What is the “Right Size” for Solar Companies?

Traditional consolidation in industries suffering from overcapacity typically sees stronger companies merge and weaker ones close, resulting in a healthier, more sustainable sector where everyone is profitable. But such conventional “right sizing” is less common in China, where struggling companies in strategic industries are often kept alive through financial and other support from local governments that are highly reluctant to let those ventures simply fail or be purchased by outsiders. Such artificial support may save jobs, but it does nothing to solve the overcapacity problem that created the need for consolidation in the first place.

That’s exactly the dilemma facing China’s struggling solar sector, which is now posting huge losses even though we’ve yet to see players close or merge despite a flurry of such activity in the West. In the absence of proper consolidation, Chinese companies appear to be taking the next-best logical step by shuttering idle capacity and implementing massive layoffs in a bid to stem their losses, according to one report

The main question is: will this kind of action be enough to avoid any of the closures that everyone seems to dread so much? My suspicion is that this “right sizing” will help some of the weaker players to perhaps survive a little longer; but at some point local governments will eventually tire of pumping more and more money into ventures that clearly have no hope of returning to profitability anytime soon, if ever.

Let’s have a look at this latest report in the English-language China Daily, which finally has some of China’s top solar companies talking candidly about what they’re doing to right-size their operations. Scandal-tainted former industry leader Suntech (NYSE: STP) said it is idling part of its manufacturing operation in its home city of Wuxi, which will affect 1,500 workers. It didn’t specify how exactly the move would “affect” those workers, but I suspect they won’t be getting any paychecks from Suntech for at least the next few months, if ever.

Meantime, Trina (NYSE: TSL), which previously announced it was taking unspecified steps to address the industry’s overcapacity, said it had laid off 200 managers. It didn’t discuss layoffs in its larger manufacturing division, but I suspect management cuts of that magnitude mean that more than 1,000 factory workers are also being cut as part of this reduction exercise.

Last but certainly not least is LDK (NYSE: LDK), one of the industry’s weakest players, which I wrote earlier this week has reportedly hired Morgan Stanley (NYSE: MS) to try and sell the company to a major state-owned enterprise. According to the China Daily report, LDK is laying off more than 5,000 employees, or nearly a quarter of its workforce, as it struggles to stay alive.

The report doesn’t discuss any more companies, but I’m fairly certain all the other major players are making similar job cuts as they struggle to stay alive. At the end of the day, many of these firms may need to cut up to a third or even half of their output, resulting in more pain even if no one closes outright. Look for this wave of “consolidation Chinese style” to continue for at least the next year, after which time perhaps we’ll finally see some of the better run companies start to return to profitability.

Bottom line: Chinese solar panel makers will cut a third to a half of their workforces over the next year, helping healthier players return to profitability by late 2013.

This blog was originally published on Young’s China Business Blog and was republished with permission.

Lead image: Big and small via Shutterstock

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Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters, writing about publicly listed Chinese companies. He currently lives in Shanghai where he teaches financial journalism at a leading local university. He also writes daily on his blog, Young’s China Business Blog (www.youngchinabiz.com), commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also the author of an upcoming book about the media in China, The Party Line: How the Media Dictates Public Opinion in Modern China.

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