Chinese Solar Makers' Strategies to Overcome Trade Conflicts
Trade conflicts in the solar industry have affected Chinese and Western manufacturers alike, and Chinese solar firms are pursuing different strategies to navigate the complex trade climate and mitigate its adverse effects.
On October 19th, 2011 SolarWorld and six other photovoltaic (PV) companies filed a complaint with the U.S. International Trade Commission and the U.S. Department of Commerce (DOC), alleging that Chinese companies received unfair subsidies and dumped their products in the U.S. market. Results from the subsequent investigation found that the U.S. solar industry was materially injured, and Chinese cell makers were subject to antidumping and countervailing duties. In early 2015, a second round of investigation found that Chinese firms exploited the first ruling’s loophole by sourcing their cells from another country, and the DOC extended the duties to include Chinese and Taiwanese solar wafers, cells, and modules.
The first round of U.S. rulings substantially affected the operation and revenue of Chinese solar makers. Shares of China’s Yingli (NYSE:YGE), Trina Solar (NYSE: TSL), and SunTech Power tumbled, slipping 12%, 8%, and 4%, respectively. Analysts pointed to the substantial loss in market share and in revenue during this time as one of the significant factors that led to SunTech Power’s bankruptcy. In contrast, the second ruling was met with little commotion, partly because the decision was widely expected and partly because Chinese firms had shifted their focus to other markets in response to the first ruling. For instance, Canadian Solar’s (NYSE: CSIQ) sale fell 15% between 2012 and 2013, but actually increased 50% in the year after the second ruling.
In order to understand the different strategies Chinese firms are pursuing to stay competitive in the current trade climate, we visited numerous Chinese PV developers, manufacturers, and regulators in September as part of the first China-US PV Youth forum. Based on our interviews with senior executives and governmental officials, we found that there were three main pathways that Chinese solar companies are exploring and adopting, which we term the “go big”, “maintain a presence”, and “stay home” strategies.
Firms that embrace this strategy are typically large firms with large coffers and have had experience managing an international operation. Emerging markets are attractive destinations for these firms to build their manufacturing facility because of lower factor costs as well as rising demand for solar. Expanding manufacturing capacity abroad allows Chinese firms to optimize and develop local production capacity, at the same time circumventing existing anti-dumping tariffs. Canadian Solar, for example, has expanded their cell and module operations to Brazil, Indonesia, and Vietnam. In fact, according to BNEF, about one-third of new cell and one-quarter of new module capacity will be built in Asian markets outside of China.
However, there are a number of concerns. Given the rising protectionist sentiments around the world, existing tariffs may be extended to cover solar equipment made in these emerging countries as well. Furthermore, Chinese firms expanding abroad have to navigate various policies and markets of foreign countries, a daunting task even for seasoned players. Finally, the incomplete local supply chain and the lack of qualified engineers and technicians to staff the plants may drag down the efficiency of the operation’s overall efficiency, a problem that cannot be immediately remedied.
Maintain a Presence
Despite the tariff measures in the U.S. and EU, Chinese solar makers can maintain a presence in these markets through acquisition. Recent policy developments in the U.S. and EU suggest healthy and steady growth in the next several years in two of the world’s largest markets. The U.S. government extended the federal Investment Tax Credit of 30% to solar projects through 2019. The Paris COP21 agreement and its subsequent ratification also demonstrate the commitment of the U.S. and the EU to renewables; the U.S. solar market is projected to grow to close to 20GW by 2020, and the EU market is estimated to grow at similar rates.
Shunfeng International Clean Energy (SFCE), which also owns Suntech, is actively pursuing this strategy by acquiring a majority stake in American solar maker Suniva. Under the Suniva label, Shunfeng can bypass the antidumping and countervailing tariffs and access the US market. This strategy also enables the firm to pick up new technological and manufacturing capabilities. Through its acquisition of Sunniva, Shunfeng can take advantage of Suniva’s experience in high-efficiency monocrystalline PV cells and modules. However, as with any acquisition deal, there are uncertainties related to the company’s technology, operation, and organizational culture. Additionally, Chinese firms acquiring established companies in developed markets are forgoing low-cost factors available in emerging markets.
Instead of looking abroad, Chinese firms can focus on their domestic market. After all, China is the world’s largest PV market. Despite its plans to scale back deployment incentives, the Chinese government continues to prioritize renewable development, as demonstrated by its 13th Five Year Plan and recent announcements made by the National Energy Administration (Chinese). Companies like Shunfeng PV (SF-PV)/SunTech and Beijing Sunlectric are betting that the government will continue policy support for PV development.
The main advantage to this approach is that Chinese firms are not subject to uncertain trade policies around the world. Instead, they can focus on the domestic market with a familiar regulatory environment. Nevertheless, this strategy does not allow firms to diversify their investment portfolios, making them susceptible to domestic policy changes. Furthermore, since the hyper-competitive domestic market is currently inundated with small manufacturers of various technologies, a firm would need to offer unique value propositions in order to compete and stay afloat. In fact, one governmental official commented that many of the smaller companies were “polluting” the market with inferior technology, and that proper measures, such as the “Top Runner Program”, are needed to weed out the weak domestic players and improve the industry’s performance and health.
Despite calls to cancel trade duties both in the U.S. and EU, executives whom we interviewed did not expect that these trade conflicts would be resolved any time soon. Chinese solar manufacturers’ operation and bottom lines were significantly affected by the first round of U.S. anti-dumping and countervailing duties, but they have since adapted various strategies to cope with this “new normal”. One immediate consequence of the current trade war is the development of manufacturing capacity in emerging markets, especially in Southeast Asia. Given China’s rising factor costs, such a transition was perhaps inevitable, but the current trade conflicts have no doubt accelerated the speed at which it is unfolding.
Photo Credit: Slimdandy via Flickr