China's Solar Dominance

As the American companies Evergreen and Solyndra go bankrupt, China has asserted its dominance of the worldwide solar industry. Stephen Lacey of Climate Progress gives the lament of U.S. solar industry officials, who cannot complete with a massively subsidized Chinese sector. The scale of the subsidies is shown in the accompanying chart, comparing American and Chinese government subsidies for solar in 2010.

Explains Lacey:

Armed with tens of billions in loans from the Chinese government, Chinese solar companies have scaled at a rate unthinkable only a few years ago. At the end of this year, there will likely be 50,000 megawatts (MW) of manufacturing capacity in place around the world, with much of that new capacity being developed in China and other Asian countries. (In the year 2000, there were only 100 MW of production capacity worldwide.)

In four years, the solar manufacturing sector shifted from being led by a geographically dispersed number of companies to one dominated by Chinese companies. In 2006, there were two companies from China in the list of top ten cell producers. In 2010, there were six, according to Bloomberg New Energy Finance. There are currently only two non-Asian manufacturers in the top ten, and those companies -- First Solar and Q-Cells -- have shifted a lot of their production to Asia.

According to one U.S. company, the reason is predatory financing and “free money” from the Chinese Development Bank (CBD).

The CDB was originally set up as a "policy bank," to operate as an arm of the Chinese central government, doling out public funding to support central government development programs. Now it is a "joint stock company with limited liability" that often reports to China's national cabinet on certain policy issues. This allows the Chinese government to get involved in CDB activities and direct loans toward projects officials want to support.

Unlike most regular commercial banks, CDB raises most of its money via long-term bonds. Funders cannot take that money back out until the term is up, so the bank can make longer-term loans to Chinese companies. CDB also gives borrowers very low interest rates, and, if the borrower cannot pay back the loan, it may be back-stopped by the Chinese government.

This makes it easier, cheaper, and a lot less risky for solar companies to obtain financing.

In 2010 alone, the bank handed out $30 billion in low-cost loans to the top five manufacturers in the country. (See chart above.) This has enabled China's solar producers to grow to GW scale in a very short period of time, turning the country into a leading exporter of solar and pushing down prices dramatically. . . .

With Chinese producers in a far more dominant position than in 2009 and a slew of solar manufacturing facility closures announced in the U.S. in recent months, concerns about dumping have resurfaced. Just yesterday, Oregon Senator Ron Wyden sent a letter to President Obama asking him to investigate whether or not Chinese companies are selling product below cost in order to push American producers out of the market. He also called on the administration to implement a trade tariff on Chinese modules . . .

It will be difficult for the U.S. to compete with China at its own game -- namely, high-volume manufacturing of a commoditized product -- given the cost advantages available for Chinese manufacturing. However, the U.S. can and should continue to develop and commercialize innovative technologies that offer lower costs than traditional panels. These new technologies are generally proprietary, require a more skilled labor force, and are difficult to duplicate.

Suniva could be considered part of this category. Using a unique cell design, the company has created a high-efficiency mono-crystalline solar cell that could compete with SunPower. But with all the cheap debt that the Chinese government is throwing at domestic companies, Suniva is finding it increasingly tough to stay in the U.S.

"If something isn't done, no one will be making solar PV in the U.S.," said Ashley. . . .

9/23/11: A new report by Standard and Poor's, according to David Jones of Platts, also attributes the "shrinking profit margins and bulging warehouses" of the solar industry to Chinese policy, though it gives a figure for global solar capacity at 30 gigawatts, much lower than Lacey's estimate of 50 gigawatts:

"The primary source of these PV price declines [42% in the last year] has been Chinese manufacturers that have enormously expanded global capacity and that continue to fully utilize their plants despite lack of demand," said Standard and Poor's.

The result? Inventories among solar PV equipment producers, particularly in China, have swelled. Global production capacity of about 30 GW in 2011 will far outstrip expected demand of 15-20 GW, according to the study.

To date, China's banks have largely financed this buildup through almost-zero interest debt, which "is being used by Chinese solar companies to achieve economies of scale, to offer extended credit terms to customers to augment their already industry-leading cost positions, and to gain market share," the study said.

What's more, a new Chinese government policy will offer feed-in tariffs for PV power generation, which the nongovernmental organization The Climate Group called "a major step forward in accelerating development in China's domestic solar market". . . .

 * * *

The solar power exchange traded fund, TAN, whose comings and goings we have chronicled previously, broke beneath its March 2009 lows (4.63) in the recent market sell-off. The chart below shows the September 9 close. As of September 23, it had fallen to 3.65, down another 20%. 

First Solar, headquartered in Arizona, operates in the United States, Germany, France, Canada, and other countries. As the largest holding in TAN, at 20%, its price movement closely the follows that of the etf. The Chinese companies have also suffered big losses in the downturn. 

Here are the largest holdings of TAN: