Solar

Notes from the Solar Underground: Is China’s Domestic Solar Industry Too Big To Fail?

Mid-2018 China’s central government threw the entire PV industry, including observers and pundits, into a panic by making drastic changes to its PV deployment that included temporarily halting utility scale deployment, lowering the FiT, shifting economic responsibility to the provinces and, in a related move, attempting (one-more-time) to control the country’s debt problem. Forecasts were lowered, and gloom descended on top of the entire solar industry.

More recently, the government has announced, with no real details, that a new incentive (or at least encouragement) program would be put in place mid-2019.  Despite lacking any details, the indication of continued support caused the entire PV industry, including observers and pundits, to finally exhale and begin ramping optimism and forecasts, though not actual manufacturing capacity.

What makes a business or even country too big to fail? Typically, governments make this decision when the failure of a company or institution would be likely to trigger a catastrophic market event. A significant uptick in unemployment can trigger a catastrophic market event as well as social unrest.

In the US, the biggest bailout in history was AIG, American International Group, propped up over time to the tune of $180-million. AIG was saved after the US government stepped aside and allowed Lehman Brothers to collapse (leading to a catastrophic market event). The US has also bailed out Bank of America, Chrysler and GM, among others.

Countries that have been bailed out include Mexico (1995), South Korea (1997), Indonesia (1997), Brazil (1998, 2001, 2003), Greece was bailed out (again and again) beginning in 2010.

Coal India, still ~78% government owned, has sold shares several times to ensure its survival and is still considered too big to fail for energy security reasons.

China consistently bails out its banking industry as well as its steel industry, its utilities, and its airlines, among others. China’s support of its mostly state-owned enterprises is both front and back loaded. Using the country’s solar industry as an example, China’s solar supply and demand was funded by government loans and grants, preferable tax and utility rates and other supports.

China’s solar industry employs a fraction of its population of over 1.4-billion at less than 1%, ~2.5-million. In comparison, agriculture employs 35% of China’s population or close to 500-million people. Even at less than 1% of its population, 2.5-million is a lot of people to be thrust out of work in a country where employment can be viewed as an “opiate of the masses”, a phrase from Karl Marx about religion used to illustrate that religion was what kept the population from rising up and overthrowing the government. 

People working in China’s solar industry receive, in the main, higher pay than people working in other industries and, as solar is both a high-tech and a construction industry, more personal cache. Dislocating solar workers from their jobs with no ready replacement would infuse social instability into the country, and this may be a price that China’s central government is unwilling to pay despite the expense of supporting ongoing PV deployment and despite the low margins of its PV manufacturing sector. 

Karl Marx had a point about religion that is transferable to employment. People who are employed, particularly in high-tech industries, feel their lives are going well. People who are unemployed do not feel that their lives are going well and demand change. 

Even non-democratic governments like to avoid angry masses of unemployed people and China has a long history of supporting industries for no other reason other than employment, particularly if that industry produces an exportable product. 

Also … as China’s economic growth slows, a forced slowing of the country’s domestic solar industry and the accompanying loss of jobs is likely less appetizing to the country’s central government. 

The Amazing and Rapid Rise of China’s Solar Industry

No other country has accelerated PV manufacturing and domestic deployment of PV installations in such a short time.  Figures 1 through 4 illustrate China’s rapid rise to PV industry dominance during which it dispatched competing manufacturers from other countries with prolonged aggressive pricing strategies and accelerated domestic deployment. As 67% of the PV industry’s capacity to produce PV cells is located either in China or in Chinese expansions in other countries any change in China’s PV policies and support structures for either demand or supply creates a demand/supply crater in the global solar industry. With one country responsible for over 50% of supply and ~50% of the available market the PV industry is not balanced and not healthy.

Figure 1 offers China’s share of demand and supply in 2002 when the market for solar deployment was ~500-MWp and still heavily influenced by demand for off grid applications. During this period China had a 1% share of demand, primarily into the off grid applications and less than a 1% share of supply. 

Figure 1: 2002 China Share of Demand/Supply Total Market 504.9-MWp

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Figure 2 offers Chinas share of demand and supply in 2007. In 2007 Europe’s feed-in-tariff was driving demand and due to a shortage of polysilicon, prices for all PV technologies were high, and margins healthy.  During this period China’s market for deployment was ~1% of the 3.1-GWp total and still primarily for off grid applications. 

However, in just five years China had increased its share of supply (shipments of cells/modules) from less than 1% to 20% of total. During this period China’s central government participated fully in the acceleration of PV manufacturing in the country for the purpose of serving the market in Europe. 

Figure 2: 2007 China Share of Demand/Supply Total Market 3.1-GWp

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Figure 3 offers data for China’s share of global PV demand and Supply for 2012. As indicated in the demand pie chart, China’s domestic deployment of PV installations had increased significantly. In the five years from 2007 to 2012, however, China’s manufacturers had accelerated capacity building and now dominated the market for PV module shipments at 45%. It did so by pricing aggressively and obliterating competing manufacturers in other countries.

By 2012, manufacturing margins were constrained, and the industry was entering a period of consolidation from which manufacturers in the traditional PV manufacturing countries (the US, Japan, and Europe) would never fully recover.

Figure 3: 2012 China Share of Demand/Supply Total Market 26.1-GWp

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Figure 4 offers China’s share of global PV demand and supply for 2017.  By 2017, China dominated domestic deployment of PV systems with a 55% share also dominating shipments of PV modules with a 57% share.  In the supply pie chart below, China’s 57% share of shipments only considers cells/modules produced in and shipped from China. Given China’s manufacturing expansion into other countries the share of shipments is higher.

In other words, by 2017 China dominated the demand and supply of the PV industry to the degree that a negative change in either has an outsized effect on the entire industry.

Figure 4: 2017 China Share of Demand/Supply Total Market 93.9-GWp

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There is no getting around it, when China’s central government took a look at its industry and decided to implement controls the entire global market for PV deployment felt it. US Tariffs?  Pointless in a period of oversupply.  EU MIP?  What’s the point? None of these instruments had ever really worked, though they did provide fodder for pundits trying to explain a slowing market. 

Figure 4 offers data on China’s expected share of a smaller market for PV deployment in 2018. In 2018 China is expected to have a 48% share of demand and a 53% share of supply.

Figure 5: 2018 China Share of Demand/Supply Total Market Estimate 87.4-GWp

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What Happens if China Let’s its Solar Industry Slow or Even Fail?

This is an unlikely scenario but if China’s central government did continue with its plans to significantly slow its domestic deployment of solar, prices for modules would stay low until China’s manufacturers sufficiently reduced capacity. Manufacturers in other countries would be unable to compete – unless, of course, the manufacturer had a Chinese parent. Manufacturers in Taiwan would likely be the most significantly affected as prices for cells would crash. Margin pressure would cause pull back in available capacity from polysilicon to module assembly. 

Finally, excess capacity would be worked off and manufacturers would attempt to raise prices and margins and find it almost impossible to do.

What Happens if China Announces a Face Saving Way to Continue Installing Solar?

In this likely scenario prices rise because the industry would find itself in a capacity constrained situation particularly affecting countries with tariffs in place – for example, the US.

With a booming home market Chinese manufacturers could turn to markets with better margins – Europe, Japan, India – where a 5% to 10% increase in the price of a module will be borne because it is still cheaper than modules produced by other manufacturers.  

Concerning the US, Chinese manufacturers would likely stop absorbing the tariff and pass it on with a bump in margin to boot and still be cheaper than domestically produced modules or other imports.

China’s Solar Industry – too many jobs to let fail

China has kept people working by building cities few live in, running factories that grind out a glut of steel and manufacturing other often unused products, and also by installing utility scale solar producing electricity that is often heavily curtailed or simply, not connected to the grid. All this building kept the economic engine of the country purring and it was primarily built on debt. 

At the beginning of 2018, before China’s economic slowdown was apparent, the government began cracking down on shadow lending, and lending in general, in order to tackle its debt. Mid-year, as previously discussed, the government announced sweeping changes to its domestic solar deployment. 

A large domestic industry that employs millions is a difficult thing to quit. In the early-2000s China’s government took a look at the booming and profitable market in Europe and decided to get into the PV manufacturing business. To do so the government provided, as previously discussed, ample support.  

By 2012 the market in Europe was waning due to the collapse of several poorly designed FiT schemes and China was left with a need to continue supporting its domestic manufacturers. Between 2012 and 2017 China’s supply domination of other global markets and its domination of PV cell/module manufacturing became greater and along the way became more unwieldy and expensive to support.

Industries fade from prominence all of the time as do companies. The global PV industry is still young and, in its ascendency, dragging all of its inefficiencies such as low margins and supported markets along with it. The fact is that some of what is inefficient and unhealthy about today’s solar industry can be traced to China.

Low pricing and low margins: aggressive pricing via China’s PV manufacturers.

A bubble-like market for PV deployment: China’s closed domestic market that could disappear with one policy change or if the debt crisis in China implodes.

The fact is that with or without central government support, China’s provinces are unlikely to let their regional markets and manufacturers collapse because the weight of the collapse will be borne by the provinces. Dissatisfaction will trickle back to the central government, but it will be felt most significantly closer to home.

In the end though, as China’s economy slows, it is highly unlikely to allow an industry that employs 2.5-million to collapse.  So, is China’s solar industry too big to fail – frankly no. Is China’s solar industry too entwined with employment in the provinces and the country’s serpentine debt crisis to fail – probably.  

Finally, can China’s central government actually slow its solar industry?  In mid-2018 China’s central government made an announcement and the global PV industry more than shuddered. Late in the year as China’s economy slowed it indicated a potential change of heart. 

Because if employment is the new opiate of the masses, unemployment is the direct opposite.