Sector-wide Shuffle for China’s PV Industry as Period of High Profit Closes

The global photovoltaic (PV) market reached US$50 billion in 2010, spurring the rapid growth of China’s PV industry. However, its high profitability is coming to an end. Local manufacturers of solar panel modules are likely to enter a price war as PV modules face further price erosion due to subsidy reductions worldwide and a domestic oversupply since earlier this year.

According to a report from UK-based IMSresearch, Suntech Power, a global leading provider of solar energy solutions in China, overtook the US’s top thin-film panel producer First Solar as the world’s largest PV modules manufacturer in terms of shipments in the third quarter of 2010.

However, the gross profit margin of Suntech PV modules experienced a sharp decline from 30.3 percent in 2005 to 20 percent in 2009, with net profit margin falling to 5.1 percent in 2010 from 13.5 percent in 2005. In the third quarter of last year, despite improved business results, its gross profit margin reached only 17 percent, far below the 33.3 percent, 31.4 percent and 22.7 percent of Yingli Solar, Trina Solar and Solarfun Power, respectively.

Gross profit margins of the overall PV industry chain in China averaged above 30 percent over the recent few years, with margins on the modules themselves a mere five percent. The margin for the power stations and the associated upstream businesses was significantly above the industry chain average. Now, industry players are seeing their overall profitability drop precipitously to less than five percent as the prices of solar panel modules continued to slide both inside and outside of China, and the prices of the raw materials continue to increase.

In addition, Chinese PV companies have reduced their prices this year in response to a series of subsidy reductions and the removal of some preferential policies on solar-produced electricity in some European countries, including Germany, Spain and Italy. A number of China-made PV modules totaling millions of MW were held up in Italian ports where they were supposed to be unloaded, while European customers demanded 30 percent discounts before accepting delivery.

Industry watchers expect a sector-wide shuffle any day now, with PV product prices experiencing further declines. The most ambitious companies with the ability to tolerate the instability will be the likely survivors of this impending change.

Nevertheless, the PV industry in China over the long-term looks promising with its total installed capacity expected to exceed 50 GW by 2020.

Industry research body Solarbuzz is forecasting that orders for solar energy panels worldwide will slow significantly in 2011 and finish the year out at 20.4 GW. Shipments will reach 23.8 GW for 2011 while ex-factory prices are likely to see a drop of up to 17 percent.

Statistics show that at of the end of 2010, China represented nearly two thirds of worldwide PV production capacity, despite its domestic demand only accounting for three percent. In 2010, the shipments of Chinese-made solar panels exceeded eight GW, around 50 percent of world production. However, over 95 percent of the panels were exported, demonstrating an unhealthy dependence on exports.

At of the end of last year, China’s cumulative installed capacity was a mere 0.8 GW. European governments have now reduced their policy support while China continues its expansion, further deepening competition among domestic manufacturers. 

Longer-term prospects look good, however short-term woes will force consolidation and knock weaker players out of the race. The survivors can start to position themselves for a brighter future when China’s domestic demand eventually heats up.

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Nanjing Shanglong Communications Liu Yuanyuan is Director of Operations and Co-Founder of Nanjing Shanglong Communications. Liu Yuanyuan previously held the position of office manager at the London Financial Times' China translation and editorial bureau in Nanjing overseeing 33 translators, editors and IT support personnel. Ms. Liu brought her many years experience of delivering, under deadline, more than 200 English-language news summaries of articles selected from Chinese-language newspapers and newswires daily as well as supervising the timely completion of 500,000+ word English-to-Chinese translation and localization projects to her role as co-founder and general manager at Shanglong. Ms. Liu joined Shanglong in 2002. In 2006, she added China Business News Service to the product suite – the service provides a continuous flow of well-researched and documented news articles to trade publishers and industry-specific websites looking to supplement their content with the latest news from China in their sector. She manages Shanglong's staff of translators, editors, desktop publishing specialists and support staff, selected from the top universities across China and well versed in the art of translation and in the technology of DTP. Ms. Liu graduated from the People’s Liberation Army Institute of International Relations - China’s elite military academy responsible for the training of the country’s foreign language specialists.

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