China’s growing share of solar market comes at a price

China was mentioned 59 times when Energy Secretary Steven Chu testified last month before a House subcommittee on the U.S. loan guarantee program for renewable-energy projects.

“Countries like China are playing to win in the solar industry,” Chu said.

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China’s share of the solar market and production has increased rapidly.
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China’s share of the solar market and production has increased rapidly.

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“My big thing is that I worry about China,” said Rep. Brian P. Bilbray (R-Calif.).

“The Chinese are eating our lunch,” said Rep. John D. Dingell (D-Mich.).

Yet if Chinese solar companies are eating our lunch, they’re also choking on it. Growth in global solar manufacturing capacity is outpacing global demand, and prices of solar energy products are plunging. And while U.S. politicians portray Chinese firms as heavily subsidized rivals gobbling up global market share, Chinese solar companies are suffering from some of the same ills afflicting their U.S. competitors.

Some of China’s biggest companies are losing money, shelving capital expenditure plans and looking to conserve dwindling reserves of cash. To avoid going deeper into debt, they have borrowed only a tiny fraction of $34 billion in loans available to them from the China Development Bank.

For consumers, the cutthroat competition is a good thing. Wholesale solar panel prices have dropped as much as 50 percent this year, and retail prices are less than half what they were five years ago. Industry experts say that the day is near when solar can compete against other energy sources without subsidies. In certain places and at certain times of day, it’s already viable. Meanwhile, analysts say, if China wants to subsidize solar products, Americans can buy more of them.

For some U.S. companies, China’s expanding industry has meant more jobs. Cheap panels fuel greater sales — and installation accounts for more than half of U.S. solar industry jobs.

Moreover, the United States has a trade surplus with China in solar goods, led by exports of polysilicon, the raw material needed to make photovoltaic cells, which in turn are the building blocks for solar panels.

The United States also exports the solar manufacturing machinery. Applied Materials, which made its name in the semiconductor business, beat analysts’ expectations earlier this year thanks to sales of equipment for making solar cells. To promote sales, the Santa Clara, Calif., company has set up a research center in the Chinese city of Xian and moved its chief technology officer there. “Now we are doing for the green economy what we did for the Information Age,” the company says on its Web site.

GT Advanced Technologies, which sells furnaces and other equipment for making the polysilicon and ingots used in making solar cells, does 98 percent of its business in Asia, much of it in China. “We compete very effectively as a U.S.-based corporation in spite of the fact that my Chinese competitors sell at half my price,” said Tom Gutierrez, chief executive of the New Hampshire-based firm. “We beat them through technology and innovation.”

But U.S. solar panel manufacturers and people who believe that solar manufacturing can become part of a new “clean technology” economy are unhappy. They believe that the flood of Chinese solar cells is a textbook case of dumping — an economic term to describe when foreign companies overwhelm a market with cheap goods to drive competitors out of business. Later, after gaining control of that market, the foreign companies can jack up prices.

Chinese panels are selling for less than $1 a watt, while those made elsewhere sell for about 20 percent more, according to Bloomberg New Energy Finance.

China supplies nearly half of U.S. solar panel imports — 44.6 million units in the first eight months of the year, up from 3.8 million in 2008, according to an anti-dumping petition filed by a group of U.S. firms. Those sales rocketed to $1.69 billion through August of this year from $233.3 million in 2008.

The biggest of those panel makers, Suntech, promotes its products in ads that show two panels hooked up to an electric American flag. “Now Power America, from America,” the ad says, even though only 2 percent of Suntech’s manufacturing capacity is in the United States.

But volume doesn’t guarantee profits and for Chinese solar companies, it has been a painful rise to the top ranks of the global market. Suntech, JA Solar and LDK Solar, the top Chinese solar panel makers, reported losses for the third quarter and warned investors the outlook was grim. JA Solar reported operating losses and a writedown on the value of its inventory. Suntech, which lost $116.4 million in the third quarter, said it expected shipments to drop 10 percent in the fourth quarter.

“This will be challenging for all solar companies,” Suntech chief executive Shi Zhengrong said during a conference call with investors in November. Many of China’s more than 100 solar cell firms and 300 solar module companies with lower-quality products could close down.

In addition, Chinese solar panel makers are facing possible tariffs as the U.S. International Trade Commission weighs charges in the dumping case. In a 6 to 0 vote Dec. 5, the ITC found a “reasonable indication” that Chinese imports are “materially injuring” the U.S. industry. It is considering whether to impose duties, and at what level.

In a Nov. 22 conference call about its quarterly earnings, JA Solar chief executive Fang Peng said the company might move some of its finishing operations to other countries, such as South Korea or Taiwan, so that its panels would not be considered imports from China. “To be prudent we need to have a work-around solution,” chief financial officer Min Cao said.

“China is not pricing its products to make money,” said Timothy Brightbill, a lawyer at Wiley Rein who is representing U.S. solar panel makers in the dumping case. “It’s pricing its products to try to dominate this market.”

A new type of Chinese industry?

There is a measure of irony in the growth of the Chinese solar industry. In its new five-year economic plan, unveiled in March, China’s government has singled out 35 sectors, including solar and other types of renewable energy, as priorities for creating a cleaner, technology-based economy, one with a healthier balance between domestic demand and exports.

“We have to develop our green economy,” Cheng Siwei, former vice chairman of the standing committee of the National People’s Congress, said at a Brookings Institution event Nov. 1.

Yet Barry Naughton, an economics professor at the University of California at San Diego, noted that China is, in fact, re-creating “the old pattern of economic development.” Like many Chinese industries from the past, the solar industry is supported by subsidies and loans from state-owned banks; it imports equipment, thrives on low-margin, high-volume exports and often violates basic environmental standards in disposing of waste. In September, riot police clashed with about 500 people who damaged vehicles and stormed a Jinko Solar plant, which they said had dumped toxic waste in a local river.

The U.S. economy, by contrast, focuses on jobs that add more value — research, design and equipment manufacture — and it captures profits at the retail level.

“I’m worried that what we see in China is . . . a pattern where existing technologies — sometimes mature, sometimes not — are ramped up rapidly, expanded quickly, because they have access to government support,” Naughton said. “That kind of support has a danger because it distorts the overall global environment for these newly emerging technologies — technologies that are important for all of us.”

Joanna Lewis, a professor of science, technology and international affairs at Georgetown University, adds that “the part of the process that China excels in is energy-intensive and not environmentally friendly.” She adds that solar is “clean, green technology, but only after you manufacture it” — and not if it’s all exported.

While China talks about boosting its domestic market, its solar panel manufacturing capacity is 32 times greater than domestic consumption. Solar last year accounted for just 0.006 percent of China’s electrical power, Naughton said.

“Solar panel manufacturers in China are not so much in a technology business as a commodity one,” Massachusetts Institute of Technology professor Edward Steinfeld and MIT researcher Jason Lee wrote in an unpublished paper. “They get into the game by buying expensive assembly line equipment (mostly from American suppliers). They produce a product identical to that of their many other Chinese competitors, and then they try to hang on by producing at massive scale and tiny profit margins.”

Solar subsidies

Yet this is a business that few political leaders in America are ready to concede.

“I’m not going to surrender to other countries technological leads that could end up determining whether or not we’re building a strong middle class in this country,” President Obama said Oct. 6 in discussing the bankruptcy of Solyndra, a solar panel maker that received $535 million of federal loan guarantees.

He added, “There are going to be times where it doesn’t work out, but I’m not going to cave to the competition when they are heavily subsidizing all these industries.”

Seven U.S. solar cell and module makers have banded together to form the Coalition for American Solar Manufacturing, a new group, to file the dumping case. Many of them thought the existing trade group, the Solar Energy Industries Association, would not back the petition because its chairman is an executive at Suntech, the Wuxi, China-based company that also has a small facility in Goodyear, Ariz. On Dec. 12, the German-based company SolarWorld quit the SEIA board, saying in a letter that it “no longer serves the interest of our company.”

Over time, academic exchanges and trade have kept the Chinese and U.S. solar industries entwined. For example, Fang Peng, the chief executive of JA Solar, earned his doctorate at the University of Minnesota, then held technology and management posts at Applied Materials, working on semiconductors. Suntech’s chief financial officer earlier worked at Disney, Bechtel and Price Waterhouse, and its supply chain head got his MBA at Michigan State.

But the dumping plaintiffs say it isn’t just experience that has given Chinese firms a leg up. “We’re really quite efficient,” said Ben Santarris, a spokesman for the U.S. unit of SolarWorld. “However, it is very difficult for us to compete with the Communist Party of China.”

SolarWorld’s petition cites likely sources of government aid to Chinese solar panel makers, such as grants given to exporters by China’s Export Product Research and Development Fund and cut-rate insurance from a state-owned firm. It alleges that firms such as Suntech and LDK Solar might get help under programs designed to foster “famous brand names,” from the central government and the province of Jiangxi, where both firms are based.

Many subsidies are given out at the local or provincial level. The dumping petition points to Shandong’s $340 million energy fund for solar water heaters, Hunan’s call for a 150 percent tax deduction for solar research and development, and Yunnan’s grants and low-interest loans.

Georgetown’s Lewis notes that a Hunan company called Sunzone bought industrial land from the Chinese government at one-third the official rate, then listed the land on its books at full value.

A Suntech filing with the Securities and Exchange Commission in May says most of its subsidiaries qualify as “high and new technology enterprises” and therefore pay a 15 percent corporate income tax rate instead of 33 percent.

U.S. solar companies and lawmakers also point to the $34 billion in credit that the China Development Bank has offered to the big five panel makers. But JA Solar, which in September 2010 announced that the bank would provide $4.7 billion in financing, told Bloomberg News last month that it has not drawn down any of that amount. Suntech has used less than 10 percent of its $7 billion facility, said Andrew Beebe, the company’s chief commercial officer. Other firms have also balked at the bank’s offer for the time being.

The China Development Bank’s interest rates have been “market rates,” according to Beebe and SEC filings by Chinese solar firms listed on the New York Stock Exchange. Beebe says Suntech paid as little as 4.5 percent over the past couple of years and more than 6 percent this year. That is about three times as high as the rates Solyndra was paying for five-year loans from the Federal Financing Bank.

SEC filings reveal other advantages for Chinese firms. Suntech describes a guarantee it gave for a loan of 554 million euros provided by China Development Bank to a project developer called Solar Puglia, which Suntech had acquired. When Solar Puglia’s power projects were not connected to the grid by Jan. 30, 2011, China Development Bank was entitled to demand immediate payment; it did not.

Another key trade dispute: The price and availability of polysilicon. China has imposed a quota on exports of polysilicon, the key ingredient of most solar panels. That has kept the price of silicon in China artificially low. In 2008, the price of polysilicon spiked as high as $450 a kilogram (2.2 pounds). Solyndra’s panels did not use silicon, an appealing feature at that time, and Energy Department officials said they could not foresee a plunge in polysilicon prices.

But GCL Poly, a company with ties to the People’s Liberation Army and the Chinese government, was already revving up production, providing half of the needs of Chinese exporters by late 2010, according to a report by the research group Fathom China. Today the price of polysilicon has crashed to less than $30 a kilogram. It’s off 30 percent in the past month alone, the lowest level since around 2003, according to Bloomberg New Energy Finance group. GT’s Gutierrez says companies can make polysilicon today at less than $25 a kilogram, after depreciation expenses.

Most of China’s policies until now have been export-oriented, and Chinese companies’ fortunes have risen and fallen with the size of subsidies in Germany, Italy and Spain.

Beijing’s National Development and Reform Commission for years showed little interest in subsidizing domestic solar use, and a “Golden Sun” project subsidized by the ministries of finance and construction was plagued by corruption, poor planning and inferior products, Fathom China said. Ningxia province, beset by dust and pollution, found that every one of its 160,000 panels needed to be wiped clean four times a year. And the coal-dominated electricity grid is not suited to accommodate large amounts of fluctuating solar power.

But in the new five-year plan, the Chinese government has set a goal of generating 20 gigawatts of electricity with solar by 2020. That would represent just 1 percent of China’s expected power generation, but it would be roughly equal to the world’s total installed capacity. That could mean subsidies similar to Europe’s “feed-in tariffs,” which guarantee artificially high prices to solar energy producers. Such subsidies could tilt Chinese solar panel production toward the Chinese domestic market, potentially a positive development for U.S. manufacturers.

Will the best win?

China isn’t the only one handing out subsidies.

Indeed, Chinese authorities have said they would investigate U.S. subsidies to solar manufacturers. Those include a 30 percent production tax credit, investment tax credits, research and development grants, and the Energy Department’s recent loan guarantees. In addition, renewable energy standards in about 30 states are requiring electric utilities to boost the share of renewables in their power-generation portfolios, essentially forcing them to buy solar even if at higher prices, a subsidy hidden in utility rates paid by consumers.

“The support we have received in China is no different and perhaps significantly less than what we’ve seen many companies in the United States and Europe, and Germany in particular, receive,” said Suntech’s Beebe.

Meanwhile the U.S. solar industry is divided over the dumping case.

Some U.S. companies opposed to the dumping case note that SolarWorld received aid from Oregon to set up a solar cell factory there and that it will receive assistance from the government of Qatar for a joint venture producing polysilicon there. SolarWorld said that it has taken $11 million of Oregon tax credits, but added that those credits are “available to companies of all nationalities” and offset “less than 2 percent” of its more than $500 million investment in Oregon.

A SolarWorld spokesman said that the company does not "argue that subsidies are inherently improper,” but rather “that it is illegal for one country’s subsidies to fund its producers in mounting a predatory export drive that hobbles domestic producers of a foreign market — exactly what China has done.”

The Coalition for Affordable Solar Energy, by contrast, includes firms involved in installation, which accounts for 52 percent of the solar industry jobs, the group says. For them, cheap panels mean more demand, regardless of where the panels come from. (SolarWorld says that installers, not consumers, have profited from falling panel prices.)

Then there are solar manufacturers that use thin-film technology, which is cheaper, though less efficient, than photovoltaic panels using crystalline polysilicon. First Solar, an Arizona company with plants in Germany, Malaysia and Ohio, is the industry leader and building a plant in Arizona. General Electric is spending $600 million to open a thin-film plant in Colorado.

GE’s Victor Abate, vice president of renewables, said in an interview: “The price of solar had to come down for it to become mainstream. . . . The question is, can you compete? And that depends on technology. The best technology is going to win here.”

“It’s a race,” DeLine said of solar panel manufacturing, “and it’s not just the Chinese.”

 
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