Over the Bund10012014016018020022020202021202220232024U.S.10-Year Treasury Bond vs.German 10-YearBund SpreadData as at April 30,2024.Source:Bloomberg.Exhibit 85:The ECB Is Expected to Increase the Pace of QT,Even as Other Central Banks Have Paused Balance Sheet Reduction 01,0002,0003,0004,0005,0006,0002015201620172018201920202021202220232024ECB Holdings-Asset Purchase Programes,BillionsPSPPCSPPCBPP3ABSPPPEPPTotalPEPP 1.7tnAPP 3.1tn340bn unwound from peakData as at April 30,2024.Source:Bloomberg.Insights|Volume 14.3 52OilForecasts:We continue to forecast that$80 is the new$60 as a midpoint for WTI oil prices in coming years.If we are correct that shale producers are now focused on generating attractive free cash flow and return on equity,we believe that a long-term price level of around$80 is required to achieve those aspirations.This level is above futures pricing of$71 per barrel in 2026 and$68 per barrel in 2027.That said,we do think prices may center closer to the mid-$70s during parts of calendar year 2025(i.e.,somewhat below average relative to an$80 long-term run-rate).The key driver is our expectation that the global supply/demand balance will at times flirt with a modest surplus next year.The combination of ample Americas supply growth(Guyana,Brazil,Canada,etc.)and decelerating global demand(end of COVID recovery boost for jet fuel)would likely leave little room for OPEC to boost production.That would keep the core OPEC spare capacity elevated(at more than five million barrels per day),capping the oil price upside absent renewed flare-ups in the Middle East and/or Russia.We are often asked if a second Trump term would change this dynamic via increasing U.S.production or easing of sanctions on Russia.The problem,from our perspective,is that the levers Trump has available to pull are quite limited.For starters,easing Russian export sanctions would add only modest new supply to the market,as it is already exporting most of what it has available to China and India.Furthermore,the acreage of U.S.federal lands where Trump could ease drilling restrictions is relatively small,and as such,we think the additional capacity would likely not move the needle on supply in the near term.We think,however,that Trump could achieve friendlier relations with the Gulf states than what exists today,but the real potential for this to ease oil prices looks limited.Importantly,fiscal breakevens in the Gulf remain quite high,so we see limited scope vs.todays levels for OPEC to facilitate any structural easing of pricing.The bottom line,from our perspective,is that we respect the fundamental unpredictability of Donald Trumps policy playbook,as well as the imperative he may feel to push prices lower.That said,we currently do not see any obvious magic bullets to immediately lower oil prices.Commentary:In terms of why we hold a differentiated view in the out years for oil,we tend to focus on what we call the four Cs at KKR.They are as follows:Exhibit 86:Our 2024 Average WTI Price Forecast of$85 per Barrel Accounts for Tighter Fundamentals and a Heightened Geopolitical Risk Premium.Our 2025 Forecast of$75 per Barrel Is in Anticipation of OPEC Partially Unwinding Voluntary Cuts Amidst Moderating Global Demand GrowthGMAA Base Case vs.FuturesHigh/Low ScenariosMemo:Dec-23 Forecasts KKR GMAAWTI FuturesKKR GMAA vs FuturesKKR GMAA KKR GMAA KKR GMAAWTI Futures May24May24May24High CaseLow CaseDec23Dec232021a6868N/A6868N/AN/A2022a9595N/A9595N/AN/A2023a7878N/A8575N/AN/A2024e807911256575732025e75741956080682026e807191007080662027e806812100708064Data as at May 28,2024.Prior as of December 7,2023.Forecasts represent full-year average price expectations.Source:Bloomberg,Haver Analytics,KKR Global Macro&Asset Allocation analysis.Insights|Volume 14.3 53 y Shale Consolidation:The Shale supply elasticity to price has been cut in half in recent years,as producers are maintaining capital discipline and prioritizing shareholder return over volume growth.The wave of consolidation by larger players should also reduce pro-cyclical drilling by smaller privates.The drawdown of drilled but uncompleted wells(DUCs)to decade lows,coupled with aging tier-1 acreage,base declines,and plateauing well productivity,should lead to a slower pace of U.S.supply growth going forward.y Production Costs:The PPI for oil and gas drilling is still roughly 20ove pre-COVID levels.The latest Dallas Fed Survey suggests that the breakeven price for U.S.producers has increased to around$65 per barrel(up from about$50 per barrel on average in 2019-21),which raises the floor for oil prices,in our view.y OPEC Control of Incremental Supply:More modest U.S.Shale production leaves OPEC in the drivers seat of incremental global supply.Importantly,core OPEC is now prioritizing price stability over market share in our view,underscored by repeated production cuts in recent years to balance global markets.In addition,Saudi Arabias fiscal breakeven has increased on a structural basis to$90-100 per barrel given the higher pace of spending on Vision 2030 mega-projects,which incentivizes higher oil prices.y Durable Consumption:We think the durability of demand from emerging markets(especially Asia)and petrochemicals can offset declines in gasoline demand from developed markets and China.Overall,we expect non-OECD demand to keep growing through the end of the decade at least.Bottom line:Our thesis that$80 is the new$60 as a midpoint for WTI oil prices keeps us constructive on energy-related businesses going forward.As it relates to natural gas,we also remain optimistic about the medium-term demand outlook.New LNG export capacity remains the key source of demand growth,with current FIDs(Final Investment Decision)pointing to exports roughly doubling to greater than 25 billion cubic feet per day by the end of the decade(from 13 billion cubic feet per day in 2023).Power demand should also be a source of upside going forward,which follows 15-20 years of largely stagnant domestic electricity consumption trends.Industry analysts expect AI-related data center power demand to drive an incremental 3-5 billion cubic feet per day of new natural gas demand by 2030,which is a notable boost to help offset erosion from continued renewables penetration.Exhibit 87:The Global Supply/Demand Balance Has Tightened Consistently Over the Past Few Months0.20.3-0.10.40.0-0.5-0.60.2-0.20.81Q242Q243Q244Q2420242025Global Supply Surplus/Deficit,Consensus Estimates,Millions of Barrels per Day Dec-24Apr-24Note:Consensus includes Evercore,MS,JPM,GS,UBS,Citi,RBC and Piper Sandler.Data as at April 16,2024.Source:Energy Intelligence,KKR Global Macro&Asset Allocation analysis.We continue to forecast that$80 is the new$60 as a midpoint for WTI oil prices in coming years.If we are correct that shale producers are now focused on generating attractive free cash flow and return on equity,we believe that a long-term price level of around$80 is required to achieve those aspirations.This level is above futures pricing of$71 per barrel in 2026 and$68 per barrel in 2027.Insights|Volume 14.3 54SECTION IVFrequently Asked Questions QUESTION NO.1Where do you see relative val-ue in Credit?While we think that relative value opportunities in Credit have become less outsized versus the beginning of the year,we still see several attractive pockets of opportuni-ty across both Public and Private markets.We note the following:y Within Liquid Credit,we see value across the capital structure,but we continue to prefer high-grade CLO liabilities as a way to pick up extra spread without taking on significant credit risk.To review:Our research suggests that senior CLO liabilities typically offer about 10-15%credit enhancement(making the chance of a default quite low based on historical behavior),but a total return in the eight to nine percent range.So,while recent spread tightening makes us a bit less excited about this part of the market from a tactical perspec-tive,we still think there is plenty of value in terms of ab-solute return.Meanwhile,within High Yield we continue to prefer European HY to U.S.HY this cycle.Key to our thinking is that shorter maturities and discounted prices in many instances mean that there is potentially more upside in this market,especially if the refinance wave continues to come earlier than markets are expecting.y In Direct Lending,by comparison,we are now a little more cautious on a cyclical basis,though we agree with the growing number of CIOs who now view this asset class as a permanent allocation in a diversified Credit portfolio.What are we seeing?Competition has continued to heat up,with average terms for a new unitranche continuing to tighten and the illiquidity premium falling to very low levels versus history.At the same time,average leverage has remained flat.As a re-sult,the premium for many new entrants is now getting quite narrow relative to liquid U.S.public loans in many instances.We are also seeing a greater propensity for corporations to use payment-in-kind(PIK)strategies when cash flow gets tight.The good news,however,is that for existing portfolios most of the pressure on margins from inflation and interest coverage now seems to be behind us.Said differently,we are not looking for a huge surge in losses in the Private Credit space,despite what we see as a more competitive positioning in this area of the market.y Against this backdrop,we increasingly view Asset-Based Finance as a potentially more interesting destination for new capital on a relative value basis versus Direct Lend-ing.Banks,feeling the impact of fleeing deposits,higher accruals,and/or more regulatory scrutiny,are now more willing sellers of assets backed by hard collateral,and we continue to think the core/prime consumer should con-tinue to hold up fairly well this cycle.All told this space is definitely one area where we continue to look for oppor-tunities,particularly in cases where one can partner with existing platforms around underwriting and origination.We continue to think the core/prime consumer should continue to hold up fairly well this cycle.Insights|Volume 14.3 55Exhibit 88:We Continue to Favor Asset-Backed Finance,Senior Direct Lending,and Shorter Duration European High YieldUS Senior BSLsUS Junior BSLsEU Senior BSLsUS Corp HYEU Corp HYUS Corp IGEU Corp IGCLO AAACLO BBBCLO BBUS CMBSUS RMBSUS Senior DLEU Senior DLGlobal MezzABF0%5 %0.0%1.5%3.0%4.5%6.0%7.5%9.0.5%Expected Total ReturnCredit Strategies-Expected Near-Term Total Return vs.VolatilityAbove Line:Higher return per unit ofmarket riskPrivatePublicData as at April 30,2024.Source:KKR GBR analysis.Exhibit 89:BB and BBB CLOs,Senior Direct Lending,and European High Yield Screen Well On a Return Over Leverage BasisUS Senior BSLsUS Junior BSLsUS Corp HYEU Corp HYUS Corp IGEU Corp IGCLO AAACLO BBBCLO BBUS Senior DLEU Senior DLGlobal Mezz0%5 %2.0 x3.0 x4.0 x5.0 x6.0 x7.0 x8.0 x9.0 xExpected Total ReturnLeverageCredit Strategies-Expected Near-Term Total Return vs.LeverageAbove Line:Higher return per turn ofcorporate leverage EU Senior BSLsPrivatePublicData as at April 30,2024.Source:KKR GBR analysis.QUESTION NO.2 Do you still believe in a higher resting heart rate for inflation?For a long time,our view has been that inflation would be both higher(on average)and more volatile than what markets got used to in the 2010-2019 period.No doubt,we have maintained our conviction that inflation would cool heading into year-end in the U.S.,as a lot of the worst cyclical imbalances in supply chains,labor markets,and lagged supercore price increases are now behind us or are being resolved.Our view presently is that,while inflation is certainly cooling(and Mays CPI was definitely a step in the right direction),it will not return fully to the Feds two percent target and certainly will not trend below two percent the way it did leading up to COVID.Moreover,our colleagues Dave McNellis and Ezra Max think that both the level and volatility of inflation will likely be higher than in the past,owing to a structural shortage of skilled workers and housing,along with geopolitical tensions and record fiscal stimulus.Importantly,we think that this thesis still holds despite better cyclical inflation in the U.S.We have also been asking ourselves whether the recent surge in the supply of workers and goods or the transition to an older demographic base could change our thinking Insights|Volume 14.3 56on the longer-term resting heart rate for inflation.For our money,the answer is no.Top of mind for us are the following:The recent surge in U.S.immigration will not resolve the U.S.worker shortage,we believe.The CBO recently revised its population forecasts to reflect an additional approximately 5.5 million immigrants over 2023-2027.Our estimates suggest that this surge could translate into about four million additional workers over the same period(Exhibit 90).No doubt,this improvement in supply should help the Feds goal of bringing better balance to the labor market.However,the actual impact on labor availability in most industries may be smaller than the headline figures would suggest.In fact,accounting for legal status and educational/skills training,we estimate that about 90%of this additional workforce(or roughly 3.5 million workers)will only be eligible for employment in traditional immigrant-friendly roles,which account for only around 25%of open U.S.jobs(or about two million out of 8.1 million total job openings).As a result,immigration will do comparatively little to impact worker availability for the 6.1 million higher-skilled roles that remain open in the U.S.econ
2024-12-29
71页
5星级
ATLWAA-20240618-3653680-11594556June 2024 Torsten Slk Apollo Chief Economist2024 Mid-Year Outlook:An.
2024-12-29
28页
5星级
CENTER FOR DATA INNOVATION 1 Digital Transformation Should Be at the Heart of the UKs Economic Agenda By Ayesha Bhatti and Justyna Lisinska|November 25,2024 The UK economy has experienced sluggish growth for years,but the country has a unique opportunity to use recent advances in AI to reinvent itself as an economic powerhouse driven by digital innovation and detached from EU dependencies.To seize this opportunity,the UK should adopt bold,forward-thinking policies around digital transformation and artificial intelligence(AI)that will allow the UK to drive economic growth.The following recommendations outline a path forward.The new government should:1.take a light-touch approach to AI regulation;2.unlock data;3.address the digital skills gap by aligning training and education with industry needs;4.use government funding to support research and development(R&D)commercialisation;and 5.support the digital transformation of the public sector.RECOMMENDATION 1:TAKE A LIGHT-TOUCH APPROACH TO AI REGULATION The previous government landed on a set of pro-innovation,cross-sectoral AI governance principles to balance safety and innovation.The current government should continue down this path to unlock new economic CENTER FOR DATA INNOVATION 2 opportunities,create highly skilled jobs,and attract greater investmentfuelling future domestic innovation.1 The UK AI market is currently valued at over$21 billionthe third largest AI market in the world after the United States and Chinas.2 A supportive approach to AI development would allow the UK to bypass the burdensome regulations of the EU AI Act,which has already caused major players such as Meta and Apple to hold off on launching AI products in Europe.3 The UK government should learn from these mistakes and seize the opportunity to create a more competitive regulatory landscape.T Thehe UKUK governmentgovernment s shouldhould firstfirst exploreexplore nonnon-regulatoryregulatory optionsoptions forfor managingmanaging risksrisks it it wisheswishes toto addressaddress.4 Regulations for specific technologies can quickly become outdated,especially since AI models are rapidly evolving and researchers do not yet fully understand the best ways to mitigate risks from the technology.5 Instead,the government should encourage regulators to rely on existing technology-neutral legislation,such as the Equality Act 2010,to address some of the issues within their sectors.Once regulators have a clearer understanding of AIs capabilities and risks,they should apply sector-specific measures to tackle real,immediate harms,such as nonconsensual deepfake pornography,rather than hypothetical concerns such as AI becoming self-aware.The government should also not single out special rules for the handful of companies developing the most capable AI models,as such an approach could hinder the adoption of these technologies in the UK and stifle innovation.The UK governments Artificial Intelligence Safety Institute(AISI)can provide nonregulatory solutions to the potential risks from AI.For example,AISI has already tested five leading AI models used by the public to assess their potential risks.6 To ensure AISI operates free of political interference,the government should make it an independent agency,rather than a part of the Department for Science,Innovation,and Technology.And to ensure that it has the resources to continue to pursue pragmatic measures to improve AI safety,the government should provide it with sufficient funding.These changes would also encourage better collaboration with the industry by reassuring companies that AISIs core mission is fixed.The UK has a unique opportunity to lead the world in AI governance by maintaining a balanced approach that promotes innovation while safeguarding against emerging risks.By continuing to apply high-level principles,leveraging existing technology-neutral legislation,and strengthening institutions such as AISI,the UK can foster a thriving AI ecosystem that drives economic growth and positions the country as a global leader in AI safety.CENTER FOR DATA INNOVATION 3 RECOMMENDATION 2:UNLOCK DATA The availability of data is crucial for driving innovation,especially in AI,yet much of this potential remains untapped.Data-driven innovation is not happening quickly enough,in large part due to the culture created by introduction of the General Data Protection Regulation(GDPR).GDPR has left the UK with a disincentive for data-driven services,leading to limited data sharing across government and industry.Data reform starts with addressing the root cause:badly designed data protection regulations.The COVID-19 pandemic should have been the opportunity to build on political impetus to make data sharing the norm.The pandemic spurred urgent data sharing that garnered valuable insights for public health officials.7 The post-pandemic era has instead seen untapped gains.Indeed,according to the Office for Statistics Regulation(OSR),innovation brought on by data sharing is neither widespread,nor the norm.8 In fact,according to OSRs 2024 report on data sharing for the public good,it found that linking datasets for research,statistics,and evaluation is not yet the norm in the UK statistical system,and that stronger commitments to prioritise data sharing are needed from senior UK politicians and civil servants.9 The previous government attempted to take advantage of the wealth of government data it held.In September 2020,the UK government published the National Data Strategy(NDS),an ambitious five-mission initiative that aimed to“drive the collective vision that will support the UK to build a world-leading data economy.”10 However,it ultimately failed to make this a reality,not going far enough to encourage widespread data sharing,losing focus with its missions,and lacking a central figurehead to push forward NDS priorities across government.To make the UK the world leading,data-driven economy in the next five years requires bold,decisive action to accelerate data-driven innovation.The UK government needs a new data strategy that addresses the failures of the last government.This means enabling the public and private sector to use available data by:reforming the UK GDPR;investing in privacy-enhancing technologies(PETs);establishing data trusts;establishing data-sharing partnerships;and providing data literacy training to civil servants.The UK GDPR,a legacy of its membership in the EU,hamstrings UK data innovation,by making it difficult for organizations to access and use significant amounts of quality data.The GDPRs core purpose is to limit CENTER FOR DATA INNOVATION 4 personal data use.Unfortunately,the last government failed to introduce legislation to fix the GDPR.This type of reform is desperately needed to foster a data-driven economy.Indeed,a recent Organisation for Economic Cooperation and Development(OECD)working paper highlights that UK data-intensive firms are on average more productive,generate more revenues,and trade more in foreign markets than do non-data-intensive UK firms.11 Specifically,the average number of employees for data-intensive firms is around 1,500,compared with only 700 for non-data-intensive firms.Data-intensive firms also have around six times more capital assets and generate seven times higher revenue and higher gross output.12 This makes a clear case for unlocking data for more businesses,and thethe UKUK governmentgovernment shouldshould reformreform UKUK GDPRGDPR toto reducereduce datadata accessaccess barriersbarriers.The Labour government has introduced a new Data(Use and Access)Bill(DUA Bill),which,according to the government,will“unlock the secure and effective use of data for the public interest”.13 The DUA Bill is a welcome start on the road to GDPR reform,but the government needs to do more to unlock data sharing for both the public and private sectors.Private sector data innovation is as much in the public interest as public sector data innovation is.The DUA Bill retains many of the positive provisions contained in the previous governments Data Protection and Digital Information(DPDI)Bill.14 This includes necessary provisions towards the establishment of digital verification services,the development of a national underground asset register,smart data schemes,and data access to support scientific research.Whilst these initiatives may positively contribute to a data economy,they do not address the widespread data access and processing issues faced by businesses UK-wide.In particular,the old DPDI Bill introduced a new definition of identifiability that moved the concept of identifiability to a more subjective interpretation,raising the threshold for what could be considered personal data.This would mean less data falls within the scope of the UK Data Protection Act 2018(DPA)and would therefore be subject to fewer compliance rules.15 The“reasonable means”test allowed for easier data sharing whilst still maintaining data protection standards because it considered the time,effort,and abilities of a data controller to reidentify an individual;just because data could hypothetically become identifiable does not necessarily mean it is personal data if reidentification is unreasonable from the viewpoint of the data controller.This small but significant change would have alleviated data protection compliance substantially because it would have reflected the practical aspects of data processing that would move data outside the purview of the DPA.This necessary change is missing from the current DUA Bill,meaning a large proportion of data remains subject to stringent,EU-instigated data-sharing rules that will continue to plague UK data innovation.CENTER FOR DATA INNOVATION 5 Moreover,the DUA Bill excludes key provisions from the DPDI Bill that would have introduced government oversight of the Information Commissioner Offices(ICOs)strategic priorities,marking a missed opportunity for the new government to support the alignment of a key UK regulator to the overall missions of government.Indeed,such a provision,which would have also allowed the government to issue recommendations to the ICO,would have supported the future introduction of a Regulatory Innovation Officean office to drive economic growth through regulatory reform that enables innovation.16 The UK government needs to do much more to inject quality data into the public and private sectors,and it should start by carrying forward the abovementioned provisions from the DPDI Bill into the DUA Bill.To complement a supportive data framework,thethe UKUK shouldshould investinvest in in researchresearch onon PETsPETs thatthat safeguardsafeguard datadata whilewhile stored,stored,processed,processed,andand transmitted.transmitted.17 For example,fully homomorphic encryption is a way of performing computations on encrypted data without having to first decrypt it.Coupled with supportive data-sharing policies,PETs would provide technical solutions to protect data privacy whilst fostering data-driven innovation.In the UK,there exists OpenMined,an open-source organisation whose mission is to lower the barrier to entry to privacy-preserving technology.18 OpenMineds work includes supporting access to medical data.One use case highlights the possibility of using a Python package to study heart disease that allows developers to work with the data but without exposing the private data,and running the code that uses the data on the server where the data is stored,reducing the risk of data leaks.19 The UK should invest in initiatives such as OpenMined,awarding grants to specific research institutions and businesses working on the development of PETs that would complement a reformed data protection framework to accelerate secure data sharing.T Thehe UKUK governmentgovernment shouldshould alsoalso establishestablish datadata truststrusts andand datadata-sharingsharing partnershipspartnerships toto fosterfoster globalglobal datadata sharingsharing.Data trusts are a type of data governance framework that manage,protect,and share data for an agreed-upon purpose on behalf of individuals and organisations.For example,a public sector data trust could foster secure and efficient transfer of public data to private institutions to drive public sector innovation.The UK should prioritise data sharing for specific purposes,such as drug discovery,where there is a clear benefit from more data sharing,and could support an industry in which the UK could be a world leader.For example,Sweden and the United States have entered into a bilateral cooperation agreement to encourage science and technology exchange dedicated to cancer research.20 The UK should establish similar data-sharing partnerships.The UK should consider these mechanisms as part of its efforts to implement Data Free Flow with Trust(DFFT),a pro-data-sharing vision led CENTER FOR DATA INNOVATION 6 by the OECD that aims to promote the free flow of data whilst ensuring trust in privacy,security,and intellectual property.21 DFFT serves the dual purpose of promoting data for economic and social purposes whilst also supporting data privacy.In setting up public sector data trusts that operationalise DFFT,the new government can leverage the benefits that increased data access brings,particularly to public services such as the National Health Service(NHS).Public sector data trusts can also form the building blocks for AI-powered public services,and would support the delivery of Labours manifesto missions,including kick-starting economic growth,and building an NHS fit for the future.22 A similar initiative in EstoniaX-road and its X-tee instanceacts as the backbone of Estonias digital infrastructure,facilitating data transfers between the public and private sectors.23 Whilst it does not provide the data itself,it does support secure,interoperable data exchanges,something the UK currently does not offer.24 Public sector data trusts could form the basis of a similar data-sharing infrastructure,supporting data-driven innovation for the benefit of public services across the entire development pipeline.Finally,to unlock the full potential of public data,the UK government should introduceintroduce civilcivil servantservant datadata literacyliteracy programmesprogrammes thatthat upskillupskill civilcivil servantsservants onon howhow to use data in a GDPR-compliant way.The use of data and AI has the potential to drastically cut down time spent on central government transactions,yet civil servants remain reluctant to use data because of fears around GDPR compliance.25 More than this,data-illiterate civil servants fail to leverage the full benefits of government-adopted open data policies,rendering said policies redundant.26 To rectify this,the government should offer data literacy programmes for civil servants and work with the ICO to issue specific guidelines that clearly define when public agencies can share data without the need for extensive legal interpretation.The government should also direct key organisations and agencies to provide pre-cleaned and vetted datasets for civil servants to use,which would reassure civil servants about GDPR compliance and provide the immediate data access needed to start introducing data-driven solutions within government.RECOMMENDATION 3:ADDRESS THE DIGITAL SKILLS GAP BY ALIGNING TRAINING AND EDUCATION WITH INDUSTRY NEEDS Digitalisation has significantly transformed the skills required in the workplace.Over 80 percent of all jobs advertised in the UK now require digital skills,yet employers report that the lack of available talent is the single biggest factor holding back growth.27 Both foundational and advanced digital skills,which demand specialised knowledge,are essential for businesses across sectors.Estimates suggest that this digital skills gap costs the UK economy as much as 63 billion a year in lost gross domestic product(GDP).If left unaddressed,this figure could rise to 120 billion by CENTER FOR DATA INNOVATION 7 2030.28 To support economic growth,the government should act at a broad level,such as understanding employers needs and reforming the national curriculum,while also targeting specific areas for improvement such as T Levels,Skills Bootcamps,and apprenticeships.On a broad scale,thethe governmentgovernment shouldshould comprehensivelycomprehensively mapmap thethe digitaldigital skillsskills demanddemand andand supplysupply landscapelandscape.Despite a surge in students taking up STEM(science,technology,engineering,and maths)subjects since 2011,there is still a glaring disconnect between what universities teach and what employers actually need.29 For example,computer science graduates were among the hardest hit by unemployment in the 20172018 academic year.30 This disconnect is a clear signal that the government should get a firm grip on the digital skills supply and demand landscape if it wants to prepare the workforce for the future.The proposed Skills England initiative,set to craft a national strategy to boost the UKs skill base,is a move in the right directionbut it will not be fully operational until next year.31 In the meantime,the government should instruct the Department for Education(DfE)to begin consultations with industry stakeholders to identify critical skills gaps and create practical plans to address them.However,this attempt cannot be a one-off effort.DfE should also establish a robust system for the regular review and updating of skills initiatives based on continuous feedback from employers,educators,and employees.As part of this broad approach,reforming the national curriculum is crucial to equip students with the skills the digital economy demands.In an increasingly data-driven world,a strong understanding of data,particularly through statistics,is essential for individuals to navigate both their personal and professional lives.Currently,statistics are taught in schools across the UK,primarily as part of the mathematics curriculum.The UK should introduce a separate mandatory,standalone General Certificate of Secondary Education and A-level in statistics and data science,distinct from the general mathematics curriculum.Moreover,the government should provide funding for targeted professional development programmes to train teachers specifically in statistics and data science,ensuring that they have both the subject knowledge and pedagogical skills to teach these subjects effectively.The government should also integrate statistics across various subjects,such as science,geography,and economics,by introducing curriculum reforms that clearly incorporate statistical concepts into each discipline.In specific areas,thethe newnew governmentgovernment shouldshould reviewreview andand enhanceenhance existingexisting initiativesinitiatives toto ensureensure thatthat theythey correspondcorrespond toto industryindustry needsneeds andand adequatelyadequately prepareprepare individualsindividuals forfor thethe workforceworkforce.According to the Skills Policy Audit Database,the government has not fully implemented the recommendations from various reviews on skills development.32 CENTER FOR DATA INNOVATION 8 Key programmes and initiatives that require review and enhancement include the following:T T LevelsLevels:T Levels are two-year courses for 16 to 19 year-olds,which offer a mixture of classroom learning and“on-the-job”experience,preparing students for skilled employment,further study,or a higher apprenticeship.33 Ofsted conducted a review on T Levels and found that,at their worst,T Levels are not what students expected,pointing to issues around teaching,staff recruitment and retention,and industry placements.34 DfE should better align students expectations with the course material,enhance the quality of teaching,and foster stronger industry partnerships.SkillsSkills BootcampsBootcamps:These bootcamps are intensive,short-term training programmes for people ages 19 and older with a guarantee of getting an interview after completion.35 DfEs report on Skills Bootcamps finds that some respondents indicated insufficient time to learn necessary skills,especially in courses such as coding,cybersecurity,and software development.36 The government should enhance the curriculum to ensure adequate skills and knowledge acquisition.It should also review and disclose how many students are able to get an interview and a job offer after completion.ApprenticeshipsApprenticeships:Apprenticeships are practical,work-based training programmes that combine working and learning.37 The government has conducted various reviews but has missed implementing all the recommendations in the context of improving apprenticeships.38 It should now revisit those overlooked recommendations and identify the issues that need attention.Closing the digital skills gap is crucial for the UKs future growth.Without action,businesses will continue to face talent shortages,costing the economy billions in lost potential.The government should ensure that it understands the needs of the industry and that the education system equips the next generation with the skills needed for the digital economy.At the same time,it should review and enhance existing initiatives to prepare todays workforce for the rapidly changing world of work.Without these efforts,the UK risks falling behind in the race for innovation and economic leadership.CENTER FOR DATA INNOVATION 9 RECOMMENDATION 4:USE GOVERNMENT FUNDING TO SUPPORT R&D COMMERCIALISATION The UK has world-leading research institutions that work at the forefront of technological innovation.According to the Global Innovation Indexs 2023 report,the UK ranked 4th out of 132 measured economies across its innovation capabilities,demonstrating its strengths in R&D,scientific output,and market sophistication.39 But in productivity,the UK ranked 18 percent lower than the United States,and areas displaying clear gains in R&DBirmingham,Manchester and Glasgownot only showed large productivity gaps relative to London but also had productivity levels well below those of peer cities in Europe.40 Moreover,the UK is world-leading with the amount of R&D expenditure on higher education as a percentage of GDP,yet there is a distinct lack of robust technology transfer systems and pathways to commercialisation.41 The UK can do much more to improve the effectiveness of commercialising the UKs digital innovation output in order to realise technology-driven productivity gains.Indeed,the UK falls below the G7 average for scale-ups and value added,which respectively refer to the point at which innovation finds a practical technological application and the stage at which innovation adds value to the economy.42 Moreover,spinouts from UK research institutions,which represent clear pathways from R&D to commercialisation,are few and far between,concentrated heavily in the Greater South East region,which includes the Golden Triangle of London,Oxford,and Cambridge.Where spinouts do exist,the benefits are obvious.The Oxford Science Enterprises(OSE)is one such example of the success of spinouts that leverage the power of industry-academia partnerships.OSE is an independent billion-pound investment company that partners with Oxford University to fuel innovation and support spinout companies that apply innovation.43 Founded in 2015,OSE has raised over 850 million,resulting in a portfolio worth over 2 billion,and two initial public offerings on NASDAQ.Cambridge Innovation Capital(CIC)is a leading Series A investor in the Cambridge ecosystem,which includes quantum start-up Riverlane.44 Riverlane is building technology to make quantum computers less error prone and recently raised$75 million in Series C funding to continue its work making quantum computing commercially viable.45 And the UCL Technology Fund was specifically set up to invest in commercialisation opportunities,leading to 4 NASDAQ IPOs,19 licensing projects,and 34 proofs of concept.46 These examples show the power of such partnerships to unlock the dual benefits of supporting innovation efforts and creating clear pathways to commercialise cutting-edge R&D,laying the groundwork for much needed technology-induced productivity gains.CENTER FOR DATA INNOVATION 10 Yet,even these benefits are limited.For comparison,according to a 2019 study conducted by Octopus Ventures,academic entrepreneurialism within the Massachusetts Institute of Technology(MIT)in the United States has been the genesis for more than 26,000 companies,which in turn has created 3.3 million jobs with a combined annual turnover of$2 trillion.47 That represents 65 percent of UK annual GDP from just one university.If If thethe UKUK governmentgovernment wisheswishes toto powerpower itsits digitaldigital economyeconomy withwith worldworld-leadingleading UKUK R&D,R&D,it it shouldshould supportsupport thethe scalingscaling ofof initiativesinitiatives suchsuch asas OSE,OSE,CICCIC,andand thethe UCLUCL TechnologyTechnology Fund,Fund,andand pushpush forfor thethe developmentdevelopment ofof similarsimilar initiativesinitiatives beyondbeyond thethe GreaterGreater SouthSouth EastEast region.region.The new government could do this by addressing funding and training issues that,if properly addressed,would foster the right conditions for commercialisation.First,the UK innovation system needs reform to incentivise more collaborative R&D(i.e.,incentivising the private sector to invest more into the building blocks of innovation).TheThe UKUK governmentgovernment shouldshould reevaluatereevaluate thethe UKsUKs currentcurrent R&DR&D taxtax creditcredit schemescheme toto supportsupport moremore businessesbusinesses investinginvesting in in UKUK R&D,R&D,speedingspeeding upup thethe approvalsapprovals processprocess andand introducingintroducing moremore clarityclarity forfor businesses.businesses.This should be coupled with more resources for HM Revenue&Customs(HMRC)to appropriately tackle the error and fraud rate of the system,whilst offering clear pathways for legitimate claims.It is clear that the current system has an urgent need for HMRC to address the error and fraud rate for R&D tax credits,which was at 17.6 percent overall for the 20212022 tax year,and 25.8 percent within the small and medium-sized business(SME)scheme.48 HMRC should be careful not to approach the issue of fraud by discouraging or preventing legitimate claims from coming through.Total R&D tax relief claimed by businesses during the tax year 20222023 was 7.5 billion,which corresponded to 46.7bilion in R&D expenditure overall.This shows the power of collaborative R&D to inject much needed cash into research.49 Yet,according to businesses,HMRC is failing to award legitimate R&D tax credits,particularly for start-ups and small businesses.50 This is causing a real-term loss of innovation,with businesses deciding to move overseas for friendlier and more predictable tax-credit regimes.Reform is needed to speed up the approvals process and introduce clarity for businesses,which would in turn encourage businesses to establish themselves in the UK and contribute to UK R&D.Second,thethe governmentgovernment shouldshould reassessreassess thethe criteriacriteria it it holdsholds forfor universityuniversity fundingfunding andand introduceintroduce fundingfunding tiedtied toto thethe performanceperformance ofof a a universityuniversity acrossacross certaincertain benchmarks.benchmarks.This would incentivise universities to reprioritise R&D in line with commercial viability,particularly if benchmarks CENTER FOR DATA INNOVATION 11 include the employability of STEM students after graduation as an indicator of a highly skilled graduate workforce,the percentage contribution universities make to UK scale-ups and value-added,the proportion of spinouts that develop directly from a universitys R&D efforts,and a demonstration that current university R&D is aligned to UK industrial strategy.Universities that perform better across these benchmarks should receive more government support than those that do worse across the same benchmarks.Funding,however,should continue for R&D into long-term,deep-tech capabilities that demonstrate real capacity to boost UK innovation and competitiveness.To address training issues,and specifically,a knowledge gap in entrepreneurialism amongst researchers,the UK government should offer support to research institutions,taking inspiration from the National Science Foundations(NSFs)Innovation Corps(I-Corps)based in the United States.51 NSFs I-Corps is a programme designed to improve the effectiveness of scientists and engineers to commercialise innovation.It facilitates the“transformation of invention to impact”by offering a seven-week training programme to researchers to prepare them to look beyond university lab work towards commercialisation.Moreover,several I-Corps hubs have been set up across the United States to support commercialisation from a whole host of colleges and universities.Each hub is made up of a regional alliance of at least eight research institutions and can receive up to$3 million per year for five years,the purpose of which is to help researchers learn to investigate the commercial potential of science and engineering R&D.The programme is working.More than half of the teams that have participated in I-Corps since 2012 have launched start-ups which have cumulatively raised$3.16 billion in subsequent funding.52 Similarly,more than 5,800 researchers have undergone the programme,contributing to an entrepreneurial workforce.ThisThis UKUK governmentgovernment shouldshould replicatereplicate thethe NSFNSF I I-CorpsCorps modelmodel toto setset upup hubshubs thatthat formform regionalregional alliancesalliances withwith researchresearch institutionsinstitutions toto supportsupport researchersresearchers taketake promisingpromising sciencescience andand technologytechnology R&DR&D beyondbeyond universityuniversity labslabs intointo thethe commercialcommercial sphere.sphere.Doing so would directly target the current ineffectiveness of UK R&D commercialisation,proactively spread efforts beyond the Greater South East region,and contribute to a more entrepreneurial workforce capable of bringing cutting-edge technology to market from which the UK can benefit.The UK sits on a broad spectrum of world-leading technology R&D,but the benefits of this kind of innovation are not translating into productivity gains that boost the UK economy.By focussing on the commercialisation of this research,the new government increases the chances of technology CENTER FOR DATA INNOVATION 12 diffusion and builds on its world-leading research capabilities to produce world-leading businesses that contribute to much needed UK economic growth.RECOMMENDATION 5:SUPPORT THE DIGITAL TRANSFORMATION OF THE PUBLIC SECTOR The UK has historically led in driving digital transformation across government.Unfortunately,it is now falling behind in key areas,such as the deployment of digital IDs and digitalisation efforts.Resolving these issues is essential if the UK government wants to achieve its goal of widely deploying AI to improve public services.The UK ranks seventh in the most recent E-Government Development Index(EDGI).53 To compare,Denmark has consistently topped the league tables since 2018,and a deep dive into the EDGI report highlights some divergence from the UK that could be the reason for Denmarks success.54 In particular,there are three key areas where Denmark is outperforming the UK on its digital strategies:stronger coordination with all levels of government,leveraging the power of digital IDs,and using clear key performance indicators(KPIs)to track progress.Moreover,Denmarks communication of its digitalisation strategies are clear and accessible.TheThe UKUK shouldshould taketake inspirationinspiration fromfrom DenmarksDenmarks approachapproach toto radicallyradically reimaginereimagine itsits digitaldigital transformationtransformation goalsgoals withwith a a newnew publicpublic sectorsector digitaldigital transformationtransformation strategystrategy,starting with two top-level priorities.First,introduce stronger coordination between local,regional,and national layers of government;and second accelerate the creation of a UK digital ID framework.Denmark shows much stronger coordination than does the UK between national government priorities and sub-national and local development strategies.For example,Denmark developed its Joint Government Digital Strategy(JGDS)simultaneously with its National Digital Government Strategy(NGDS).55 The JGDS facilitates cooperation across the three levels of government(national,regional,and local).As part of this cooperation,the strategy coordinates priorities with annual budget agreements between the three levels.The JGDS crucially shares four of the same visions as the NGDS,showing a direct purpose and,more importantly,process to bringing national level agendas down to local government.Moreover,to integrate more fully national and sub-national strategies,the Danish government initiated the Danish Government Digitisation Partnership,which partnered government with 28 representatives across the Danish business community,research,and other relevant stakeholders.56 This partnership directly fed into the NGDS,pooling together 46 recommendations from both the public and private sectors to ensure a relevant,up-to-date,and feasible strategy.CENTER FOR DATA INNOVATION 13 In contrast,the UK created its“Transforming for a digital future:2022 to 2025 roadmap for digital and data,”a roadmap that only directly applies to central government departments.57 Moreover,according to the UK EDGI report,each level of government is disconnected from the other,each government organisation has its own set of digital officers,and each department has its own budget for digital transformation activity.58 Central government digital activity is also separate from local government initiatives,and devolved governments such as Scotland,which has its own digitalisation strategy.59 This lack of coordination is unnecessarily delaying the crucial progress needed to digitalise public services across the UK,leading to inefficient,inaccessible interactions with citizens that are not fit for purpose.COVID-19 demonstrated this fragmentation when two separate systems were used in England and Scotland to track and record COVID-19 vaccinations.To rectify this lapse in coordination,the UK government should reimagine its new public sector digital transformation strategy to include clear KPIs,introduce stronger leadership mechanisms for the Central Digital and Data Office(CDDO)to spearhead the strategy,and centralise the strategy across all levels of government,paying special attention to devolved responsibilities.First,thethe UKUK needsneeds a a revitalisedrevitalised publicpublic sectorsector digitaldigital transformationtransformation strategystrategy thatthat containscontains KPIsKPIs toto keepkeep accountabilityaccountability andand tracktrack progress.progress.Indeed,according to the National Audits 2021 report on the challenges in implementing digital change,previous attempts at digital transformation lacked specificity.60 This would be rectified by introducing clear targets to hold ministers,parliamentarians,and civil servants accountable.Denmark employs clear KPIs for tracking progress of the NGDS.Specifically,there are 61 initiatives the NGDS highlights,including the use of health-care data and citizen-reported data to boost treatment quality in the Danish healthcare sector.61 Other targets include a flexible and efficient framework for public procurement,green data processing and storage,and a comprehensive data roadmap for public data to drive innovation,development,and value.The UK government should likewise identify key initiatives to build strong digitalisation and data-sharing capabilities,such as with NHS,and introduce clear KPIs that measure success for that domain.Second,to better drive a reimagined cross-party public sector digital transformation strategy,thethe UKUK governmentgovernment shouldshould reaffirmreaffirm CDDOCDDO asas thethe single,single,leadingleading entityentity thatthat willwill carrycarry forwardforward thethe strategy.strategy.CDDO holds a host of responsibilities related to digital and data functions within government,setting governments strategic direction,technology strategy,and standards.62 This work is incredibly valuable and should be taken as a priority within all government departments working with CDDO.To better support CDDOs mission,the UK government should allocate long-term ring-fenced funding that can withstand changing budgetary pressures.This CENTER FOR DATA INNOVATION 14 would secure CDDOs work and enable long-term road-mapping that is necessary to instigate real change across government.Finally,thethe UKUK governmentgovernment shouldshould centralisecentralise thethe strategystrategy acrossacross allall levelslevels ofof government,government,includingincluding devolveddevolved governmentsgovernments,byby workingworking closelyclosely withwith relevantrelevant countrycountry departmentsdepartments toto alignalign interests.interests.To do this,the government should begin with consultations to evaluate current gaps in digital capabilities with devolved,regional,and local governments.This should also serve to make known who should be responsible for implementing aspects of the digital transformation strategy at the different levels,as well as ensure that all areas of government,and not exclusively central government,understand the overall strategy mission.Similarly,the UK should consult with a mixture of public and private sector organisations to form specific recommendations and initiatives that support secure data sharing.Once drawn up,the UK government should also communicate this strategy clearly online,streamlining previous initiatives and roadmaps into a single source that articulates the purpose,process,KPIs,and ongoing outcomes and achievements of the new strategy.It is promising that the UK government has maintained the digital verification services provisions of the DPDI Bill in the new DUA Bill,which should contribute to the acceleration of a digital identity framework.This should act as the cornerstone for efficient,seamless access to public services,leveraging the single-source-of-truth principle,and building trust between both public authorities and citizens.Denmark leverages the power of electronic IDs(eIDs)to ensure seamless digital interactions with broader public services,maintain single-source-of-truth principles,and improve the reuse of basic information.63 Almost all public services are accessible through an eID,and a stated priority in Denmarks EDGI report is to make digital services as easy and convenient as possible to use.64 By allowing for better,secure information sharing between public authorities,the eID serves as a key for both citizens and businesses to access public digital services across all levels of government.The UK offers a limited service,with some work being done by the previous government to instigate a UK digital identity and attributes trust framework.65 However,this work is not nearly as extensive,and therefore not nearly as powerful,as the eIDs rolled out in other European countries,including Belgium,Finland,and Ireland.66 The DUA Bill is a good start but currently insufficient to tackle the needs of a growing digital economy that would benefit immensely from streamlined data sharing rooted in a trusted digital ID framework.TheThe newnew governmentgovernment shouldshould buildbuild onon thethe digitaldigital identityidentity trusttrust frameworkframework toto developdevelop a a fullyfully fledgedfledged digitaldigital IDID frameworkframework thatthat reducesreduces barriersbarriers forfor citizenscitizens toto accessaccess crucialcrucial publicpublic services.services.CENTER FOR DATA INNOVATION 15 The new government has a real opportunity to lead in public sector digitalisation.By 2029,the UK should be the leading data-driven economy,and rank first across the UN member states for e-government services.To achieve this,the UK government needs to take drastic measures,and the recommendations herein offer a starting to point.CONCLUSION The UK stands at a critical moment when embracing digital transformation,AI,and data innovation is not just an opportunity but also a necessity.By implementing forward-thinking policies,the UK can not only drive economic growth but also position itself as a global leader in emerging technologies.These changes are essential to foster productivity and growth in a rapidly evolving global economy.Now is the time for bold action to ensure that the UK capitalises on its strengths and avoids falling behind.CENTER FOR DATA INNOVATION 16 REFERENCES 1.Office for Artificial Intelligence and Department for Business,Energy and Industrial Strategy,“A pro-innovation approach to AI regulation,”August 3,2023,https:/www.gov.uk/government/publications/ai-regulation-a-pro-innovation-approach/white-paper.2.International Trade Association,“United Kingdom Artificial Intelligence Market 2023,”https:/rb.gy/f0f3yi.3.Jess Weatherbed,“Meta wont release its multimodal Llama AI model in the EU,”The Verge,July 18,2024,https:/ Castro,“Ten Principles for Regulation That Does Not Harm AI Innovation,”(Centre for Data Innovation,February 2023).5.Ibid.6.AISI,“AI Safety Institute Advanced AI evaluations at AISI:May Update,”May 20,2024,https:/www.aisi.gov.uk/work/advanced-ai-evaluations-may-update.7.Robert Chote“We need to make data sharing across UK government the rule,not the exception,”The Guardian,August 18,2024 https:/ for Statistics Regulation,“Data Sharing and Linkage for the Public Good:Follow-Up Report,“July 2024,https:/osr.statisticsauthority.gov.uk/publication/data-sharing-and-linkage-for-the-public-good-follow-up-report/.10.Department for Digital,Culture,Media&Sport,“National Data Strategy,”October 15,https:/www.gov.uk/government/publications/uk-national-data-strategy/national-data-strategy.11.OECD Statistics Working Papers,“Towards a better understanding of data-intensive firms in the United Kingdom,”ISSN:18152031(online),https:/doi.org/10.1787/18152031.12.Ibid.13.“New data laws unveiled to improve public services and boost UK economy by 10 billion,”gov.uk,accessed November 15,2024,https:/www.gov.uk/government/news/new-data-laws-unveiled-to-improve-public-services-and-boost-uk-economy-by-10-billion.14.UK Parliament,“Data Protection and Digital Information Bill,”September 23,2024,https:/bills.parliament.uk/bills/3430.15.“Data Protection Act 2018,”gov.uk,accessed November 15,2024,https:/www.legislation.gov.uk/ukpga/2018/12/contents.16.“Game-changing tech to reach the public faster as dedicated new unit launched to curb red tape,”gov.uk,accessed November 15,2024,CENTER FOR DATA INNOVATION 17 https:/www.gov.uk/government/news/game-changing-tech-to-reach-the-public-faster-as-dedicated-new-unit-launched-to-curb-red-tape.17.OpenMined,“Privacy-Preserving Data Science,Explained,”May 19,2020,https:/blog.openmined.org/private-machine-learning-explained/.18.OpenMined,“How to Get Involved in OpenMined,”August 19,2020,https:/blog.openmined.org/how-to-get-involved-into-openmined/.19.OpenMined,“Need more medical data?A Python package and an email is all you need,”September 5,2024,https:/blog.openmined.org/a-python-package-and-an-email-is-all-you-need/.20.Sandra Barbosu,“Advancing Biomedical Innovation With Policies Supporting Privacy-Enhancing Technologies”(ITIF,May 13,2024),https:/itif.org/publications/2024/05/13/advancing-biomedical-innovation-with-privacy-enhancing-technologies/.21.OECD,“Data free flow with trust,”https:/www.oecd.org/en/about/programmes/data-free-flow-with-trust.html.22.“Mission-driven government,”labour.org,accessed October 16,2024,https:/labour.org.uk/change/mission-driven-government/.23.“The free and open-source data exchange solution,”X-Road,accessed October 10,2024,https:/x-road.global/.24.Ayesha Bhatti,“Why The EU Should Look To Estonia To Achieve Its Vision For A Digital Europe”(Centre for Data Innovation),April 17,2024,https:/datainnovation.org/2024/04/why-the-eu-should-look-to-estonia-to-achieve-its-vision-for-a-digital-europe/.25.The Alan Turing Institute,”AI for bureaucratic productivity:Measuring the potential of AI to help automate 143 million UK government transactions,”https:/www.turing.ac.uk/news/publications/ai-bureaucratic-productivity-measuring-potential-ai-help-automate-143-million-uk;“How Can the UK Encourage the Uptake of AI in the Public Sector?”(Centre for Data Innovation),accessed October 16,2024,https:/datainnovation.org/2024/04/how-can-the-uk-encourage-the-uptake-of-ai-in-the-public-sector/.26.Fernando Kleiman et al.,“Changing civil servants behaviour concerning the opening of governmental data:evaluating the effect of a game by comparing civil servants intentions before and after a game intervention”(2022)International Review of Administrative Sciences,88(4),921942,https:/doi.org/10.1177/0020852320962211.27.“New Digital Strategy to make UK a global tech superpower,”gov.uk,accessed November 15,2024,https:/www.gov.uk/government/news/new-digital-strategy-to-make-uk-a-global-tech-superpower.28.Department for Digital,Culture,Media&Sport,“UKs Digital Strategy,”gov.uk,June 13,2022,https:/www.gov.uk/government/publications/uks-digital-strategy.CENTER FOR DATA INNOVATION 18 29.UCAS,”Students turn to technology with university choices,”February 4,2011,https:/ Education Graduate Outcomes Statistics:UK,2017/18-Outcomes by subject studied,”June 18,2020,https:/www.hesa.ac.uk/news/18-06-2020/sb257-higher-education-graduate-outcomes-statistics/study.31.DfE,The Rt Hon Sir Keir Starmer KCB KC MP and The Rt Hon Bridget Phillipson MP,“Skills England to transform opportunities and drive growth,”July 22,2024,https:/www.gov.uk/government/news/skills-england-to-transform-opportunities-and-drive-growth.32.Federation of Awarding Bodies,“Skills Audit Database(SPAD),”https:/ of T Levels,”March 9,2023,https:/www.gov.uk/government/publications/introduction-of-t-levels/introduction-of-t-levels.34.Ofsted,T-level thematic review:final report,”July 20,2023,https:/www.gov.uk/government/publications/t-level-thematic-review-final-report/t-level-thematic-review-final-report#main-findings.35.DfE,Skills Bootcamp,”https:/find-employer-schemes.education.gov.uk/schemes/skills-bootcamps.36.DfE,”Evaluation of Skills Bootcamps:wave 2 implementation report,“March 30,2023,43,https:/assets.publishing.service.gov.uk/media/6424129b3d885d000cdaddc3/Evaluation_of_Skills_Bootcamps_Wave_2_Implementation_Report_March_2023.pdf.37.HM Government,About Apprenticeships,”https:/www.apprenticeships.gov.uk/apprentices/about-apprenticeships.38.Federation of Awarding Bodies,“Skills Audit Database(SPAD),”https:/ Kingdom ranking in the Global Innovation Index 2023,”https:/www.wipo.int/gii-ranking/en/united-kingdom.40.UKSPA,“Hexagon Tower Spurs R&D Surge in North Manchester,”August 12,2024,https:/www.ukspa.org.uk/hexagon-tower-spurs-rd-surge-in-north-manchester/;UKRI“The productivity agenda”(The Productivity Institute,2023),https:/www.productivity.ac.uk/wp-content/uploads/2023/11/TPI-Agenda-for-Productivity-2023-FINAL.pdf.41.Robert D.Atkinson and Lawrence Zhang,“Assessing Canadian Innovation,Productivity,and Competitiveness”(ITIF,April 29,2024),https:/itif.org/publications/2024/04/29/assessing-canadian-innovation-productivity-and-competitiveness/.42.“Does the UKs scientific research translate into industrial success?”CIIP,accessed November 15,2024,https:/www.ciip.group.cam.ac.uk/reports-and-articles/does-the-uks-scientific-research-translate-into-industrial-success/.CENTER FOR DATA INNOVATION 19 43.“We found,fund and build for tomorrows challenges,today,”Oxford Science Enterprises,accessed August 21,2024,https:/ Error Correction Stack that unlocks useful quantum computing,”CIC,accessed August 21,2024,https:/www.cic.vc/company/riverlane/45.Daphn Leprince-Ringuet“Building error-free quantum computers:UK startup Riverlane raises$75m Series C,”Sifted,August 6,2024,https:/sifted.eu/articles/riverlane-raise-series-c-news.46.“We help UCL innovators scale globally,”CIC,accessed August 21,2024,https:/www.cic.vc/;https:/ucltf.co.uk/.47.Octopus,“Research to Riches new report highlights untapped potential in UK universities,”November 19,2024,https:/ Revenue and Custom,“Approach to Research and Development tax reliefs 2023 to 2024,”October 30,2024,https:/www.gov.uk/government/publications/hmrcs-approach-to-research-and-development-tax-reliefs-2023-to-2024/approach-to-research-and-development-tax-reliefs-2023-to-2024.49.HM Revenue and Custom,“Research and Development Tax Credits Statistics:September 2024,”September 24,2024,https:/www.gov.uk/government/statistics/corporate-tax-research-and-development-tax-credit/research-and-development-tax-credits-statistics-september-2024.50.Yasemin Craggs Mersinoglu,“HMRC undermining innovation by failing to award R&D tax credits,say start-ups,”Financial Times,April 1,2024,https:/ Innovation Corps(I-Corps),”NSF,accessed November 15,2024,https:/new.nsf.gov/funding/initiatives/i-corps.52.“NSF names three new I-Corps Hubs expanding the National Innovation Network across the U.S.,”NSF,accessed November 15,2024,https:/new.nsf.gov/funding/initiatives/i-corps/updates/nsf-names-three-new-i-corps-hubs-expanding-national;“Impact Data,”NSF,accessed November 15,2024,https:/new.nsf.gov/funding/initiatives/i-corps/impact-data.53.“United Kingdom of Great Britain and Northern Ireland,”UN E-Government Knowledgebase,accessed November 15,2024,https:/publicadministration.un.org/egovkb/en-us/Data/Country-Information/id/182-United-Kingdom-of-Great-Britain-and-Northern-Ireland.54.United Nations,“Member States Questionnaire(MSQ)for the United Nations E-Government Survey 2024,”https:/publicadministration.un.org/egovkb/Portals/egovkb/MSQ2024/UK - MSQ2024.pdf;“Member States Questionnaire(MSQ)for the United Nations E-Government Survey 2024,”UN E-Government Knowledgebase,accessed October 16,2024,https:/publicadministration.un.org/egovkb/Portals/egovkb/MSQ2024/Denmark - MS MSQ 2024.pdf.CENTER FOR DATA INNOVATION 20 55.“The Joint Government Digital Strategy,”Agency for Digital Government,accessed August 21,2024,https:/en.digst.dk/strategy/the-joint-government-digital-strategy/;“National Strategy for Digitalisation,”Agency for Digital Government,accessed August 21,2024,https:/en.digst.dk/strategy/the-national-strategy-for-digitalisation/.56.“The Danish Government Digitisation Partnership,”Agency for Digital Government,accessed August 21,2024,https:/en.digst.dk/digital-transformation/the-danish-government-digitisation-partnership/.57.Central Digital&Data Office,“Transforming for a digital future:2022 to 2025 roadmap for digital and data-updated September 2023,”November 29,2023,https:/www.gov.uk/government/publications/roadmap-for-digital-and-data-2022-to-2025/transforming-for-a-digital-future-2022-to-2025-roadmap-for-digital-and-data#about-the-governments-2022-25-roadmap-for-digital-and-data.58.“Member States Questionnaire(MSQ)for the United Nations E-Government Survey 2024,”accessed October 16,2024,UK-MSQ2024.pdf(un.org).59.Scotland Government,“A changing nation:how Scotland will thrive in a digital world,”gov.scot,March 11,2021,https:/www.gov.scot/publications/a-changing-nation-how-scotland-will-thrive-in-a-digital-world/.60.National Audit Office,“The challenges in implementing digital change,”NAO,July 21,2021,https:/www.nao.org.uk/insights/the-challenges-in-implementing-digital-change/.61.The Danish Government,“National Strategy for Digitalisation Together in the digital development,”Agency for Digital Government,May,2022,https:/en.digst.dk/media/27861/national-strategy-for-digitalisation-together-in-the-digital-development.pdf.62.“About us,”gov.uk,accessed October 16,2024,https:/www.gov.uk/government/organisations/central-digital-and-data-office/about.63.“eID in Denmark,”Agency for Digital Government,accessed October 16,2024,https:/en.digst.dk/systems/mitid/eid-in-denmark/.64.“Member States Questionnaire(MSQ)for the United Nations E-Government Survey 2024,”accessed October 16,2024,UN,https:/publicadministration.un.org/egovkb/Portals/egovkb/MSQ2024/Denmark - MS MSQ 2024.pdf.65.Department for Science,Technology,and Innovation,“Enabling the use of digital identities in the UK,”February 13,2023 https:/www.gov.uk/guidance/digital-identity.66.“What is the eID?”eID Belgium,accessed October 16,2024,https:/eid.belgium.be/en/what-eid;“Seamless trust and control of your own data,”Findynet,accessed October 16,2024,https:/findynet.fi/en/;Government of Ireland,“Harnessing Digital The Digital Ireland Framework 2023 Progress Report”,January 2024,https:/www.gov.ie/pdf/?file=https:/assets.gov.ie/280518/e7f7f7c5-2af8-4209-849a-8c75caf5ceab.pdf.CENTER FOR DATA INNOVATION 21 ABOUT THE AUTHORS Ayesha Bhatti is a policy analyst at the Center for Data Innovation.Prior to joining,she worked as a data scientist at a technology consulting firm in London.She has an LLB from the University of Nottingham,and an MSc in Computer Science from Birkbeck,University of London.She is also a licensed attorney in the state of New York.Justyna Lisinska is a policy analyst at the Center for Data Innovation.Previously,she served as a policy research fellow at Kings College London,where she developed a policy programme for the UKs largest project on autonomous systems.She also has experience working within the government and with government officials.Justyna holds a PhD in Web Science from the University of Southampton.ABOUT THE CENTER FOR DATA INNOVATION The Center for Data Innovation studies the intersection of data,technology,and public policy.With staff in Washington,London,and Brussels,the Center formulates and promotes pragmatic public policies designed to maximize the benefits of data-driven innovation in the public and private sectors.It educates policymakers and the public about the opportunities and challenges associated with data,as well as technology trends such as open data,artificial intelligence,and the Internet of Things.The Center is part of the Information Technology and Innovation Foundation(ITIF),a nonprofit,nonpartisan think tank.Contact:infodatainnovation.org datainnovation.org
2024-12-29
21页
5星级
itif.org Why the US Economy Needs More Consolidation,Not Less TRELYSA LONG|MAY 2024 Larger firms are generally more productive because of scale economies,but some U.S.industries still have too high a share of small firms.Policymakers should encourage,not discourage,greater consolidation in these industries.KEY TAKEAWAYS Large firms are generally more efficient than smaller ones.As an indicator of their greaterproductivity,firms with 500 or more employees have higher receipts per worker than dofirms with fewer than 500 employees in 710 of 938 six-digit NAICS industries.Most of the 228 industries in which smaller firms are more productive are those withlittle ability to gain scale economies(e.g.,furniture repair,food trucks,etc.).Consolidation can boost industry-wide productivity by ensuring that more production isconducted by larger firms with higher productivity.Some industries would benefit from greater scale but still have large shares of smallfirms.They include industries in which government policy has significant influence,suchas banking,construction,doctors offices,farming,and telecommunications.Despite the efficiency gains consolidation can bring,state,local,and federal governmentpolicies can discourage greater consolidation.Policymakers need to modify or,if possible,remove these policies.Overall,its time to balance the agenda of seeking more competition with an equallycompelling and not mutually exclusive goal of seeking more consolidation and higherproductivity.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 2 CONTENTS Key Takeaways.1 Introduction.2 Economies of Scale and Productivity.4 The Role of Consolidation in Improving Efficiency.5 Examining 12 Industries in 5 Sectors.7 Banks.7 Physicians Offices.10 Construction.13 Farming.17 Telecommunications.20 Policy Recommendations.23 Conclusion.24 Endnotes.25 INTRODUCTION Larger firms are the key to productivity growth,as,in most industries,large firms are more productive than their smaller counterparts partly because of what economists term“economies of scale.”In some industries,there seem to be few scale effects.For example,its hard to imagine why a motor vehicle towing company with 5,000 workers would be more efficient than one with only 5.And many industries already have achieved close to optimal scalealthough,of course,technology is constantly changing,which is one reason why companies may want to merge or divest.Yet,there are certain industries that appear to be able to benefit from scale economies but have not adequately done so,in part because government policy either restricts consolidation or rewards fragmentation.Although most policies are well-intentioned,many have an unintended negative impact on firm growth and consolidation.For example,while building codes protect us from faulty infrastructure,the lack of standardization across localities and states means that firms are discouraged from expanding to new areas,as they would have to learn a new set of codes,which would increase their costs.As a result,firms in many industries face barriers to reaching scale economies and greater efficiency.This is concerning because the United States nonfarm business labor productivity growth rate has been below average since 2005,leading to slower economic growth,stagnant wages,and reduced competitiveness.(2020 was an anomaly based on COVID reductions in employment in low productivity industries.)(See figure 1.)Increased consolidation,leading to greater scale economies,could play a role in reversing this trend.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 3 Figure 1:Year-over-year growth in U.S.labor productivity1 Yet,consolidation is demonized by neo-Brandeisians and other proponents of the“small is beautiful”antitrust school,making it much harder to justify modifying policies that limit consolidation.Indeed,they have all but shunned the very idea that consolidation can be beneficial and,accordingly,the economic consensus that some firms can benefit from greater scaleall in order to support their claim that a small businesses-dominated economy is the ideal one.As Robert Atkinson and Michael Lind have asserted:Neo-Brandeisians go out of their way to deny the very existence of scale economies because they know that this reality,more than any other,undercuts their claim that breaking up big companies would be good for the economy.Matt Stoller at the American Economic Liberties Project and Open Markets Institute,reflects that view when he tweets,“Im increasingly convinced the biggest con in business history is the notion of economies of scale.”2 Troublingly,the Biden administration has subscribed to the view that small firms are the ideal outcome for most industries.In addition to appointing neo-Brandeisians and their allies to top positions at the Federal Trade Commission(FTC)and Department of Justice(DOJ),the administration stated in its Executive Order on Promoting Competition in the American Economy that“the problem of consolidation now spans these sectors and many others”essentially demonizing greater consolidation without considering the benefits it could bring to at least some industries.3 Yet,as the broad economic consensus shows,many industries do benefit from greater scale and consolidation.4 Thus,policymakers subscribing to the“small is beautiful”doctrine need to reconsider how they view industry consolidation.-2%-1%0%1%2%3%4%5941998200220062010201420182022INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 4 Policymakers thus need to promote greater consolidation in industries that benefit from large scale economies and that have not yet achieved such scale.The best way to do that is to modify or,if possible,remove government regulationsat the local,state,and federal levelsthat disincentivize consolidation or promote fragmentation.This is necessary because doing so would allow efficient firms to stay in the market and grow while encouraging the less efficient ones to either merge or exit the market,boosting an industrys productivity.As a starting point,the Biden administration should follow up on its prior executive order on competition with a new one,such as an“Executive Order on Removing Barriers to Consolidation in the American Economy”that would do at least two things.First,such an order would call for regulatory size neutrality to minimize bias toward firms of a specific size.Second,it would examine industries and policies with the goal of eliminating policies and regulations that keep industries too fragmented.This report shows 1)that larger firms in the economy are generally more efficient due to scale economies,2)how consolidation can help smaller firms maximize economies of scale,and 3)how 12 industries in 5 sectors(banking,doctors offices,construction,farming,and telecommunications)face barriers to consolidation because of government regulations.For each of the five sectors,it suggests what governments can do to enable market-based consolidation.ECONOMIES OF SCALE AND PRODUCTIVITY The vast majority of industries in the economy enjoy scale economies for two reasons.The first is that most industries have not insignificant fixed costs that do not grow as output increases(a fact that is particularly true in the high technology markets that drive innovation).Firms producing a small output volume will face higher average costs because there are fewer units of output to spread out fixed costs.However,as output increases,the average cost of a unit of output goes down because fixed costs remain stable despite costs growing with revenues.For instance,it can be cheaper per unit of output to produce 100,000 items than 100 because specialized machines can be introduced.Second,every additional unit of production usually declines in cost as workers gain experience.These cost declines continue until the firm reaches an efficient scale wherein greater efficiencies are outweighed by rising inefficiencies from size(such as greater coordination costs).5 The efficient scale varies by industry for a number of reasons,so it is difficult for governments to determine the“proper limit.However,larger firms are generally more efficient than smaller ones in the vast majority of industries throughout the economy.In an analysis of large firms with over 500 employees from 938 six-digit NAICS industries,we found that the receipts per worker are higher than the industry average for 710 industries.6 In comparison,the remaining 228 industries have receipts per worker that are less than the industry average,although some of this could be a result of their charging lower prices.7 These 228 industries with lower receipts per worker than the average tend to be industries wherein massive scale is unnecessary to achieve the lowest costs.For example,large nail salons(NAICS:812113)have receipts per worker of$40,854 compared with the industry average of$64,131.8 Nail salons have few fixed costs and little returns from scale,meaning that their average costs will only decline by a minuscule amount after serving a number of customers.In fact,the marginal cost of serving an additional customer may increase if a nail salon becomes too large for idiosyncratic reasons,such as nail technicians getting in the way of one another.In other words,some industries are efficient with small firms partly because they do not need large outputs with many workers in order to maximize scale economies.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 5 But most industries likely need large outputs to maximize scale economies.In 2017,the receipt of large firms in the average industry was 21.7 percent higher than the average firm in the economy,or$353,619,compared with the average firms$290,617.9 Small firms receipts per worker were 24 percent lower than that of the average firm.10(See figure 2.)Figure 2:Average receipts per employee across 938 six-digit NAICS industries11 THE ROLE OF CONSOLIDATION IN IMPROVING EFFICIENCY Consolidation is key to firms in industries with a high minimum efficient scale as a way to maximize efficiency.The process is as follows:First,consolidation in the form of mergers and acquisitions(M&A)or an increase in market share from one firm to another allows firms to become larger.As a result of their growth in size,these firms acquire a larger share of the market and can benefit from greater economies of scale to lower marginal production costs(or increased economies of scope or the elimination of double marginalization in conglomerate or vertical transactions).12 Finally,as these firms continue to grow,they will eventually reach a point where their unit costs to produce an additional unit of goods can no longer decrease.13 At that point,the firm has maxed out any efficiency gains from increasing scale.In sum,consolidation helps firms maximize their efficiency from scale economies by becoming larger.(See figure 3.)$0$50,000$100,000$150,000$200,000$250,000$300,000$350,000$400,000Small firmsLarge firmsAll firmsINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 6 Figure 3:The process of increasing efficiency through consolidation When consolidation increases a firms efficiency by achieving significant scale,it ceteris paribus increases the industrys efficiency in partial equilibrium.This is why M&A is generally beneficial to firms and industries.When firms merge or acquire another firm,they can leverage scale economies and reduce costs through synergies,such as by combining their core knowledge.14 For example,two stores need separate accounting,advertising,and purchasing services,but if these two stores combine,they can use a single set of services and workers to serve two customers,thereby reducing the overall costs of selling a unit of goods.Moreover,if these two stores have special processes that make their individual processes efficient,they can also share this know-how,further increasing the merged stores efficiency.As a result,a merger creates incentives to reduce costs for firms and,additionally,improve the quality of a firms service or goods.15 There is an added reason to focus on this issue and that is the role of information and communications technology(ICT).Research has shown that adoption of ICT is a key driver of firm productivity.However,as a recent study by the U.S.Census Bureau shows,ICT adoption is positively correlated with firm size.16 For example,10 times more large firms adopted artificial intelligence(AI)than did small firms in 2020.One reason for this is there are often somewhat high fixed costs relative to marginal costs for information technology(IT)and software,and therefore the economics of adoption work better for larger firms.As firm efficiency increases from greater M&A,an industrys productivity will ceteris paribus also rise.This is because M&A redistributes resources between firms so that the more efficient,acquiring firm will be able to reduce costs,charge lower prices,and create competitive pressures in the market that drive out less-efficient firms.Indeed,a study by Joel David finds that M&A increases output by about 14 percent,and 9 of those percent result from improved productivity distribution of firms.17 Demirer and Karaduman corroborated this with a study on power plants,which concludes that“high productivity firms buy underperforming assets from low-productivity firms and make the acquired assets almost as productive as their existing assets after acquisition.”18 In other words,M&A,or consolidation,increases efficiency at the firm level and,ultimately,at the industry level.M&As or capturing others market share allows firms to growGreater market share lowers production costs through economies of scaleUnit costs decrease until firms reach maximum efficiencyINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 7 EXAMINING 12 INDUSTRIES IN 5 SECTORS In the following five sectorsbanking,doctors offices,construction,farming,and telecommunicationslarge firms are more productive because of scale economies,despite the fact that government regulations have kept or are keeping the industries in these sectors fragmented.This is why the average firm size for the 11 industries in these sectors is below 500 employees,or what the Small Business Administration describes as a“small business.”19(See figure 4.)The average farm size,measured using gross cash farm income(GCFI),was$207,756,or what the United States Department of Agriculture(USDA)would consider a small farm.20 Figure 4:Average number of employees in studied sectors21 As a result of the small average firm size,we explore these five sectors as case studies in the following subsections.Each of the five subsections will provide evidence that 1)an industry benefits from scale economies,2)larger firms are more productive,3)government regulations disincentivize consolidation,and as a result,4)how the industry still has a high share of small firms.Banks Larger banks are generally more efficient than small ones because of scale economies.Studies have found that the larger a bank grows,the greater its efficiency gains from scale economies.Indeed,studies by McAllister and McManus,Ferrier and Lovell,and Hunter and Timme have found that banks with over$1 billion in assets could still benefit from scale economies.22 Further corroborating this finding,banks with over$1 trillion in assets were found to still have increasing returns to scale,meaning that they could still grow larger and benefit from scale economies.23 In contrast,small banks with less than$100 million in assets are found to have substantial scale inefficiencies.24 In other words,banks benefit from large scale economies.050100150200250300350400Commercial bankingWired telecommunications carriersWireless telecommunications carriersIndustrial building constructionAll other telecommunicationsPhysicians officesCommercial and institutional buildingNew multifamily housing constructionNew housing for-sale buildersNew single-family housing constructionResidential remodelersINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 8 This helps explain data for 2017 showing that the average large commercial bank with more than 500 employees had a receipt per employee of$302,358,which was 2.6 percent higher than the industry average of$294,594.25 In comparison,small commercial banks with less than 500 employees had a receipt per employee of$263,435,which was 10.6 percent lower than the industry average.26(See figure 5.)Figure 5:Commercial banking receipts per employee27 Despite large banks greater productivity,government regulations have historically kept banks small by preventing consolidation.As early as the 19th century,states and the federal government already had a series of unit banking laws that prevented branch banking in order to protect small,local banks from competition and consolidation.At the state level,some states permitted their banks to operate branches within their headquartered state or within the same cities.28 Yet,other states were much more restrictive and forced their banks to operate out of a single building.29 At the national level,banks could only operate within a single building from 1863 to 1927.30 As a result,these unit banking laws kept banks relatively small since they could only grow to a limited size and reach a limited share of the market,given the restriction on their location.Although the McFadden Act of 1927 promoted the growth of national banks,allowing them to operate branches as long as they complied with state laws,the banking industry was still fragmented because,at best,each banks growth was still limited to the size of its state.Indeed,Robert Atkinson and Michael Lind asserted that these protectionist policies for small banks resulted in an industry with“thousands of tiny,undercapitalized unit banks owned by members of the local gentry”while other nations industry comprised“a financial system dominated by a few national banks.”31 As a result,while other nations branch banking policies eliminated bank runs in the early 20th century,the United States continued to face bank panics exacerbated by unit banking laws until the late 20th century,when the interstate banking laws were passed.32$0$50,000$100,000$150,000$200,000$250,000$300,000$350,000Small firmsLarge firmsAll firmsINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 9 Moreover,the act also raised wages in the financial industry.33 In other words,government regulations have historically undermined growth and consolidation in banking that could have led to scale economies benefits,fewer bank panics,and higher wages.Yet,despite the consequences of historic unit banking laws,policymakers still insist on keeping banks small through regulation that discourages consolidation.In July 2021,the Biden administration signaled in its Executive Order on Promoting Competition that the administration plans on increasing scrutiny of bank mergers,writing,“To ensure Americans have choices among financial institutions and to guard against excessive market power,the Attorney General,is encouraged to adopt a plan for the revitalization of merger oversight under the Bak Merger Act.”34 In response to the order,DOJ has“recently indicated it would take a more granular,wide-ranging approach to bank merger reviews amid increased antitrust scrutiny.”35 Rallying behind these detrimental policies,neo-Brandeisian antitrust critics have warned,“The total number of banks in America has fallen by some 60 percent since 1981,even as the population has grown substantially,”implying that large banks are gaining more monopoly power.36 Truth be told,however,C4 and C8 concentration ratiosthe four or eight firms with the highest market sharefor commercial banks are declining:From 2002 to 2012,the C4 and C8 concentration ratios for commercial banks fell from 29.5 to 25.6 and from 41.0 to 35.8,respectively.37 To be sure,it is one thing for one of the top-four banks in the United States to acquire another bank,which may or may not have competitive implications.But having 500 small and regional banks get bought up by larger banks is unlikely to reduce competition.38 Unfortunately,government regulations continue to impede the process of consolidation that encourages banks to maximize economies of scale.Indeed,these government regulations are partly why the industry still has a large share of small firms despite larger firms greater efficiency.In 2017,only 5.6 percent of commercial banks(281)were large,while the remaining 94.4 percent(4,735)were small.39(See figure 6.)Figure 6:Small and large firms shares of the commercial banking industry40 Small firms 94.4%Large firms5.6%5,016FirmsINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 10 With so many small banks,the United States has more banks per capita than most other nations.As Robert Atkinson and Michael Lind wrote:But because most other nations never had American-style unit banking laws,they have always had significantly fewer banks per capita.In 1998 Japan had just 170 banks,or one bank for every 747,000 people.Canada,widely viewed as having the safest banking system in the world,had one bank for every 1.16 million residents.The United States has one bank for every 58,000 people.And in 1999,the share of deposits and assets of the five largest US banks was just 27 percent,compared to 77 percent in Canada,70 percent in France and 57.8 percent in Switzerland.41 To encourage greater efficiency,the Biden administration should modify its executive order to encourage more bank acquisitions rather than discourage them.In the modified executive order,the administration should encourage the FTC and the DOJ Antitrust Division to review mergers between small and regional banksnot including mergers by the largest four or five largest banks nationallywith a focus on how efficiency gains can potentially outweigh the increases in concentration.Doing so would allow the banking industry in the United States to benefit from increasing returns to scale.As Robert Atkinson and Michael Lind asserted:But even with the number of banks falling by more than half in the last few decades bank economies of scale have still not been exhausted and the United States still suffers from too many banks.As the Federal Reserve has found,even the largest banks face increasing returns to scale The Fed found,Our results suggest that capping banks size would incur opportunity costs in terms of foregone advantages from IRS Other studies have found similar results.42 In other words,when the administration encourages greater bank consolidation,it will also encourage greater bank efficiency because banks will become larger and benefit from increasing returns to scale.Physicians Offices Larger doctors offices are generally more efficient than small ones because of scale economies.To best serve their patients,doctors offices must adopt new technologies and medical treatments.However,the cost of implementing these new methods is often high,meaning doctors offices face high fixed costs to obtain the tools needed to treat patients.As a result,a larger doctors office can serve more patients to spread out its fixed costs and lower its average cost.43 Indeed,case studies of 14 small primary care practices find that only some of these practices could cover the$44,000-per-doctor cost of electronic health record software after 2.5 years,suggesting that small doctors offices do not have the scale to implement even the most basic efficiency-enhancing technologies.44 This is why Baker,Bundorf,and Royalty concluded that multispecialty group practices are more likely than single specialty groups(which tend to be smaller)to benefit from scale economies.45 For example,One Medical,a large national practice group recently purchased by Amazon,has its own in-office laboratories for blood work and related analysis.The data is in accord.In 2017,large physicians offices had a receipt per worker of$204,931 compared with average small firms receipts per employee of$190,182.46 In other words,large INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 11 firms were 4.6 percent more productive than the average while small firms were 3 percent less productive.(See Figure 7.)Figure 7:Receipts per employee in physicians offices(not including mental health specialists)47 Despite the benefits that doctors offices can gain from scale,government regulations at the federal and state level have historically been an impediment to the growth of doctors offices.For example,in 1964,New York adopted the Certificate of Need(CON)law,restricting the construction of new hospitals under the assumption that the restriction of capital expenditures could reduce the high cost of health care.48 As the American Hospital Association lobbied for more states to also adopt similar regulations,the federal government passed a mandate in 1974 to have all states implement a CON program as part of the National Health Planning and Resources Development Act.49 As a result,all states,except Louisiana,had a CON law by 1980.50 This meant that hospitals and any other health care facilities included in these regulations faced the burden of having to apply for,and then the possibility of being denied,whenever they considered expanding their facilities.In other words,these CON laws prevented growth and consolidation by raising the cost of growth,thereby limiting doctors offices efficiency gains from scale.Although the federal government repealed its mandate in 1986 because the law didnt lower health care costs,35 states still had CON laws as of 2020.51 These laws continue to prevent growth and consolidation in the physicians offices industry,reducing their benefits from scale economies.Indeed,Maureen Ohlhausen,former commissioner of the FTC,wrote that“CON laws actively restrict new entry and expansion.They displace free market competition with regulation and tend to help incumbent firms amass or defend dominant market positions.”52 In other words,these regulations protect small incumbent firms that are unwilling to grow and compete fairly$0$50,000$100,000$150,000$200,000$250,000Small firmsLarge firmsAll firmsINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 12 while simultaneously disincentivizing others from consolidating and becoming more efficient from scale economies and embracing more patient-friendly information technology systems.In addition to the CON laws,state governments have continued to impose other regulations that stifle consolidation in the industry.In the last year,states have passed laws that increased the burden for merging parties in the healthcare industry.For example,New York recently passed a law that requires health care entities to give a 30-day notice before closing a deal,while Maine repealed a law that exempted certain health providers mergers from antitrust laws.53 Additionally,consolidation in the industry could also slow in California next year when all M&A deals have to be reviewed and approved by the Office of Health Care Affordability.54 Indeed,the National Academy for State Health Policy has advocated for more of these legislations with its Model Act for State Oversight of Proposed Health Care Mergers,which calls for greater scrutiny of health care mergers through state regulation.55 As such,consolidation in the industry is already slow and will likely continue to be slow in the future,hurting firms ability to achieve scale and greater efficiency.Despite the benefits that doctors offices can gain from scale,government regulations at the federal and state level have historically been an impediment to the growth of doctors offices.Indeed,CON laws and other regulations that stifle consolidation still exist because proponents of the antimonopolist tradition continue to assert that policymakers should protect small firms from competitionwhen they should really be encouraging them to grow and competedespite reduced efficiency.As a result,consolidation in the doctors offices and physician groups industry more generally is demonized even if it can bring efficiency gains.For example,a New York Times article asserts that“the absorption of doctors practices is part of a vast,accelerating consolidation of medical care,leaving patients in the hands of a shrinking number of giant companies or hospital groups.”56 Meanwhile,Senator Elizabeth Warren(D-MA)asserted that she has a fear“that the acquisition of thousands of independent providers by a few massive health care mega-conglomerates could reduce competition on a local or national basis,hurting patients and increasing health care costs.”57 This combination of state regulations and paranoia among policymakers is partly why the industry still has a large share of small firms despite the higher productivity of large firms.In 2017,large firms comprised only 0.6 percent of physicians offices(not including mental health specialists).There were 919 such offices.The remaining 99.4 percent of physicians offices were small(160,367 offices).58(See figure 8.)INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 13 Figure 8:Small and large firms shares of physicians offices(not including mental health specialists)59 To encourage greater efficiency,state governments should take two steps to encourage greater consolidation in the doctors offices industry.First,they should repeal CON laws if their state still has one in existence.This would encourage doctors offices to consolidate and grow larger without higher costs or fear of repercussions from this law that specifically prohibits firm expansion without extensive review.Second,the state governments should conduct a broad review of their state regulations and compile a list of all regulations relevant to physician groups in order to find those that create a barrier to consolidation and firm growth,and then modify those regulations so that they continue to serve their purpose without impeding consolidation.In addition,some regulations that have the sole purpose of impeding consolidation,such as those pertaining to M&A approvals,should be modified to focus on balancing efficiency gains with competitive effects.Construction Larger construction firms are also generally more efficient because of scale economies.Construction projects are often complex,face uncertainty,and require high levels of coordination between multiple actors,such as architects,designers,manufacturers,and other contractors.60 As a result,the most efficient construction firms have to adopt technologies that increase collaboration and coordination in the project value chain.61 For instance,Swissroc,a Swiss construction firm,adopted a single centralized platform for its workflows that resulted in higher-quality buildings,more referrals,and a 300 percent increase in revenue.Yet,adopting these technologies means high fixed costs for firms.62 As a result,larger construction firms are better positioned to manage risk and adopt new technologies to funnel the projects along at greater efficiency because they can spread out the costs among more projects.Accordingly,there are strong incentives for M&A in construction,including their post-merger sales being higher than their combined sales as individual firms.63 Small firms99.4%Large firms0.61,286Firms160,367(99.4%)INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 14 Indeed,the data supports this.In 2017,large construction firms with over 500 employees were 4 to 148 percent more productive than the industry average.64 Small construction firms were 2 to 25 percent less productive than their respective industrys average.65 For instance,the large firms in the commercial and institutional building construction industry were 38 percent more productive than the industry average,with its receipts per employee at$1.03 million compared with the industry average of$744,462.66 Yet,the small firms in this industry were 10 percent less productive than the industry average,with a receipt per employee of$672,831.67(See figure 9.)Figure 9:Construction receipts per employee68 Despite the greater efficiency of larger firms,the construction industry has historically been and continues to be extremely fragmented because of the extensive unstandardized local and state regulations that have been imposed.Indeed,as early as the 1800s,U.S.cities began establishing regulations that would affect how the construction industry would operate.For example,the California Real Estate Inspection Association notes that larger U.S.cities implemented building codes as early as the 1800s,with New Orleans establishing a law in 1865 that required public property inspections.69 By the 1880s,a myriad of local jurisdictions had also implemented their own versions of exit requirements,plumbing regulations,and hoist and elevator regulations.70 As such,the idiosyncratic nature of these early regulations likely discouraged early construction firms from growing into other jurisdictions,disincentivizing growth and consolidation.By the 1980s,these unstandardized regulations affected every aspect of the construction industry.State and local jurisdictions had implemented such an extensive range of regulations that construction firms had to navigate regulations on aesthetics,demolition,environmental protection,explosives,liability,material and equipment acceptance,and wages,among others.71 This meant that construction firms that wished to expand now faced high entry barriers because they had to 1)familiarize themselves with a wide range of regulations that impacted the industry$0.0M$0.5M$1.0M$1.5M$2.0M$2.5MNew housing for-sale buildersNew multifamily housing constructionCommercial and institutional buildingNew single-family housing constructionIndustrial buildingResidential remodelersSmall firmsLarge firmsAll firmsINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 15 and 2)navigate the differences between these regulations from one jurisdiction to another.As such,construction firms faced higher costs when operating in more than one jurisdiction,disincentivizing them from consolidating and growing.Indeed,this is why construction industry expert Barry LePatner wrote in his book that“everyone associated with the process of purchasing land and building on it over the last twenty-five years know that regulation has grown exponentially there is little double that the current system of government regulation is repressive enough to impede U.S.productivity growth.”72 These unstandardized regulations still place burdens on construction firms seeking to expand.For example,at the local level,construction firms have to abide by local building codes,which vary greatly by local jurisdiction.These include permits,approvals,safety and worksite controls,and public sector mandates for lowest price rules,among other regulations.73 As a result of these unstandardized local regulations,construction firms are hesitant to consolidate or groweven only slightly to the next local jurisdictionbecause they face higher risks working in a jurisdiction where they are unfamiliar with the regulations.In fact,even a uniform building code can have different interpretations depending on the area.For example,Richard Mettler of the Home Builder Association of Phoenix asserted that the one local building code governing the greater Pheonix area isnt even uniform because the officials in Pheonix have a different interpretation of the code than do those in Tempe or Mesa.74 Despite the greater efficiency of larger firms,the construction industry has historically been and continues to be extremely fragmented because of the extensive unstandardized local and state regulations that have been imposed.Assuming that a construction firm wants to expand across state lines,unstandardized state regulations become the next barrier they have to overcome.For example,mechanics lien laws a legal tool that enables contractors,subcontractors,and suppliers to recover compensation for unpaid construction work or for materials they have suppliedvary by states.For instance,the mechanics lien law in Alaska asks for construction firms to prove that an owner consented to a firms services;yet,other states do not mention who has the burden of proof in the regulation.75 These variations mean that construction firms will have to familiarize themselves with the lien law for each state they operate in or hire a professional to help.In other words,they will either have to face the opportunity cost of time to understand each new regulation or the cost of hiring a professional.In either case,the cost of operating in multiple states increases the cost for construction firms,disincentivizing them from consolidating or growing.As such,local and state governments should work to standardize the regulations imposed on the construction industry to encourage consolidation.These recommendations are not new.MIT professor Kelly Burnham called for“national acceptance of a standard building code for plumbing”as early as 1959.76 Others have suggested that the standardization of building codes would reduce costs.Yet,despite these calls and evidence that greater consolidation can benefit the industry,regulations are still highly fragmented across local and state jurisdictions.This is partly why a participant at an Information Technology and Innovation Foundation(ITIF)event asserted that the construction industry is“Americas sole remaining mom and pop industry that wastes at least$120 billion each year”due to its inefficiencies.77 INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 16 This is supported by the data.The construction industry has a large share of smaller,less-efficient firms.In 2017,the six construction industries under the 2-digit NAICS construction sector had between 0.1 and 2.2 percent of large firms in their industry,meaning that a vast majority of firms were still small and had not reached scale economies.78 For example,the new single-family housing construction industry had 49,215 firms,but only 34 had more than 500 employees.(See figure 10.)Figure 10:Small firms share of construction industries79 First,to encourage greater efficiency,the federal government could publish a standardized set guidelines on 1)the type of regulations the industry should have and 2)how to set regulations for the construction industry so that it encourages greater consolidation.Although the federal government cannot limit state regulations,it can encourage greater cohesiveness in regulations across states so that construction firms face fewer barriers when consolidating and expanding across state lines.Furthermore,setting guidelines on how to set regulations so that it encourages consolidation can also be an indirect way to prevent future state regulations from impeding firm growth.Second,state governments can also encourage greater consolidation by implementing a standard set of regulations for the industry that effectively preempt local regulations.This will ensure that firms face fewer costs and barriers when expanding across local jurisdictions because they will only have to understand a standardized state regulation rather than multiple varying sets from each local jurisdiction.With fewer barriers,firms will be encouraged to consolidate and grow,increasing their efficiency.100.9.7.5.9.8%0 0%Residential remodelersNew single-family housingNew housing for-sale buildersCommercial and institutional buildingNew multifamily housingIndustrial buildingSmall firmsLarge firmsINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 17 Farming Notwithstanding the sentimental views toward small,family farms,larger farms are generally more efficient than their smaller counterparts partly because of scale economies.According to Purdue University,53 percent of costs(land,machinery,and labor)in agricultural production are fixed.80 As a result,large farms producing more yields benefit from increasing returns to scale as a higher output reduces the average cost of production.In fact,a study of the heartland and Northern Crescent states finds that scale economies are the driving factor for farm efficiency and competitiveness in the economy.81 Simply put,larger farms are generally more efficient.Accordingly,a study by MacDonald,Hoppe,and Newton concludes that a full-time employee at a large farm generates annual sales of$212,766 compared with$36,630 for a small farm producing less output.82 This is compared with the average farms annual sales of$102,145 per full-time employee.83(See figure 11.)Figure 11:Farm receipts per full-time employee84 Despite the greater efficiency of larger farms,government intervention in the form of farm subsidies has historically disincentivized consolidation in the industry.The original intent of these subsidies was to help cash-strapped farmers during the Great Depression.During the height of the Great Depression,President Roosevelt passed the Agricultural Adjustment Act(AAA)as part of the New Deal to curtail the output of crops and livestock in order to stabilize farmers income amid the production of excess crops and low prices.85 Yet,these interventions continued after the Great Depression even though they could no longer be economically justified.According to the Minneapolis Federal Reserve Bank,the AAA was not repealed after the Great Depression but instead became a permanent price adjuster for six basic commodities so that their levels were“relative to the general prices levels in the 1910-1914 period”even during$0$50,000$100,000$150,000$200,000$250,000Small farms(Sales$1M)All farmsINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 18 periods when farm incomes were strong.86 In addition to the AAA,the government continued adding other farming subsidiessuch as supply controlsthat fixed prices for farmers over the next few decades.As a result,farmers no longer had to worry about competing or becoming more efficient in the economy because the government subsidies would essentially guarantee price and revenue to farmers with no strings attached.Indeed,the Private Enterprise Research Center at Texas A&M University concluded that farm subsidies are inefficient because they incentivize farmers to make decisions that will get them the most subsidies rather than“fetch the best price on the open market.”87 In other words,government subsidies disincentivized farms from consolidating,reaching scale economies,and growing more efficient than they were during this period.Today,government subsidy programs continue to disincentivize farms from consolidating and becoming more efficient.Indeed,the U.S.Department of Agriculture spends about$30 billion a year on farm subsidies,which include crop insurance programs,agricultural risk coverages,price-loss coverages,and ad hoc and disaster aid relief,among others.88 Although some support programs are reasonable,such as the conservation program,numerous other programs are just a form of government intervention that impedes the process of competition while disincentivizing growth and efficiency when resources are handed out without any strings attached.For example,the crop insurance program is a farm subsidy program that covers over 100 crops,paying out billions of dollars a year to farmers when their crop yields or revenue is reduced.89 Moreover,most farmers do not have to pay the insurance premium to enroll in this program:The government subsidizes nearly 62 percent of premiums.90 As such,farms have little incentive to consolidate and adopt specialized equipment that will help manage risks and reduce costs because the government removes risks and guarantees revenue with its subsidies.Despite the greater efficiency of larger farms,government intervention in the form of farm subsidies has historically disincentivized consolidation in the industry.The crop insurance program is just one of many government subsidy programs that disincentivize farms from consolidating to increase efficiency.The Price Loss Coverage program and the Agricultural Risk Coverage program are two other programs that also guarantee price and revenue to farmers.91 Both programs make payments to producers when market prices or revenues fall below a certain level.92 Similar to the AAA and other subsidy programs in the 20th century,these two programs disincentivize growth and efficiency because farmers no longer have to compete based on who can offer the lowest price to consumers to gain revenue.93 Instead,they just have to focus on how to obtain the most subsidy from the government.94 As such,instead of finding ways to grow and become more efficient,farms are figuring out how to shift from growing wheat to corn because corn is more likely to fetch higher subsidies in a given year.As a result,government subsidies are one of the reasons the industry still has so many smaller,less-efficient farms.In 2021,the U.S.Department of Agriculture found that 51 percent of all farms had sales less than$10,000 and only 7.4 percent had sales of over$500,000.95(See figure 12.)INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 19 Figure 12:Farming market shares96 To be sure,many of these smaller farms depend on subsidies for income.A USDA technical paper finds that many small and medium-sized farms receive some program benefits from the government,with only one in four able to sell enough to cover their costs.97 The government payments tend to be greater than sales for the smallest farms,and 90 percent of their sales and government payments are derived from government subsidies.98 Indeed,controlling for size,small farms,defined by USDA as those with less than$100,000 in GCFI,received$0.29 per dollar of sales while large farms(more than$1 million in GCFI)only received$0.02 cents.99(See figure 13.)In other words,government subsidies disincentivize growth and consolidation because large farms generally get less than small farms when their size is controlled for.0 0Pp0%Small farms(Sales$500K)INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 20 Figure 13:Government subsidies per dollar of sales100 To encourage greater efficiency,the federal government should not eliminate subsidies for revenue because they ensure a stable food system.Instead,they should tie subsidies to farm efficiency gains or farms efforts to improve their efficiency.In other words,the government should first establish a productivity measure for farms and then establish a new set of policies that only provide subsidies to farms that have experienced productivity gains in the preceding five years(five years because it will likely take time for efforts to increase efficiency to show in productivity measures).Alternatively,the government can also tie subsidies to a farms efforts to increase its efficiency,such as by adopting specialized equipment.Moreover,the government should also establish regulations that prevent farms from manipulating the types of crops produced in order to receive higher subsidies.As a result of these policies,the government will encourage farms to consolidate as they search for ways to increase their efficiency without endangering the stability of the food system.Telecommunications Larger telecommunications firms are also generally more efficient than smaller ones because of scale economies.Telephone and Internet service providers(ISPs)pay extremely high up-front costs,face limited materials and labor forces,and see a return on investment tied directly to the number of customers in a particular area.The provision of telecom and broadband services is also highly complex,technical work that requires considerable investments in infrastructure and development.101 Because a large number of potential customers is needed to recoup even the up-front costs of a project,small telecom providers are generally quite easily priced out of the market,or need heavy,ongoing government subsidies to survive.Large firms have easier access to the massive up-front funds needed,entrenched institutional knowledge that can help them$0.00$0.05$0.10$0.15$0.20$0.25$0.30Small farms(GCFI$100K)Small farms($100K to$249,999)Mid-sized farms($250K to$499,999)Mid-sized farms($500K to$999,999)Large farms(GCFI$1M)INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 21 avoid pricey mistakes,and widespread existing broadband networks and customer bases that are more cost-effectively expanded than built anew.The data is in accord.For wired telecommunications carriers,wireless telecommunications carriers(except satellite),and all other telecommunications industries,large firms range from 3 to 46 percent more productive than their respective industrys average.By contrast,small firms are 31 to 61 percent less productive than their respective industrys average.102 For example,the large firms in the wireless telecommunications carriers industry are 7 percent more productive than the industry average,with receipts per employee of$916,985 compared with the industry average of$854,583.103 This is compared with the small firms receipts per employee of$331,056,or 61 percent less efficient than the industry average.104(See figure 14.)Figure 14:Telecommunications industries receipts per employee Despite the greater efficiency of larger telecom firms,government policies discourage consolidation in the telecommunications industry.This is because some government subsidy programs that enable telecom services in high-cost areas are biased toward smaller providers.For instance,the High Cost Loop support program under the High Cost Fund is biased toward smaller providers.Indeed,historically,the subsidy was based on a formula that only provided support to the telecom companies whose costs were a specified percentage above the national average.As a result,if two companies merge and achieve scale economies,they risk losing this subsidy because their cost to provide service may no longer exceed the national average by the designated percentage.Thus,this means that the telecom companies receiving this subsidy has every incentive to shun growth and consolidation that could result in lower costs and greater efficiency.$0$200,000$400,000$600,000$800,000$1,000,000All othersWireless carriers(except satellite)Wired carriersSmall firmsLarge firmsAll firmsINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 22 Although a vast proportion of telecom companies that once received this subsidy have moved over to the more cost-efficient Alternative Connect America Model(ACAM)of support,some companies are still receiving the High Cost Loop support.However,the continuation of High Cost Loop support as an option for telecom providers is concerning because the subsidy still uses the same formula that caused inefficiencies in the past.According to the Universal Service Administrative Co.,the subsidy is still only available to rural companies whose costs to provide service exceeds 115 percent of the national average cost per line.105 In other words,telecom companies face the risk of losing support if their costs suddenly fell below 115 percent of the national average.As a result,companies still receiving this subsidy have no incentive to consolidate,achieve scale economies,and reduce costs.Indeed,the bias toward small firms in subsidies is partly why the three different telecom industries still have a large share of small firms.In 2017,these industries had 1.3 percent to 3 percent of large firms with more than 500 employees,meaning all three industries still have a vast majority of firms that have yet to maximize scale economies.106 For example,the wired telecommunications industry has only 100 large firms but 3,264 small firms,meaning large firms only make up 3 percent of all firms.107 This means that growth in size of the 3,264 small ones can lead to greater efficiency from scale economies.(See figure 15.)Figure 15:Small firms share of telecommunications industries108 In sum,subsidy programs are undoubtedly necessary to close the digital divide,but the method of subsidy distribution needs to be revamped to encourage greater consolidation in the industry.The best way to do so is to eliminate the High Cost Loop support program and move the remaining telecom companies still receiving this subsidy to the ACAM of support.This is because the provision of subsidy through the ACAM model does not hinge on a firms cost,meaning that 98.7.6.0%0 0%Wireless carriers(except satellite)All othersWired carriersSmall firmsLarge firmsINFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 23 two telecom companies looking to merge for efficiency gain can do so without losing subsidies.As such,moving the remaining firms to the ACAM model could only result in efficiency gains as smaller telecom companies choose to consolidate in order to maximize their scale economies.In the case that the telecom companies still receiving the High Cost Loop support resist the move to the ACAM model,an alternative solution would be that the formula for the provision of High Cost Loop support is modified so that it is not based on whether a provider has high costs.Regardless of the solution pursued,the main goal is to ensure that firms seeking to consolidate and become more efficient can do so without losing subsidies.POLICY RECOMMENDATIONS At the broadest level,policymakers should focus on developing policies and programs that encourage small firms to grow,merge based on scale economy benefits,and compete rather than rely solely on government assistance programs for survival.Going beyond that,policymakers should be focused on ensuring that current government policies and programs do not disincentivize greater consolidation in industries characterized by high minimum efficient scale.For instance,the 12 industries in 5 sectors studied all benefit from scale economies,and that is why the large firms in these industries are generally more productive than their smaller counterparts.Yet,these industries still have many small firms,some of which are the result of market conditions,but others are from government policy distortion.Policymakers should encourage an increase in firm size for these and related sectors through greater consolidation from M&A or the loss of market shares from one firm to another.This means policymakers should modify or remove the local,state,or federal government regulations that discourage consolidation in these industries.The Biden administration should draft a new executive order on competition that explicitly looks for instances when government policies keep firms in particular industries too small and unproductive.The goal of the order should be to eliminate regulations that keep these industries fragmented.The administration should also create an interagency body to examine whether an industry benefits from large scale economies and,if so,whether the regulations in that industry are discouraging consolidation.It would also have the task of recommending ways to modify or,if possible,remove existing regulations that discourage consolidation without harming those that the regulations are meant to protect(e.g.,standardizing building codes rather than eliminating them).The Biden administration should draft a new executive order on competition that explicitly looks for instances when government policies keep firms in particular industries too small and unproductive.Finally,FTC and DOJ should not modify their merger guidelines and premerger notification rules.This is because their recent decision to change the merger guidelines,premerger notification rules,and Premerger Notification and Report Form will discourage consolidation for industries with high minimum efficient scale.First,the merger guidelines will discourage consolidation because they no longer acknowledge that mergers can increase efficiencies.This means mergers will face more scrutiny and denials even if their efficiencies balance out anticompetitive effects.109 Second,the modifications to the premerger notification rules and form will increase the burden that firms face when filing merger notifications with the new,extended lists of documents that INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 24 were not previously required.110 These changes will decrease the value firms place on M&A,reducing their incentive to consolidate.As such,the amendments in these two federal regulations are also government distortions that need to be modified in order to promote greater consolidation and efficiency in industries wherein large firms are more efficient,but small firms are still too many.CONCLUSION In a majority of industries in the U.S.economy,larger firms are generally more productive than their smaller counterparts partly because of scale economies.One way firms within these industries can achieve this greater scale and efficiency is through consolidation.This is because consolidation,often through mergers between rivals,increases firms sizes through growth.As such,a growth in average firm size and efficiency can also increase an industrys productivity.To be sure,antitrust policy is important to ensure that scale benefits are not outweighed by anticompetitive incentives to raise prices,reduce output,or diminish innovation.Yet,government regulations at the local,state,and federal levels in industries with large scale economies often unnecessarily discourage consolidation even when the industry still have a large share of small firms.As such,policymakers need to ensure that policiesincluding antitrust,regulation,tax,and subsidiesat all levels of government are size neutral.Given that many regulations still disincentive growth and consolidation,the first step for policymakers is to modify or,if possible,remove these regulations in industries characterized by large scale economies.This is critical because the economy is made up of both large and small firms that need different levels of scale economies to thrive:The U.S.economy needs both dry cleaners and semiconductor fabrication plants,but expecting a semiconductor plant to have only five employees,much like a dry cleaner would,to produce millions of chips would be unreasonableand it goes without saying that having 1,000 employees to dry clean clothes for a local neighborhood would be just as unreasonable.Regulations should not disincentivize consolidation or growth,but rather incentivize firms to grow to as big or as small as they need in order to be efficient,including through M&A.In so doing,size-neutral regulations would help the U.S.economy because all firms would have incentives to grow to an efficient scale.As such,this could be the first step to reversing the United States declining productivity growth since 2005.Also,when firms maximize their efficiencies from scale economies,they are also in a better place when competing in the global market against foreign competitors.If policymakers want a productive,growing economy that can compete globally,they need to remove regulations that demonize consolidation and larger firms.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 25 Acknowledgments The author would like to thank Robert Atkinson,Joseph Coniglio,Joe Kane,Lilla Kiss,and Jessica Dine for their feedback and assistance on this report.Any errors and omissions are the authors alone.About the Author Trelysa Long is a policy analyst for antitrust policy with ITIFs Schumpeter Project on Competition Policy.She was previously an economic policy intern with the U.S.Chamber of Commerce.She earned her bachelors degree in economics and political science from the University of California,Irvine.About ITIF The Information Technology and Innovation Foundation(ITIF)is an independent 501(c)(3)nonprofit,nonpartisan research and educational institute that has been recognized repeatedly as the worlds leading think tank for science and technology policy.Its mission is to formulate,evaluate,and promote policy solutions that accelerate innovation and boost productivity to spur growth,opportunity,and progress.For more information,visit itif.org/about.ENDNOTES 1.U.S.Bureau of Labor Statistics,Labor Productivity and Cost Measures for Major Sectors(labor productivity change from previous year for nonfarm business sector),accessed November 2,2023,https:/www.bls.gov/productivity/tables/.2.Robert D.Atkinson and Michael Lind,Big is Beautiful(Massachusetts:The MIT Press,2018).3.“Executive Order on Promoting Competition in the American Economy,”The White House,July 9,2021,https:/www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/.4.Maureen Ohlhausen and Taylor Owings,“Evidence of Efficiencies in Consummated Mergers,”U.S.Chamber of Commerce,June 1,2023,https:/ Davut,“The Minimum Efficient Scale:A Note on Terminology,”https:/dergipark.org.tr/tr/download/article-file/36306.6.U.S.Census Bureau,Statistics of U.S.Businesses(U.S.&states,6-digit NAICS),accessed November 9,2023,https:/www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.7.Ibid.8.Ibid.9.Ibid.10.Ibid.11.Ibid.12.T.R.Bishnoi and Sofia Devi,“Cost Efficiency and productivity,”in Banking Reforms in India,edited by Philip Molyneux(Bangor:Palgrave Macmillan,2017),121-163,https:/ TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 26 14.Markus Berger-de Leon et al.,“Buy and scale:how incumbents can use M&A to grow new businesses,”McKinsey and Digital,December 21,2022,https:/ Farrell and Carl Shapiro,“Scale Economies and Synergies in Horizontal Merger Analysis”(working paper,University of California,Berkeley Competition Policy Center,October 2000),https:/escholarship.org/uc/item/8v1500b8;https:/www.journals.uchicago.edu/doi/10.1086/704069.16.Nikolas Zolas et al.,“Advanced Technologies Adoption and Use by U.S.Firms:Evidence from the Annual Business Survey”(working paper at the Center for Economic Studies,December 2020),https:/www2.census.gov/ces/wp/2020/CES-WP-20-40.pdf.17.Joel David,“The Aggregate Implications of Mergers and Acquisitions,”The Review of Economic Studies 88,no.4(2012),https:/ Demirer and Omer Karaduman,“Do Mergers and Acquisitions Improve Efficiency:Evidence from Power Plants”October 27,2022,https:/www.ftc.gov/system/files/ftc_gov/pdf/demirerkaraduman.pdf.19.Small Business Administration,“Frequently Asked Questions,”March 2023,https:/advocacy.sba.gov/wp-content/uploads/2023/03/Frequently-Asked-Questions-About-Small-Business-March-2023-508c.pdf.20.United States Department of Agriculture,Agricultural Resource management Survey(ARMS)(gross cash farm income for all farms),accessed January 20,2023,https:/www.census.gov/data/tables/2021/econ/susb/2021-susb-annual.html.21.U.S.Census Bureau,Statistics of U.S.Businesses 2021(U.S.&states,6-digit NAICS),accessed January 22,2024,https:/www.census.gov/data/tables/2021/econ/susb/2021-susb-annual.html.22.Robert DeYoung and Gary Whalen,“Banking Industry Consolidation:Efficiency issues”(working paper,Jerome Levy Economics Institute Working Paper No.110,1998),https:/ Mester,“Scale Economies in banking and Financial Regulatory Reform,”Federal Reserve Bank of Minneapolis,September 1,2010,https:/www.minneapolisfed.org/article/2010/scale-economies-in-banking-and-financial-regulatory-reform.24.Allen Berger,William Hunter,and Stephen Timme,“The efficiency of financial institutions:A review and preview of research past,present,and future,”Journal of Banking and Finance 17,no.2-3(1993),https:/ Bureau,Statistics of U.S.Businesses(U.S.&states,6-digit NAICS),accessed November 9,2023,https:/www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.26.Ibid.27.Ibid.28.“McFadden Act of 1927,”Federal Reserve History,November 22,2013,https:/www.federalreservehistory.org/essays/mcfadden-act.29.Ibid.30.Ibid.31.Atkinson and Lind,Big is Beautiful.32.Ibid.33.Ahmet Ali Taskin and First Yaman,“The effect of branching deregulation on finance wage premium”(FAU Discussion Papers in Economics,August 2023),https:/www.econstor.eu/bitstream/10419/280992/1/1876291222.pdf.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 27 34.White House,Executive Order on Promoting Competition in the American Economy,July 9,2021,https:/www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/.35.“U.S.Bank M&A to Remain Stalled Until Regulatory,Valuation Headwinds Abate,”Fitch Ratings,July 17,2023,https:/ Lynn,“Antitrust:A Missing Key to Prosperity,opportunity,and Democracy,”Desmos,October 2013,https:/ and Lind,Big is Beautiful.38.James Fontanella-Khan,Ortenca Aliaj,and Rob Armstrong,“M&T Bank to buy Peoples United Financial in$7.6bn deal,”Financial Times,February 22,2021,https:/ Bureau,Statistics of U.S.Businesses(U.S.&states,6-digit NAICS),accessed November 9,2023,https:/www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.40.Ibid.41.Atkinson and Lind,Big is Beautiful.42.Ibid.43.Laurence Baker,M.Kate Bundorf,and Anne Beeson Royalty,“The Effects of Multispecialty Group Practice on Healthcare Spending and Use”(working paper,NBER,June 2019),https:/www.nber.org/system/files/working_papers/w25915/w25915.pdf.44.Robert Miller et al.,“The Value of Electronic health Records in Solo or Small Group Practices,”Health Affairs 24,no.5(2005),https:/www.healthaffairs.org/doi/10.1377/hlthaff.24.5.1127.45.Baker,Bundorf,and Beeson Royalty,“The Effects of Multispecialty Group Practice on Healthcare Spending and Use.”46.U.S.Census Bureau,Statistics of U.S.Businesses(U.S.&states,6-digit NAICS),accessed November 9,2023,https:/www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.47.Ibid.48.Maureen Ohlhausen,“Certificate of Need Laws:A Prescription for Higher Costs,”Antitrust 30,no.1(Fall 2015),https:/www.ftc.gov/system/files/documents/public_statements/896453/1512fall15-ohlhausenc.pdf.49.Jessica Harris,“Certificate of need Laws:A Brief History,”Cardinal Institute for West Virginia Policy,https:/ of Need Laws:A Prescription for Higher Costs”;Adney Rakotoniaina and Johanna Butler,“50-State Scan of State Certificate-of-Need Programs,”National Academy for State Health Policy,May 22,2020,https:/nashp.org/state-tracker/50-state-scan-of-state-certificate-of-need-programs/.51.Ohlhausen,“Certificate of Need Laws:A Prescription for Higher Costs.”52.Ibid.53.Arielle Dreher,“States look to crack down on health care merger,”Axios,June 26,2023,https:/ Tool for States to Address Health Care Consolidation:Improved Oversight of Health Care Provider Mergers,”National Academy for State Health Policy,November 12,2021,https:/nashp.org/a-tool-for-states-to-address-health-care-consolidation-improved-oversight-of-health-care-provider-mergers/.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 28 56.Reed Abelson,“Corporate Giants Buy Up Primary Care Practices at Rapid Pace,”The New York Times,May 8,2023,https:/ Condon,“Corporate giants ramp up primary care deals,”Hospital CFO Report,May 8,2023,https:/ Bureau,Statistics of U.S.Businesses(U.S.&states,6-digit NAICS),accessed November 9,2023,https:/www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.59.Ibid.60.Maria Joo Ribeirinho et al.,“The Next Normal in Construction,”McKinsey&Company,June 2020,https:/ Projects and Infrastructure/Our Insights/The next normal in construction/The-next-normal-in-construction.pdf.61.Ibid.62.Tooey Courtemanche,“Why efficiency in construction is a global issue,”Independent,October 6,2021,https:/www.independent.co.uk/news/business/business-reporter/efficiency-construction-global-issue-b1929129.html.63.Santiago Castagnino et al.,“How to Nail M&A in Engineering and Construction,”BCG,December 19,2019,https:/ Bureau,Statistics of U.S.Businesses(U.S.&states,6-digit NAICS),accessed November 9,2023,https:/www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.65.Ibid.66.Ibid.67.Ibid.68.Ibid.69.“The Development of Our Building Codes,”California Real Estate Inspection Association,https:/www.creia.org/the-development-of-our-building-codes.70.Ibid.71.Barry LePatner,Broken Buildings,Busted Budgets:How to Fix Americas Trillion-Dollar Construction(Chicago and London:The University of Chicago Press,2007).72.Ibid.73.Ribeirinho et al.,“The Next Normal in Construction.”74.LePatner,Broken Buildings,Busted Budgets:How to Fix Americas Trillion-Dollar Construction.75.“Chapter 19-50 State Summary Mechanics Lien Law,”Fullerton and Knowles,2019,https:/ Buildings,Busted Budgets:How to Fix Americas Trillion-Dollar Construction.77.“How IT Can Help Fix Americas Ailing Construction Industry”(ITIF,January 2008),https:/itif.org/events/2008/01/24/how-it-can-help-fix-americas-ailing-construction-industry/.78.U.S.Census Bureau,Statistics of U.S.Businesses(U.S.&states,6-digit NAICS),accessed November 9,2023,https:/www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.79.Ibid.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 29 80.“Its Not Just About Costs Per Acre,Even in Tight Times,”Purdue University,April 6,2015,https:/ag.purdue.edu/commercialag/home/resource/2015/04/its-not-just-about-costs-per-acre-even-in-tight-times/.81.Catherine Paul et al.,“Scale Economies and Efficiency in U.S.Agriculture:Are Traditional Farms History?”Journal of Productivity Analysis 22(2004),https:/ MacDonald,Robert Hoppe,and Doris Newton,“Three Decades of Consolidation in U.S.Agriculture”(technical paper,United States Department of Agriculture Economic Research Service,March 2018),https:/www.ers.usda.gov/webdocs/publications/88057/eib-189.pdf.83.Ibid.84.Ibid.85.Edward Lotterman,“Farm Bills and Farmers:the effects of subsidies over time,”Federal Reserve Bank of Minneapolis,December 1,1996,https:/www.minneapolisfed.org/article/1996/farm-bills-and-farmers-the-effects-of-subsidies-over-time.86.Ibid.87.Dennis Jansen,Liqun Liu,and Andrew Rettenmaier,“U.S.Farm Subsidies:A Prime Example of Crony Capitalism,”Private Enterprise Research Center,July 29,2021,https:/perc.tamu.edu/PERC-Blog/PERC-Blog/U-S-Farm-Subsidies-A-Prime-Example-of-Crony-Capita.88.Chris Edwards,“Cutting Federal Farm Subsidies”(Cato Institute,August 2023),https:/www.cato.org/briefing-paper/cutting-federal-farm-subsidies#types-farm-subsidy.89.Anne Schechinger,“One-third of all crop insurance subsidies flow to massive insurance companies and agents,not farmers,”EWG,July 12,2023,https:/www.ewg.org/research/one-third-all-crop-insurance-subsidies-flow-massive-insurance-companies-and-agents-not;Chris Edwards,“Farm Bill 2023:Crop Insurance Subsidies”(Cato Institute,July 2023),https:/www.cato.org/blog/farm-bill-2023-crop-insurance-subsidies.90.Ibid.91.Congressional Budget Office,“USDA Farm Programs”(Washington,D.C.:May 2023),https:/www.cbo.gov/system/files/2023-05/51317-2023-05-usda_0.pdf.92.Ibid.93.Jansen,Liu,and Rettenmaier,“U.S.Farm Subsidies:A Prime Example of Crony Capitalism.”94.Ibid.95.United States Department of Agriculture,Farm and Land in Farms 2021 Summary(Washington,D.C.:February 2022),https:/www.nass.usda.gov/Publications/Todays_Reports/reports/fnlo0222.pdf.96.Ibid.97.“Food and Agricultural Policy:Taking Stock for the New Century”(technical paper,U.S.Department of Agriculture,2001),https:/ntrl.ntis.gov/NTRL/dashboard/searchResults/titleDetail/PB2002105128.xhtml.98.Michael Duffy,“Economies of Size in Production Agriculture,”Journal of Hunger and Environmental 4,no.3-4(2009),https:/www.ncbi.nlm.nih.gov/pmc/articles/PMC3489134/#R1.99.Authors calculations.United States Department of Agriculture,Agricultural Resource Management Survey(ARMS)(government payments and crop sales),accessed January 17,2024,https:/www.ers.usda.gov/data-products/arms-farm-financial-and-crop-production-practices/.100.Ibid.INFORMATION TECHNOLOGY&INNOVATION FOUNDATION|MAY 2024 PAGE 30 101.“Economics of Broadband Networks:An overview,”NTIA,March 2022,https:/broadbandusa.ntia.doc.gov/sites/default/files/2022-03/Economics of Broadband Networks PDF.pdf.102.U.S.Census Bureau,Statistics of U.S.Businesses(U.S.&states,6-digit NAICS),accessed November 9,2023,https:/www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.103.Ibid.104.Ibid.105.“High Cost Loop,”Universal Service Administrative Co.,https:/www.usac.org/high-cost/funds/legacy-funds/high-cost-loop/.106.U.S.Census Bureau,Statistics of U.S.Businesses(U.S.&states,6-digit NAICS),accessed November 9,2023,https:/www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.107.Ibid.108.Ibid.109.Ted Bolema,“Decoding the 2023 FTC and DOJ Merger Guidelines:Insights into Shifting Antitrust Enforcement”(Mercatus Center,February 2024),https:/www.mercatus.org/research/policy-briefs/decoding-2023-ftc-and-doj-merger-guidelines-insights-shifting-antitrust.110.Harry Robins et al.,“New HSR Form Will Transform the U.S.Merger Review Process,”Morgan Lewis,June 30,2023,https:/
2024-12-29
30页
5星级
bp in the UKOur impact on the UKeconomy in 2024bp in the UK:Our impact on the UK economy in 20241Con.
2024-12-29
23页
5星级
Economic Report 2024Contents2Economic Report 202403Foreword04Key Findings23Socio-Demographic Aspects 3034Glossary&Methodology05HR Services Industry2022 Results Sales Revenues Number of agencies Internal staff17HR Services Industry2023 Trends Sales Revenues Agency work activity index Online jobs market Job placements Penetration Economic sectors servedRegional Focus North America Latin America Europe-APAC3The HR services industry demonstrated remarkable resilience and adaptability throughout 2022,following a stellar recovery in 2021 from the global economic downturn caused by the pandemic.During an era marked by rapid change,uncertainty,complexity,and ambiguity,this annual economic report serves as a compass,shedding light on the most recent trends in the industry.In 2022,the HR services industry remained an anchor for millions of individuals and thousands of companies worldwide,facilitating the return of job seekers to employment and filling vacancies.From innovative remote work solutions to the prioritisation of workforce well-being,organisations within the HR services ecosystem demonstrated agility by putting the needs of both clients and workers at the heart of their operations.The result was not only growth for the industry and the economies they operate in but,most importantly,the invaluable support provided to their clients in those troubled times and the positive impact they have made on the lives of millions of workers.As we delve into the data presented in this report,it becomes clear that collaboration and innovation are key to successfully navigating the complexities of todays labour markets.Looking ahead,let this report be a cornerstone for informed decision-making and strategic planning,securing ongoing growth for the HR services industry.A benefit not only for the industry but also for society at large.Marius OsterfeldChair of the Economic Affairs CommitteeViktorija ProskurovskaLabour Market Intelligence ManagerForewordNavigating in turbulent times4Source:IMF,WEC members,SIA Own calculationsFollowing a strong 2021,the first half of 2022 was still upbeat,but by Q4 2022 agency work activity in terms of hours worked started declining across the globe.Tight labour markets,characterised by high levels of job scarcity,peaked in 2022helping the global unemployment rate reducefrom 6.1%in 2021 to 5.9%.At the same time,production limits due to lockdowns in crucial global economies like China and the rising demand after lockdown lifts triggered inflation.As a result,the HR services industry turnover grew 8.3%in 2022,largely as a result of an increase in workers remuneration.Largest HR services markets sales revenues,such as the US,grew a solid 8.3%in 2022,while Australian and Japanese markets expanded 13.4%and 12.7%respectively.Turnover in Germany grew 8.6%,while the UK registered a modest 1.8%increase.Among smaller markets,double-digit growth was registered in Canada(27.3%),Switzerland( 18.8%),China(18.3%)and India( 17.4%).Number of people placed in jobs by the HR Services industry globally increased 4.7%in 2022 to nearly 60 million individuals.Strong development was reported by Ireland(41%),India(13.9%)and Australia(10.4%).A reduction in headcount took place in Portugal(-17%),Denmark(-12%)and Chile and Brazil(both-8%).Despite the overall positive results in terms of the number of people that the HR Services sector helped find jobs,the agency work penetration rate was largely stable at 1.9%compared with 2021,indicating that the increase in the working age population in 2022 from the year before was proportional to the increase in the number of people placed in jobs.Early indications suggest that in 2023,the agency work activity dynamics stayed largely negative way throughout the year.While the number of open job postings started gradually reducing,the gap is still wide,not least due to a skills mismatch.This fact points to a great need and opportunity for training and(re-)skilling of job seekers.Key findingsKey results of 2022 and early indications for 2023Economic Report 20245Agency WorkIs a triangular employment relationship,defined in ILO Convention 181 as:“Services consisting of employing workers with a view to making them available to a third party,who may be a natural or legal person(“user enterprise”)which assigns their tasks and supervises the execution of these task”.Managed Services ProvidersMSP is a service whereby a company takes on primary responsibility for managing an organizations contingent workforce programme.Typical responsibilities of an MSP include overall programme management,supplier selection and management,order distribution and often consolidated billing.And MSP may or may not be independent of a staffing provider.Direct RecruitmentServices for matching offers and applications for employment,without the private employment agency becoming a party to the employment relationships which arise therefrom(Source:ILO Convention 181),including executive search and selection.Recruitment Process OutsourcingA service by a third-party specialist provider to assume the role of the clients recruiting department by owning and managing part of all its recruitment process and related recruitment supply chain partner relationships,provided the necessary skills,activities,tools,technologies,and process methodologies.Career Management Services which enable jobs,skills and business performance to be viewed in an integrated way and with a long-term perspective.In includes primarily services such as outplacement and career transition,redevelopment and other development activities designing to help organisations and individuals to manage changes in the practices,processes,conditions and basis of employment.Overview of the HR services represented in this reportEconomic Report 20246Source:WEC members,SIA Own calculations*Growth in nominal termsPrivate Employment Services Industry Global Market 2022632bnUS$666bnGlobal HR Services Industry(bn)Global sales revenues of HR services industry grew 8.3%*in 20222328bn;-57bn; 66.8bn; 21.1wbn;-6.2n; 28+n; 25.9%Agency work(through agency)Agency work(through MSP)Direct RecruitmentMSP(excl.AW activities)RPOOutplacement2022202120202019Economic Report 20247Source:WEC members,SIAOwn calculations(real terms)100107114118121Australia 129100141143119147Austria 14810010510691107Belgium 10710098114105116Finland 1291001051058296France 1001001031038696Germany 101100117128144188India 22510010410095123Italy 120100102118128132Japan 155100113119108119Netherlands 10910011011498115Norway 12110099927590Poland 8210010410993109Spain 10410010710897117Sweden 130100110112106119Switzerland 1281009710591104UK 9310010810090107USA 104201720182019202020212022HR Services Sales Revenues index in selected Countries(national currency,Inflation-adjusted)20202022India144225Japan128155Austria119148Sweden97130Finland105129Australia118129Denmark99129Switzerland106128Norway98121Italy95120Netherlands108109Belgium91107USA90104Spain93104Germany86101France82100UK9193Poland7582Top 5 markets sales revenues increased 11tween 2017-2022Economic Report 20248Sales revenues in largest HR services markets-2022(bn,y-o-y%)Evolution was varied across countriesSources:WEC Members,SIAOwn calculations(nominal terms)Sales revenues in 15 largest markets grew 8.96bn, 8.3ebn, 12.7Sbn, 1.8Ebn, 8.68bn, 13.4#bn, 3.4bn, 2.5!bn, 18.3bn, 17.4bn, 4.4bn, 27.3bn, 18.8n, 11n,-4.4kn, 0.5%Source:WEC members,SIA426bn(USD 449bn)or 67%Top five HR services markets totalledof the global total of HR services sales revenues in 2022.All largest markets grew in 2022.226bn(USD 238bn)65bn(USD 68bn)53bn(USD 56bn)45bn(USD 47bn)38bn(USD 40bn)Top five countries represent 67%of WEC global sales revenuesEconomic Report 20249Sources:ASA Staffing Index,WEC Members,Eurostat Own calculations Global growth in 2022 was mainly driven by the Chinese market220 068HR ServicesAgencies4 millionInternalStaffThe number of HR services agencies grew1.9%HR services industry increased agencies&staff steadily2.2%The number of internal staff grew Economic Report 202410Growth was sustained in most of the largest global HR marketsEconomic Report 202411Sources:WEC Members,EurostatOwn estimations and calculations 2.6 millionpeople were placed in temporary and permanent jobs by the HR services agencies in 2022,an increase of 4.6%compared with 2021.Number of people placed by Private Employment Agencies globally59.5 millionNumber of placements through TWAs55.4 millionNumber of placements through DR4 millionNumber of people placed in jobs by HR services increased by a strong 4.6%in 2022Economic Report 202412Sources:WEC MembersOwn estimations and calculations Job placements in largest HR services markets-2022(m)TOP PERFORMERSRomanian private employment agencies increased the number of people placed in jobs 91%in 2022 compared with the year before.Second biggest gain was recorded in Ireland( 41%).China,USA&India accounted for 70%of all workers placed by HR servicesEconomic Report 202413Sources:WEC MembersOwn estimations and calculations*Excluding ChinaHR services headcount index,selected marketsHeadcount index for selected countries(2017=100)1001081038891USA 94100116132137167India 19010010410591110France 117100190175125139UK 147100116117106130Italy 1401001041038390Netherlands 9310083797474Poland 7810097877679Germany 8010010711094110Spain 114100110113115117Canada 119100102105125146Australia 16110011110590109Switzerland 11520172018201920202021202220202022India137190Australia125161UK125147Italy106140Brazil100129Canada115119France91117Switzerland90115Spain94114Belgium92113TOP 1596111Japan100111USA8894Netherlands8393Germany7680Poland7478Top 15 markets*placed 12%more people in jobs in 2022 compared with 2017Economic Report 202414Sources:WEC Members,Eurostat,ILOOwn estimations and calculationsPenetration rate is the full-time equivalent number of agency workers to all working population of 15 years oldPenetration rate-2022(%)Evolution of agency work penetration rate by region(2020 in bn,2021&2022 in%change)Global penetration rate for agency work remained broadly stable3.3%3.0%3.0%2.9%2.7%2.5%2.5%2.4%2.3%2.2%2.2%2.1%2.1%1.8%1.7%1.6%1.3%1.2%1.1%1.0%1.0%0.9%0.9%0.8%0.5%0.4%0.4%0.4%0.4%0.3%0.3%0.2%0.1%APAC 2.2%Global 1.9%Europe 2.2%Americas 1.031841233.828.6%5.9%2.61.2%3.3%5.7.5!.8%NORTH AMERICAEMEAAPACLATAM(EXC.MSP&RPO)202020212022Economic Report 202415Sources:WEC MembersOwn estimations and calculations based on simple(unweighted)averages by sector across countries46G%6%5%7%EUROPE1%B%3%8$%NORTH AMERICA3%61%8&%LATAM1(%9%47%APAC31%8%5!%GLOBALAgricultureManufacturingConstructionServicesHealthcarePublic AdministrationOtherHR services are vital for all economic sectorsServices is the primary sector for agency workers employmentEconomic Report 202416Sources:WEC MembersOwn estimations and calculations based on simple(unweighted)averages by sector across countriesThe global(unweighted)share of agency workers in healthcare sector inched upwards in 2022.8%Agency workers in healthcare(%of all agency workers)Agency workers continue to play a pivotal role in healthcareIn most countries,level of engagement of agency workers in healthcare was sustained also in the years following the pandemic0.0%5.0.0.0 .0%.00.0%ZAIECLNLAUNONZCHDEBRUSITSEFRBERO202220212020Economic Report 202417Agency work activity for selected countries/regions quarterly dynamics(y-o-y,%)2023 showed an overall decline in the agency work activity,with Japan and Chile showing a decisive uptick in the last quarter of the year.Sources:ASA Staffing Index,ACSESS Canadian Staffing Index,Statistics of Japan,WEC MembersOwn calculationsAgency work activity is measured in hours worked by people placed in jobs over a given period.2023 was a challenging year for the global agency work industryUSEuropeJapanChileEconomic Report 202418-18%-12%-6%0%6%-60%-40%-20%0 %Europe agency work activity(y-o-y)US agency work activity(y-o-y)Europe(EU28)GDP growth(y-o-y)US GDP growth(y-o-y)US&European quarterly agency work activity vs GDP dynamics(y-o-y,%)Markets were still tight after strong growth in job placements in 2022.The room for manoeuvre for HR services industry was smaller in 2023(“The Great Stay”)while the economy was still going strong.2023 was a special year in the USA Sources:ASA Staffing Index,WEC Members,Eurostat Own calculations HR services industry activity is the oil in the economic engineHR services help businesses grow by searching&placing skilled workforceEconomic Report 202419Source:WEC members,EurostatOwn calculationsCorrelation:European agency work dynamics&GDP dynamics,2019-2023Correlation:US agency work dynamics&GDP dynamics,2019-2023y=2.86x-0.02R=0.79-60%-40%-20%0 %-20%-15%-10%-5%0%5%y=3.94x-0.05R=0.76-60%-40%-20%0 %-15%-10%-5%0%5%Change in agency work activity is a reliable predictor of a change in economic sentimentAgency Work is strongly correlated with the GDP across geographiesEconomic Report 202420Dynamics of unique online job postings by region-2023Online job postings by HR services agencies represented18%of all online job postings in 2023.HR services companies online job ads increased 5.3%globally in 2023 compared with 2022.Number of unique online jobs postings by region-2023The online job market has been expandingEurope is the worlds largest online jobs market784923173229%7%8%9%EuropeNorthAmericaAsiaSouthAmericaAfricaOceaniaTotal(millions)HR services(%of total)1006!%5%-2%-12U&%-22%SouthAmericaAsiaAfricaOceaniaEuropeNorthAmericaTotal(y-o-y%)HR services(y-o-y%)Economic Report 202421Number of unique staff agencies online postings by industry-2023Is the share of the Information and communication services industry in all online HR services agencies job postings in 2023.20.8%HR services are placing people in jobs across all economic sectors21%9%7%6%1%5%5%9%Information&communicationProfessional,Scientific&techAdmin.&support serviceManufacturingHuman health&social workFinance&insuranceConstructionAccommodation&food serviceWholesale&retail tradeTransportation&storageOtherEconomic Report 202422Top 20 occupations sought by HR services in online jobs markets-2023(%of all occupations).47%A wide variety of occupations are sought by HR services agencies online1.1%1.1%1.2%1.2%1.3%1.4%1.7%1.8%1.9%2.3%2.3%2.4%2.7%2.9%2.9%3.2%3.6%3.6%3.7%4.5%Retail&Wholesale Trade MngrsWaitersBuilding&Related ElectriciansMotor Vehicle Mechanics&RepairersTechnical&Medical Sales Profs(excl.ICT)Weaving&Knitting Machine OperatorsCommercial Sales RepsMetal Working Machine Tool Setters&OperatorsNursing ProfsAdvertising&Marketing ProfsPersonnel&Careers ProfsBusiness Services&Admin MngrsAdministrative&Executive SecretariesSystems AnalystsSoftware DevelopersFreight HandlersEngineering ProfessionalsShop Sales AssistantsAccountantsSales&Marketing MngrsTop 20 occupations represent nearly a half of all occupations that were sought online by HR services companies in 2023.of all occupationsEconomic Report 202423Agency workers by gender-2022(%of all agency workers)is the global average split of agency workers into,respectively,men and women in 2022.The global share of women in the entire labour force in 2022 was 39.7%.58%vs 42%Sources:WEC Members,World BankOwn calculations(simple average across all reporting member countries)Agency work creates employment opportunities for women around the globeShare of women in agency workforce depends largely on the industries agency workers are placed inMenWomenEconomic Report 202424Agency workers by age-2022(%of all agency workers)of agency workers are under 3050%of agency workers are aged 45 and over25%Sources:WEC MembersOwn calculations(simple average across all reporting member countries)Agency work supports youth in accessing labour marketsThe agency workers age structure is also influenced by national demographics 55Economic Report 202425Students among agency workers-2022(%of all agency workers)Sources:WEC MembersOwn calculations(simple average across all reporting member countries)Agency work offers appealing pathway to employment for students41&$%of agency workers,on average,are students.20onomic Report 202426Level of education of agency workers-2022(%of all agency workers)of agency workers,on average,have a secondary(medium)level of education.45%of agency workers,on average,have higher education.33%Sources:WEC MembersOwn calculations(simple average across all reporting member countries)On average,agency workers are well-educatedAverage level of qualification of agency workers is conditional upon limitations on use of agency work in specific sectors or types of jobsLowMediumHighEconomic Report 202427Skills required from agency workers 2022(%of all agency workers)of agency workers are expected to have high level of skills19%of agency workers are expected to have a medium level of skills53%Sources:WEC MembersOwn calculations(simple average across all reporting member countries)All types of jobs can be filled by agency workers,even high-skilled onesLevel of skills depends on profession and on the economic sectorLowMediumHighEconomic Report 202428Rate of conversion of agency workers contracts from temporary to permanent 2022(%of all agency workers)Sources:WEC MembersOwn calculations(simple average across all reporting member countries)of temporary agency workers were offered a permanent contract in 202228%Agency work is a proven gateway to a permanent contractWhere allowed by law,converting a temporary contract into a permanent one is popular35530)(%!%Agency work is not just part-timeEven when temporary,agency workers contracts are most often full-time jobsEconomic Report 202429Share of agency workers working full-time-2022(%of all agency workers)Sources:WEC MembersOwn calculations(simple average across all reporting member countries)of agency workers(on average)were working full-time in 20226800yspppeFEB6onomic Report 202430Sources:WEC Members,SIASales revenue figures includes MSP&RPO in both North&South AmericaOwn calculations(all figures are rounded)Indicator2022Number of people placed in jobs(m)15.4Number of private employment agencies27,500Number of internal staff475,600Sales revenues(bn)243.7North America CanadaMexicoUSAEconomic Report 202431Sources:WEC Members,SIASales revenue figures include MSP&RPOOwn calculations(all figures are rounded)Indicator2022Number of people placed in jobs(m)1.6Number of private employment agencies10,900Number of internal staff465,200Sales revenues(bn)6.1Latin AmericaArgentinaBrazilChileColombiaPeruEconomic Report 202432Sources:WEC Members,SIA,EurostatOwn calculations(all figures are rounded)Indicator2022Number of people placed in jobs(m)12.4Number of private employment agencies93,750Number of internal staff497,500Sales revenues(bn)225.6EuropeAustria,Belgium,Bulgaria,Croatia,Czech Republic,Denmark,Estonia,Finland,France,Germany,Greece,Hungary,Ireland,Italy,Latvia,Lithuania,Luxembourg,Netherlands,Norway,Poland,Portugal,Romania,Russia,Slovakia,Slovenia,Spain,Sweden,Switzerland,Turkey,UKEconomic Report 202433Sources:WEC Members,SIAOwn calculations(all figures are rounded)Indicator2022Number of people placed in jobs(m)29.8Number of private employment agencies84,900Number of internal staff(m)2.6Sales revenues(bn)152.2Asia-Pacific(APAC)AustraliaChinaIndiaIndonesiaJapanNew ZealandEconomic Report 202434AgencyworkAgency work is a triangular employment relationship,defined in ILO Convention 181 as:“Services consisting of employing workers with a view to making them available to a third party,who may be a natural or legal person(“user enterprise”)which assigns their tasks and supervises the execution of these tasks”.It can be named Dispatched Labour in Asia,Labour Hire in Africa or Temporary Staffing in the USA.Managed Services Providers(MSP)MSP is a service whereby a company takes on primary responsibility for managing an organisations contingent workforce programme.Typical responsibilities of an MSP include overall programme management,reporting and tracking,supplier selection and management,order distribution and often consolidated billing.The vast majority of MSPs also provide their clients with a vendor management system(VMS)and may havea physical presence at the clients site.An MSP may or may not be independent of a staffing provider.CareermanagementCareer Management services enable jobs,skills and business performance to be viewed in an integrated way and with a long-term perspective.It includes primarily services such as outplacement and career transition,redeployment and other development activities designed to help organisations and individuals to manage changes in the practices,processes,conditions and basis of employment.PenetrationrateDaily average number of agency workers(in FTEs)divided by the working population(as defined by the ILO as follows:“The employed comprise all persons of working age who during a specified brief period,such as one week or one day,were in the following categories:a)paid employment(whether at work or with a job but not at work);or b)self-employment(whether at work or with an enterprise but not at work).”Daily average numberof agency workers(in Full Time Equivalents-FTEs)Total number of hours worked by all agency workers in a country over a period of one year divided by the average number of hours worked over a period of one year by a worker with a full-time job with an open-ended contract.Private employment services/Employment industryAgency work is usually one of several other HR services provided by recruitment and employment agencies,along with direct recruitment,career management,RPO and MSP.The collective name for these services is private employment services.The employment agency provides a professional service to a user company by taking over(a part of)the recruitment and HR process.In this sense,private employment services are comparable to other professional and business services such as auditing and accounting,communications and marketing,facilities management,etc.DirectrecruitmentServices for matching offers of and applications for employment,without the private employment agency becoming a party to the employment relationships which may arise therefrom(Source:ILO Convention 181),including search and selection.Recruitment Process Outsourcing(RPO)A service by a third-party specialist provider,to assume the role of the clients recruiting department by owning and managing part or all of its recruitment process and related recruitment supply chain partner relationships,providing the necessary skills,activities,tools,technologies and process methodologies.Glossary of terms and acronyms usedEconomic Report 2024MethodologyThe data presented in this report is for the calendar year 2022,unless stated otherwise.Sources vary depending on the data,although the majority of the figuresare collected by the World Employment Confederation from its national federation members.This is primarily the case for the agency work market.Some nationalfederations gather data directly from their respective members,whereas others collect data from public sources or research partner institutions.The World Employment Confederation also partners with Staffing Industry Analysts(SIA),allowing for a more complete assessment of the industry across the various HR services(e.g.MSP,RPO,Outsourcing).Whenever a figure did not come directly from members of the World Employment Confederation,it is indicated throughout the report.35For the calculation of the total global market size of the private employment services industry,five service segments have been included:agency work,direct recruitment,MSP,RPO and career management services.Due to the fact that a significant share of MSP activities fall into the agency work category,there existsthe risk of double counting sales revenue figures.This is especially true,since the sources used to gather sales revenue figures differ for the two service segments in question.To minimise the extent of double counting,a certain share of total MSP sales revenues was subtracted and attributed to the total agency work sales revenues.In 2022,this share was estimated by Staffing Industry Analysts to be around 71%.It must be noted that some figures presented in this report may be underestimating the true picture of the global industry,since the World Employment Confederationdoes not have members in every country providing statistics.This is specifically the case for the number of agencies and internal staff.Note also that a lack of information on specific countries does not mean that private employment services are not provided in that country.In case of questions on the statistics presented or on the methodology applied,please contact Viktorija Proskurovska,LabourMarket Intelligence Managerat the WEC Head Office(Viktorija.Proskurovskawecglobal.org)36About the World Employment ConfederationThe World Employment Confederation serves as the voice of the HR services industry at the global level,representing both national federations and workforce solutions companies worldwide.Our diverse membership encompasses a broad spectrum of HR services,including agency work,direct recruitment,career management,Recruitment Process Outsourcing(RPO),and Managed Service Provider(MSP)solutions.revolves around securing recognition for the pivotal role played by the HR services industry in fostering well-functioning labour markets and advocating on behalf of our members to enable appropriate regulation.By fostering an environment conducive to sustainable growth of the HR services sector,our ultimate goal is to deliver better labour market outcomes for all.By bridging the supply and demand gaps in labour markets,creating pathways to employment,enabling agile organisations,balancing flexibility with protection and deploying digital solutions responsibly,the HR services industry plays a central role in addressing labour market challenges and delivering people-centric solutions.Our mission Economic Report 202437 Austria Belgium Bulgaria Czech Republic Denmark Estonia Finland France Germany Greece Ireland Italy Latvia Lithuania Luxembourg Netherlands Norway Poland Portugal Romania Russia*Spain Sweden Switzerland Turkey UK Canada Mexico Argentina*Brazil Chile Colombia USA Egypt South Africa Australia India Indonesia New Zealand Philippines China Japan South Korea*Membership of FAETT suspended for the year 2024(Argentina is represented by two federations)*Membership suspended for the year 2024WEC National FederationsA membership representing 90%of the global sales revenue of the industryEconomic Report 202438WEC Corporate MembersEconomic Report 2024Economic Report 202439Our Strategic PartnersTalent MarketplaceOur Affiliate PartnersLaw&RegulationData&ResearchSkilling&EducationWECPartnersAny use of this report or its content,including copying or storing it in whole or in part,other than for personal,media-related purposes or non-commercial use,is prohibited without the prior permission of the World Employment Confederation.In any case,the source of the information to be published should be mentioned as World Employment Confederation Economic Report 2024.This Economic Report is owned by the World Employment Confederation,whose registered office is at Tour&Taxis Building,Avenue du Port 86c,Box 302,1000 Brussels,Belgium.Care and precaution were taken to ensure that the information published in this report is accurate,but the World Employment Confederation publishes this content as supplied and is not responsible for its accuracy or timeliness.You must take appropriate steps to verify this information before acting upon it.Disclaimer
2024-12-29
40页
5星级
Technical and statistical reportUNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENTKey statistics and.
2024-12-29
43页
5星级
December 2024APEC Digital Economy Steering GroupUnderstanding the economic impact of digitalisation .
2024-12-29
45页
5星级
罗兰贝格：预见2026：中国行业趋势报告（90页）.pdf
智源研究院：2026十大AI技术趋势报告（34页）.pdf
中国互联网协会：智能体应用发展报告（2025）（124页）.pdf
三个皮匠报告：2025银发经济生态：中国与全球实践白皮书（150页）.pdf
三个皮匠报告：2025中国商业航天市场洞察报告-中国商业航天新格局全景洞察（25页）.pdf
国声智库：全球AI创造力发展报告2025（77页）.pdf
中国电子技术标准化研究院：2025知识图谱与大模型融合实践案例集（354页）.pdf
三个皮匠报告：2025中国情绪消费市场洞察报告（24页）.pdf
中国银行：2026中国高净值人群财富管理白皮书（66页）.pdf
亿欧智库：2025全球人工智能技术应用洞察报告（43页）.pdf
0731-84720580
商务合作：really158d
友链申请 (QQ)：1737380874
最新报告
中英对照
全文搜索
报告精选
PDF上传翻译
多格式文档互转
入驻&报告售卖
会员权益
机构报告
券商研报
财报库
专题合集
英文报告
数据图表
会议报告
其他资源
研报
新质生产力
DeepSeek
低空经济
大模型
AI Agent
AI Infra
具身智能
自动驾驶
宠物
银发经济
人形机器人
企业出海
算力
微短剧
薪酬
白皮书
创新药
行业分析
个股研究
年报财报
IPO招股书
会议纪要
宏观策略
政策法规
其他
人工智能
信息科技
互联网
消费经济
汽车交通
电商零售
传媒娱乐
医疗健康
投资金融
能源环境
地产建筑
传统产业
英文报告
其它
行业聚焦
芯片产业
热点概念
全球咨询智库
人工智能
500强
新质生产力
会议峰会
新能源汽车
企业年报
互联网
公司研究
行业综观
消费教育
科技通信
医药健康
人力资源
投资金融
汽车产业
物流地产
电子商务
传统产业
传媒营销
其它
十五五规划系列报告合集（共48套打包）
2026低空经济/低空产业报告合集（共47套打包）
AI、科技与通信
广告、传媒与营销
消费、零售与支付
HR、文化与旅游
金融、保险与投资
能源、环境与工业
医疗制药与大健康
物流、地产与建筑
其他行业
AI ▪ 科技 ▪ 通信
数字化
金融财经
智能制造
电商传媒
地产建筑
医疗医学
能源化工
其他行业
收藏
下载
2026-02-02
AI查数
行业数据
政策法规
商业模式
产业链
竞争格局
市场规模
产业概述
其它
2026年
AI读财报
年报
一季报
半年报
三季报
IPO招股书
社会责任报告
A股
IPO申报
港股
美股&全球
新三板
微信扫码登录
手机快捷登录
账号登录
