Employees assemble photovoltaic panels at Suntech Power Holdings Co.'s factory in Wuxi, Jiangsu province, China, in 2011. Just two years after taking top place in solar panel sales, Suntech has fallen into bankruptcy. (Qilai Shen/BLOOMBERG)

Business was going gangbusters for solar module maker Suntech and its chief executive, Shi Zhengrong, just a few years ago. In 2007, Time magazine called him one of the “heroes of the environment.”

In 2008, CNN named Shi “China’s Sunshine Boy.” In 2009, Fortune anointed him “China’s new king of solar.” That year, New York Times columnist Thomas Friedman also cited Shi and Suntech as models of China’s green leap forward — which he called “the Sputnik of our day” and a spur for U.S. clean energy policy.

Now, however, the Chinese Sputnik has crashed to Earth, and the Sun King has been toppled. Buffeted by fierce global competition, faced with a worldwide manufacturing glut and hobbled by heavy debt, Suntech’s directors ousted Shi on March 4 and defaulted on $541 million worth of convertible bonds 10 days later. The following week, a Chinese court declared the company bankrupt after a petition from eight Chinese banks. On Wednesday, the company announced that its 2012 revenue had plunged 48 percent from the previous year.

Suntech — which in 2011 was the world’s biggest seller of silicon-based photovoltaic modules — was once valued at $13 billion on the New York Stock Exchange; it is worth less than 1 percent of that today. A news report that Warren Buffett might be eyeing all or part of Suntech lifted the battered share price more than 80 percent in one week, but acquiring Suntech could be a risky bet.

In February, Pavel Molchanov, an analyst with the investment firm Raymond James, called Suntech “a proverbial ‘zombie’ company that perfectly exemplifies the Chinese solar industry’s massive overcapacity and consequently distressed balance sheets.”

From right, Actor Cate Blanchett, Suntech CEO Zhengrong Shi, an unidentified woman and actor Andrew Upton celebrate the “switch-on” of the Sydney Theatre Company’s rooftop solar panels in Sydney, Australia, in 2010. (Brendon Thorne/GETTY IMAGES)

The collapse of Suntech has broader significance than the damage inflicted on the company’s shareholders and creditors; it has punctured myths about the strength of China’s solar business — and its ability to depend on government support in a pinch.

Until now, policymakers in China have used subsidies to create a world-leading “green tech” industry that would push the country up the economic value chain. But green tech doesn’t guarantee thriving businesses. In the race for global solar supremacy, world manufacturing capacity has grown to 60 gigawatts, most of it in China. That outpaced solar demand, which is expected to reach about 35 gigawatts this year, enough to power about 26 million homes. So prices of photovoltaic panels have plummeted, and it will take three to five years for overcapacity to shrink, says Bill Wiseman, managing partner of consulting firm McKinsey’s Taipei office.

But China’s government has not rushed to the rescue. Last month, another Chinese solar panel maker, LDK, defaulted on a loan payment, citing cash problems. And Chen Yuan, the outgoing head of the China Development Bank, declared in March that the bank should curtail its solar lending.

In the meantime, the manufacturing of silicon-based solar modules has become a commodity business, producing large volumes and, at best, tiny profit margins for products that are virtually indistinguishable to consumers. Innovation took a back seat to expansion, particularly in China. “People are fighting tooth and nail for the last penny of margin,” Molchanov said in a recent interview. Factories making clothes or toys are doing better.

The rise and the fall

The rise of Suntech was a rags-to-riches story for its founder. Given up for adoption by destitute parents in a farming area, Shi excelled at school and obtained a master’s degree before moving to Australia in 1989 on an exchange program. He accepted a scholarship to do solar cell research at the University of New South Wales, quickly earned a PhD and became deputy research director of a university spinoff developing next-generation solar technology, according to an article written for Time magazine by his patron and professor Martin Green.

In 2001, Shi moved back to China, using $6 million in seed money from the Wuxi local government to start Suntech. At the time, Wuxi, with the blessing of the central government, was turning itself into a technology center, part of a broader nationwide effort to climb the manufacturing ladder. In addition to cash, it provided Suntech with land and tax benefits as well as cheap electricity.

Like other solar module manufacturers, Suntech took advantage of generous government subsidies in Germany and later in other countries to boost sales. In December 2005, Suntech went public, becoming the first private Chinese company listed on the New York Stock Exchange. Within four years, Shi was a billionaire. In 2011, Suntech, with sales of
$3 billion, was the world’s biggest maker of solar panels. And it set up an assembly facility in Arizona.

Suntech's solar market woes are affecting the bottom line.

One business adviser recalls the charismatic Shi showing up for a meeting in a Bentley. Shi said he didn’t want to be ostentatious, so he left the Rolls-Royce at home, according to the account.

But Shi wasn’t the only one jumping into the solar business; it became a classic bubble. In China alone, there are hundreds of manufacturers. Most are low-cost and low-quality, but there are a handful of giants with prodigious capabilities, such as Yingli and Trina. China has about two-thirds of the world’s solar panel manufacturing capacity. China alone, theoretically, could supply all of the world’s solar demand and there would be no room for U.S., German, Japanese or Taiwanese companies. Suntech tried to distinguish itself with its Pluto technology, a manufacturing process that allowed the cells to convert sunlight into energy more efficiently. But other companies also are setting new records for efficiency.

“Ten years ago, it was Suntech that was really a first mover in building China’s solar industry, and Dr. Shi at the time was a visionary of sorts,” Molchanov says. “He helped create this low-cost manufacturing industry in China.” And, for a time, Suntech was successful, emerging from the 2009 slowdown.

Then, just as Suntech became the world’s largest solar panel manufacturer, the European debt crisis hit. Profit margins collapsed, and customers’ unpaid bills piled up. In June 2012, a puzzled Citigroup analyst noted in a report that as major countries such as Germany and Italy sharply reduced subsidies, Chinese manufacturers led by Suntech boosted capacity 30 percent, “only exacerbating the excess supply conditions.” The report said that “module prices are likely to remain below Suntech’s production costs for the foreseeable future.”

Shi relinquished his chief executive position but remained executive chairman. Still, he was upbeat. He blogged, “Do not despair. This is a necessary rite of passage for our maturing industry.” He brushed aside criticism that Suntech had expanded too quickly, saying, “The world couldn’t afford to wait a hundred years to solve our planet’s energy and environmental crisis.”

Nine months later, he was ousted. In a statement at the time, he called the move “misconceived and unlawful.” He said the board members “are not focused on the issues most important at hand and are not acting in accordance with the best interest of the company.”

In the red

Suntech is not unique. Most Chinese solar panel manufacturers have been losing money. And some manufacturers in the United States and Germany also have gone bankrupt.

But Suntech had a lot of debt, incurred during its rapid expansion. It also ran into trouble when the 560 million euros ($734 million) of bonds pledged as loan collateral by a majority-owned affiliate turned out not to exist. The affiliate had promoted projects in Spain and Italy that used Suntech products. Regulatory agencies in the United States and Europe are conducting fraud investigations.

“Everyone in the industry faces the same challenges,” Molchanov said. “But what killed Suntech had nothing to do with the technology or the problems with solar in Europe. It was the balance sheet.” Suntech had borrowed more than $2 billion, from the Bank of China, the China Development Bank and even the International Finance Corp. Suntech needed to borrow just to pay interest.

Meanwhile, in late 2011, a group of U.S. solar panel manufacturers filed an anti-dumping case and won tariffs against Chinese firms. U.S. statistics indicate a sharp drop in imports from China, though some Chinese-made panels might be coming through third countries.

“We believe Suntech suffers from the same unsustainable, distortive industry factors that confront everyone: China’s dumped pricing and massive overbuilding,” said Ben Santarris, a spokesman for rival SolarWorld USA, a subsidiary of Germany-based SolarWorld. “Chinese companies can sell below their costs for only so long before they either go out of business or the Chinese government props them up, extending the anti-competitive problem.”

For years, investors have assumed that Chinese solar companies would be bailed out by the Chinese government, and Suntech and its battered shareholders and bondholders are still hoping for a rescue. A large portion of the bonds in default, currently selling for about 30 cents on the dollar, are held by U.S. private equity firms, which probably bought the bonds at deep discounts.

But the Chinese government may not come to the rescue. Indeed the government’s support for solar energy in China has grown tepid, despite an ambitious goal of adding about six gigawatts a year for the next decade. The National Development and Reform Commission approved a feed-in tariff for solar power — a guaranteed fixed-rate payment to developers — of 15 cents a kilowatt hour, but no one wants to pay for it. The state electricity company, State Grid, isn’t allowed to raise rates for households. But the central government hasn’t put the subsidy in the budget, either. In addition, connecting to the grid isn’t easy.

Lacking market relief, Suntech investors hope the municipal government of Wuxi, where Suntech is based and where many of its more than 10,000 workers were employed, might come to the company’s aid. According to a Chinese news report, fewer than 3,000 of the workers are still on the job. (Suntech would not comment for this report.) For Wuxi’s municipal government, a rescue would require a lot of money without support from the central government, which wants, at least in principle, a consolidation in the industry.

The China Development Bank has stepped in to help solar firms before. JinkoSolar, which posted a loss of $248 million last year, said the Guangdong branch of the China Development Bank agreed in December to lend it $1 billion over five years. In April, the bank gave JinkoSolar a 15-year loan for nearly $60 million.

In January, the bank gave a $71 million lifeline to another Chinese solar firm, LDK.

Suntech is thought to still owe more than $400 million to the China Development Bank. But the bank, whose rates were never terribly low, hasn’t stepped forward, and LDK is scrambling to find an investor.

Suntech’s woes have fed on one another. Solar demand is strong in new markets such as the Middle East, Thailand and Australia, as well as the United States. But when a company’s survival is uncertain, that hurts business. Solar panels typically carry 20-year warranties, which won’t be worth anything if the company goes out of business. That might be one reason that Suntech’s sales fell 18 percent in the third quarter compared with a year earlier, according to its Securities and Exchange Commission filing, while most other companies’ sales were rising.

Shi’s replacement, David King, a financial expert with experience at PriceWaterhouseCoopers, Bechtel and Walt Disney Imagineering, is trying to engineer a restructuring but would not comment. The company will meet with creditors in Wuxi on May 22 and separately in Europe.

So far, however, no reorganization plan has emerged, and the company’s future remains dim.