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Capacity Control: How Will China and Taiwan Solar Manufacturers Survive Post-Tariffs?

Overcapacity is the biggest issue facing the global solar manufacturing industry, and nowhere is the issue more apparent — and the losses deeper — than in China and Taiwan. Together these countries account for over 70 percent of solar cell manufacturing. GTM Research estimates that China alone has the capacity to manufacture 59 GW of solar modules — dwarfing even rosiest demand forecasts for 2012, which is around 30 GW. Taiwanese makers add another 8 GW of manufacturing capacity to this equation. The U.S. Department of Commerce antidumping tariffs intend to impact this condition by pricing Chinese solar cells out of the market, and sideline a significant chunk of the global solar cell supply to create a more competitive and sustainable industry.

Taiwan is expected to benefit from the ruling, with its close proximity and shared culture with Chinese module makers seeking alternative cell sources. But will the boost be enough to raise revenues and lift the industry out of the red?

Herbert Lu, deputy global sales director of Neo Solar Power (NSP) at Hsinchu Science Park in Taiwan is optimistic. The DOC tariffs “will push China to do more capacity rationalization,” he forecasts. He adds that the ruling will likely foster closer ties across the straits by Chinese makers seeking alternative sources for cells. NSP has 1.3 GW of solar cell manufacturing capacity and is one of Taiwan’s top three cell makers, along with Gintech and Motech. 

China and Taiwan already share deep business connections in an array of industries from high tech to textiles and machinery, and some of Taiwan’s biggest companies are major employers in China, such as electronics maker Foxconn and Quanta Computer. Competing with China’s scale and low costs has led Taiwan to become a leading manufacturer with strengths of high efficiency and process management. So when the preliminary finding came out last May, sourcing cells from Taiwan became the go-to solution for many Chinese module makers. Q2 earnings show the impact; Taiwanese cell makers saw shipments and revenues increase 25 percent over the previous quarter. Gintech’s Evelyn Hung notes that 20 percent of their sales in 2012 have gone to China — up from less than 10 percent in 2011. Taiwanese firm Motech, which operates approximately 30 percent of its 1.5 GW cell manufacturing capacity from China, says they adjust their utilization according to the destination of the product, and have already announced that they are labeling the country of origin.

This outsourcing to Taiwan has continued since the finalized ruling, and Taiwanese makers haven’t seen much order influence. “The impact was already felt,” observes Evelyn Hung from Gintech.

Maxim Group’s Aaron Chew cites “consistent reports of EPC/integrators holding off on projects pending the final determination of the tariff (made last week),” as reasons why the duties haven’t had a bigger impact on Taiwan’s makers. He notes, “We believe the benefit we expect Taiwan to reap from U.S. demand was delayed in 3Q12 but should emerge as development picks up steam in 4Q12.” 

The problem remains though that even with orders being diverted to Taiwanese makers, low prices mean losses. Chew writes in his report on Taiwan’s solar industry from Sept. 19: “We expect the pull towards unsubsidized pricing and the push of overcapacity to continue to compress the economics of solar module/cell/wafer manufacturing, in turn, suggesting negligible earnings leverage from any demand upside.” In other words, despite an uptick in orders, prices will remain below profit margins. 

For the DOC ruling to have any significant impact, capacity needs to come offline — permanently — but so far that hasn’t happened. “Everyone is waiting for the other guy to die,” observes an IR head for a major Taiwan solar cell concern who requested anonymity. 

China’s solar makers, however, are all on life support. With US$17.5 billion in debt and operating in the hundreds of millions of US$, China’s solar industry survives, according to many insiders and the U.S. DOC, on government lifelines. Chew writes that “China Solar has largely sidestepped a major failure to date, in our view, from deep support from the government and banks.”

Consequently, while many doubt the effectiveness of the DOC’s tariffs due to the relatively small size of the US installation market, more significant is the looming change of government in China.

China is set to begin its once a decade leadership change in November, and all bets are off until that happens. China’s stalwart support for its solar industry has been a given for years, but with a change in government comes a change in priorities.

As solar firms continue to hemorrhage, provincial authorities — concerned with the health of their local economies, might be tempted to shift their priorities to more secure industries.  “In the face of a new government coming to power October 2012-March 2013 and the capital hole facing the solar industry, we believe support at the provincial level — where it has been most prevalent — is at risk.” writes Chew. 

With government support now in question, the future for China’s solar makers may be less secure than many realize. Even among China’s tier 1 players, the impact of the sluggish industry can be seen. Heavy debt and operational losses have forced Suntech Power to reduce capacity from 2.4 GW of manufacturing to 1.8 GW. Evelyn Hung emphasizes that unlike simply mothballing capacity, Suntech’s reduction is “a restructuring” of the company that will take this capacity permanently offline. Suntech’s move to permanently remove capacity suggests that “supply is becoming more rational,” Evelyn Hung observes.

But until capacity can be rationalized, Taiwanese cell makers still need to survive. According to experts at GTM Research, to make back costly investments, solar makers need to operate at 80 percent capacity around the clock.  But with losses mounting, at this point solar makers aren’t worried about accounting losses, they are worried about whether they can pay their staff and costs of materials.  

So far, company reps say that they have maintained the cash-cost — that they are making enough to continue to keep the lights on, “but this is becoming more difficult,” NSP’s Lu admits. Through scrupulous management of inventory to keep pace with falling prices and a laser focus on efficiency, Taiwanese makers have been able to meet expenses without burning cash. Evelyn Hung of Gintech contrasts the fiscal situation of most Taiwanese makers to their counterparts on the other side of the straits and says, “The balance sheet for Taiwanese players is much better than those in China.”

Gintech has a war chest of NT$10 billion (US$300 million) in equity to sustain for the duration of the shakeout in solar. The company has NT$3.4 billion in cash along with a loan of NT$4 billion from a consortium of 13 Taiwanese banks led by the First Bank. Gintech is an independent publicly owned cell-making company with 1.5 GW of capacity.

Some Taiwanese firms are closely tied to industrial giants in more established industries such as OEM electronics manufacturing. E-ton Solar, for one, is expecting an NT$2.6 billion cash injection from major shareholder Inventec by mid-November, according to insiders. Inventec is one of Taiwan’s largest OEM electronics makers. Niche cell maker Unitech Solar also relies on the strength of its parent company, Unitech.

Taiwan’s government is also quietly supporting the industry. The government provides tax incentives and R&D subsidies to encourage development — such as the Green Energy and Environment Research Laboratories at the world-renowned public/private Industrial Technology Research Institute (ITRI). The government has also established a NT$10 billion (US$300 million) fund to help Taiwanese firms get established in the installation market overseas. Profits have consistently migrated downstream, but often projects are delayed because of funding issues, especially in recession-weary European and lagging U.S. markets. The fund will hopefully get the ball rolling, priming the pump on demand.

However, few Taiwanese solar makers have solid businesses in installation and obtain nearly all of their revenues from midstream cell making, blunting the force of such efforts.

At PV Taiwan, the annual trade expo showcasing the local industry October 3-5, people joked that the industry wasn’t waiting for tomorrow — that’s already a wash — but for the day after tomorrow; some day in the indeterminate future when solar returns to profitability. The hope for profits seems to look more like a wish. 

Lead image: Lifesaver via Shutterstock

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