Is China’s Solar Industry Heading for an Eclipse?

Being home to some of the world's top solar product companies, China has the power to dictate the future of solar energy across the globe. “The stakes are immense,” says Ryne Raffaelle, associate provost of Rochester Institute of Technology (RIT) in New York and former director of the National Renewable Energy Laboratory's photovoltaic center. “Solar is the fastest-growing market in the world. It’s a US$300 billion industry."

China now makes more than half of all crystalline silicon photovoltaic panels sold in the world. Suntech Power Holdings, Yingli Green Energy Holdings, Trina Solar and a host of other Chinese firms have become industry pace-setters, driving international competition and pricing trends.  But after blazing across the globe from small beginnings just 10 years ago, is China's solar panel industry becoming a victim of its own success?

As China's solar sector arrives at a turning point, experts are debating whether it will be forced to depart from its tried-and-tested formula. What's increasingly clear to all is that Chinese solar companies will soon need to offer more than the low-cost products and exporting prowess, say experts. That's easier said than done, of course, and reorienting their business models to focus on greater domestic market expansion and differentiating products through innovation is full of risks, even if it ultimately provides a more sustainable strategy than what they have now.

“China is even more vulnerable than the U.S. or Europe in energy security,” says Mauro Guillen, a Wharton management professor and director of the school's Lauder Institute.“It has every incentive to develop all its resources” for the home market. That involves innovation, not just low-cost production, he adds, something China's government may want to bear in mind when deciding where to channel subsidies under its latest growth plan. “If you [just] subsidize production, you could be subsidizing something that is not economical,” says Guillen. “But if you subsidize innovation, in the end, you may find something that works much better than coal,” China’s primary fuel.

The Sound of Alarm Bells

For now, it's not long-term innovation but the survival of a sector-wide upheaval that's consuming China's attention. One reason: A trade skirmish with the U.S. in a Chinese industry that exports 90% of output. "The feeling at the moment is panic,” says Melanie Hart, a policy analyst at the Center for American Progress, a Washington, D.C., think tank. It began with the shuttering earlier this year of Fremont, California-based Solyndra, blaming its default on US$585 million of federal loan guarantees on cutthroat Chinese competition. Less than two months later, on October 19, Hillsboro, Oregon-based, German-owned SolarWorld Industries America, the U.S.’s largest solar cell manufacturer, and seven unnamed U.S. companies filed an antidumping complaint against the Chinese industry before the U.S. Department of Commerce and the U.S. International Trade Commission. (Solyndra was not identified as a complainant.) Then, a few days after China’s Ministry of Commerce announced that it was investigating whether U.S. government support for the American solar industry is in violation of World Trade Organization rules[JK2] , the U.S. International Trade Commission made a preliminary decision in favor of the U.S. complainants.

There are now questions about whether SolarWorld’s case could result in high tariffs in the U.S., which would essentially shut out Chinese solar panel imports from the country. That may be welcome news in only some business circles. Today, the U.S. runs a trade surplus with China, selling equipment and other exports to Chinese solar companies. “A U.S.-China trade war would be bad for the solar industry, bad for jobs and bad for the [global] economy,” says Andrew Beebe, chief commercial officer of Wuxi, China-based Suntech Power Holdings, the world’s largest solar cell maker, with 2010 revenue reaching US$3 billion. It “would make solar electricity less competitive against traditional forms of electricity generation…. The vast majority of solar industry jobs are in end-use markets surrounding project development, construction and installation, and these jobs depend on affordable solar panels in order to be cost-competitive against traditional energy resources.”Chinese companies, including Suntech, and more than 130 U.S. companies had joined together to oppose SolarWorld’s case under the Coalition for Affordable Solar Energy.

While not everyone in the sector may agree, investors view China's solar sector as a giver of life to a still-nascent industry. For that reason, “trade sanctions are a bad idea,” says Alain Harrus, a partner at Crosslink Capital, a San Francisco venture capital firm that invests in China. “It will send us backwards to an era where there are fewer megawatts of solar installed at a higher price.” In the U.S., where 40% of solar installations use Chinese panels, supply would be hit with significant disruptions, adds Shayle Kann, managing director of GTM Research, a market research company in Boston.

Indeed, a victory for the U.S. complainants may fall short of its goals. Just as trade sanctions against Japanese semiconductor makers failed to save the industry in the United States several years ago, onerous tariffs will likely lead Chinese solar companies to change strategies, without any benefits trickling to U.S. rivals, says Jesse Pichel, senior research analyst at U.S. investment bank Jeffries & Company in New York City. For one thing, Chinese companies can follow the lead of their country's biggest players — Suntech, Yingli, Trina Solar and LDK Solar — and set up their own sites in North America, as well as low-cost countries around the globe.

What's more, points out Noam Lior, mechanical engineering professor at Penn, “The U.S. isn’t China’s only customer. They can sell to Indonesia, Taiwan, South America and others.”

Survival of the Fittest

As concerning as the trade dispute may be, there's perhaps an even greater threat to China's solar industry — plunging global prices and demand. “The industry now is facing a cyclical downturn,” says Pichel. “Demand is stalled, because prices keep coming down so much that people want to wait [before buying]." With costs falling by more than half over the last two years, global demand for PV cells jumped 165% from 2009 to 2010, but it is expected to rise only 9% this year, and 4% next year, according to Pichel. Today, supply outstrips demand by two to three times, which is typical of new industries, he says. There's also the financial crisis fallout — notably, subsidies to the sector have dried up in austerity-riddled Europe, which accounts for 70% of the market.

Chinese companies are scrambling to prevail in this market. “2012 will be a very difficult year for survival,” says Stephane Dufrenne, chief technology officer of Upsolar Group in Shanghai. “The weakest will die or be acquired. The stronger will survive and become stronger.”

Will today’s challenges change the decades-long paradigm of China as the low-cost manufacturer and the West as the innovator?Maybe, but it may take a while, say experts. “A good tech company should spend 10% to 15% of revenues on R&D,” says Pichel. “Chinese solar companies spend about 1% to 2% on R&D.” In addition, Chinese government policy and banks favor funding large state-owned companies over more entrepreneurial, small- to midsized enterprises. “SMEs [which is] where you typically see strong innovation, are dying on the vine [in China],” says Hart of the Center for American Progress.

Yet, asserts RIT's Raffaelle, “to assume the Chinese are just grafting technology developed elsewhere is dangerous. A lot of students educated in the West are coming home and setting up shop in China.” Raffaelle, editor of Progress in Photovoltaics, a PV peer review publication, says he has seen a “dramatic uptick” in submissions from China, noting many Chinese studies on the viability of thin film solar cell technology based on copper, zinc, tin and sulfur, which are all materials that are less costly than what's used today.

Whether China is capable of “true innovation” is an enduring source of debate. According to Nicoletta Marigo, research associate at the National Council for Research in Parma, Italy, who conducted a study of China's PV innovation, "We can safely say that the Chinese PV industry is not merely a good imitator and user of imported technology, but is building absorptive capacity to sustain genuine innovation.” Chinese companies have moved upstream quickly to master the technology in advanced wafer cutting processes and higher efficiency cells, competing internationally “on the basis of product performance and quality and not uniquely on heavy discounts based on cheap labor,” she says.

Big Chinese manufacturers are focusing on increasing the efficiency of their panels and lowering production costs. Ahead of that curve, Yingli, for example, partnered with a Dutch company to introduce its Panda brand modules last year, which use N-type cells that operate more efficiently than traditional P-type cells.

The technology in Suntech’s new Pluto products boosts efficiency by using ultra-thin copper, instead of silver, lines to conduct electricity. In addition, it recently introduced technology that produces high-quality silicon wafers at lower costs, andentered a partnership with Swinburne University of Technology in Melbourne, Australia to develop nanoplasmonics, a next-generation PV technology. “By 2015, we are targeting for solar electricity to cost less than retail electricity prices in more than 50% of world markets,” says Suntech's Beebe. “To get there, we must continue to improve our products' power output and reduce our costs of production by about 10% each year.”

Win-Win, Lose-Lose?

For now, China's efforts to move upstream create an opportunity for the West. Indeed, Joanna Lewis, senior fellow at the China Environment Forum at the Woodrow Wilson Center in Washington, D.C., notes, “We have to be careful to say what’s good for U.S. industry. Many U.S. companies are making a lot of money selling components to China.”

Venture capitalist Harrus is looking to invest in Western companies that can supply Chinese solar cell manufacturers with efficiency-enhancing materials, technologies or equipment. UpSolar’s Dufrenne says his company is using technology from two California companies, Tigo Energy and Enphase Energy, to increase the efficiency of its modules.

Meanwhile, expanding China’s own solar installations could benefit those companies. Under China's renewable energy regime so far, solar has taken a backseat to hydro, wind and nuclear. Now that those forms of energy are experiencing political pushback from various quarters, “solar is ripe for support,” notes Hart of the Center for American Progress.But government support must be sufficient enough to make solar attractive to consumers relative to China’s low electricity rates.

Perhaps the biggest long-term peril to China’s solar industry is the evolution of technology. China’s bet on today’s prevailing crystalline silicon could be upended by disruptive technology from global rivals. The closest threat is thin film, a low-cost, high-efficiency technology. Arizona-based First Solar leads the pack in the far as producing that technology is concerned. “First Solar has proven that there are alternative technologies to give traditional crystalline silicon a real run for its money,” says RIT’s Raffaelle.

Though China has banked on crystalline silicon, Marigo of Italy's National Council for Researchnotes that it has long engaged in thin film research. Today, Nankai University in Tianjin in northern China has a thin film center with potential for developing its own intellectual property rights around the technology, she says. For now, however, low crystalline silicon PV prices provide less incentive to develop thin film in the U.S. and elsewhere.

Still, supplying just 1% of the world’s total energy today, solar power should have room to glow brighter in years to come. The big question now is whether despite its current woes, can China's solar industry catch some of those rays?

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