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No Magic In China’s Solar Industry

Sunday I picked up an actual print copy of the Washington Post. In the Business section was a feature by Steven Mufson on the rise and fall of Chinese solar firm Suntech – which was at one time the world’s largest producer of crystalline silicon solar panels. In mid March the firm defaulted on $541 million worth of convertible bonds.

(The story of Suntech’s founder and now-former CEO, Shi Zhengrong, is also captured in the feature. A true rags to riches tale.)

In the waning months of 2012, pundits were forcasting major financial problems for some of China’s humongous solar companies – but many expected that the government would prop them up with loans to keep them afloat. There were many reasons why it might have: China wants to hold on to its dominance in making solar modules for export, it has huge targets for domestic installations, it has a policy of subsidizing industrial expansion, and it can provide both cheap electricity and cheap financing.

Mufson explains how Suntech was caught up in a very expensive race to the bottom in solar module production – overcapacity (in expensive facilities) and rapidly shrinking margins, fueled unhelpfully by China’s green economy plans. The U.S. added to the woe by slapping a tariff on solar modules imported from China (oversupply set the stage for what trade officials like to call dumping).

Mufson writes:

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.

China has other very large solar producers in addition to Suntech and LDK. They also have Trina Solar and Yingli. Four huge vertically integrated module makers was at least two too many. Analysts will be watching margins and debt very carefully now that it is clear that China’s future financial support for solar companies is not guaranteed.

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