How China Won Solar (& Why Germany Lost)

How China Won Solar (& Why Germany Lost)

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At the start of the 21st century,  China's solar cell industry found   itself far behind those in Japan, Germany,  and the United States. As late as 2003,   Chinese market share of the  solar cell industry was about 3%. In less than ten years, the Chinese solar  industry absorbed foreign technical expertise,   created their own indigenous capacity, and  outcompeted its western incumbents. By 2013, China   amounted for 60% of global solar cell production.  It retains strong market share today, though a lot   of production has migrated to the Southeast Asian  countries due to cheaper labor costs. Europe’s   share is negligible and its former national  champion Q-Cells sold to a Korean company.

Today, abundant solar energy can  be harnessed around the world.   Solar has become one of the cheapest sources  of renewable energy around. It is a key piece   of the future energy puzzle. That  was not possible a few years ago. But these gains came at a cost. Here  

we are going to look at how China outcompeted  the West and made solar energy cheap. Like most countries, China has worked  on solar cell technology since the 50s.   China's first solar cell was a single crystal  developed by the Chinese Academy of Sciences. By 1971, the country was putting its own  indigenously developed solar cells on its   space satellites. Solar installations were set  up at water pumps, relay stations, and the like.   At around this time, Chinese  products were no different than   those made by the West when judged  by energy efficiency. They did fine. But as the country entered the Cultural Revolution  and the economic doldrums that followed,   the industry fell behind its competitors in  the West. In an attempt to update the tech,  

the Chinese government acquired a few companies  and research institutes throughout the 80s. But nothing really stuck. Like  with the rest of the industry,   there was no real economic  incentive to innovate in solar.   Other energy sources were far more  cost-effective. Something needed to change. Starting in 1991, the German government began  promoting a subsidy scheme emphasizing renewable   energy sources. In this new "feed-in tariff"  system, anyone generating electricity from solar,   wind or hydro would get a guaranteed payment of  up to four times the market rate for twenty years.  

This led to strong new demand for  solar energy from European utilities. Companies in both China and the  West sprouted up to serve this need.   The leading German company would be Q-cells,  founded at the end of 1999. Based in Thalheim,   a city about 80 miles from Berlin, the company  began producing solar cells in 2001 with just   19 employees. Just eight months later, their first  plant broke even with 17.3 million euro in sales. The company quickly scaled up and in 2004 was  selling about 75 megawatts of solar cells.   This placed them fourth in rank with 6.3%  share of the industry, behind Sharp, Kyocera,  

and BP Solar and tied with Mitsubishi Electric. Sharp, Kyocera and Mitsubishi are Japanese  incumbents largely servicing their domestic   market - which has been growing since Japan  began re-emphasizing solar after Chernobyl. BP Solar was an awkward American-British-Spanish  hybrid that the oil company never seemed to   take seriously. So Q-Cells was the  European leader in the industry. What made Q-Cells' products  special was their efficiency.   The company invested a lot of resources into  R&D, which paid off. They were one of the first  

European industrial companies to commercially  ship solar cells with over 15% efficiency.   This refers to the percentage of sunlight energy  converted into electricity by the solar cell. Revenue continued to explode up and to the  right. Growth surged to 164% in 2004. They   went public a year later and the company's market  capitalization quickly exceeded a billion dollars.  

They had 2,500 employees and several prestigious  awards in ethics and employer relations.   Their solar cells were  proudly made right in Germany. Things seemed well at the time. Q-cells had  turned into a rising star in the industry.  

But over in China, a new industry began to  take its first steps towards global dominance. We will continue. But first, let us talk  a bit about how the solar industry works. The solar industry is a big one and it  has many different niches within it.   But we can generally classify them  into a cluster of different functions.

You got companies that  research new technologies: R&D. Companies that manufacture the cells  and panels. There are multiple steps   in this process, and companies occupying  various niches within those steps.  

Companies that make and purify the silicon  into the super-pure type suitable for solar   cells - a form called polysilicon. Companies  that cut that polysilicon into ingots and   produce cells. And then companies that turn  those cells into solar modules for usage. Companies that produce the other  parts of the solar installation,   such as the mounting equipment, cables or wiring,   and the inverter. The inverter is the  most valuable part of this industry.

Finally, you have those companies that deploy  and use the cells out in the field. They are the   system integrators and the solar utilities who  profit from the sale of the generated energy. In the solar cell industry, the companies that  capture the most value in the industry are those   at the beginning and the end of this chain.  So the companies actually manufacturing   the solar cells and panels make the  least profits out of the industry. You make more money by being the company that  installs and uses the solar installation.   That makes sense because  you cannot outsource that.  

A technician has to actually drive out to  the installation and get their hands dirty. Or you can make money by providing some of the  specialized materials like the purified silicon.   This makes sense since it takes unique,   specialized knowledge to get  something purified to such a degree. The reason for this is that the physical process  of producing solar cells from wafer onwards   is quite automated. But not automated enough  that human labor costs do not entirely matter.  

And the product is rather fungible. It  is not like clothes or iPhones where   the brand has a say in who used what  product. A panel is largely a panel. So, if you want to bring a competing  product into the market and make a splash,   you do not need much more than to  cough up the capital to buy and install   the manufacturing equipment. Such money  can be easily had through a bank loan.  

The equipment provider will even often offer  training on how to get the best results. For whatever reason, western countries did not see  solar module production technology as a protected   category. So when Chinese companies decided to  enter the market, it was remarkably easy. They   just went ahead and bought the most advanced  solar cell manufacturing equipment available.   Most of it from Germany. Replacing expensive  German workers with cheaper Chinese ones   gave Chinese companies a real price  advantage - in some cases as high as 20%. The Kyoto Protocol began an era of increased  awareness about the importance of reducing   greenhouse gases. That means less fossil fuels  and more renewables. China signed it in 1998.

Shortly thereafter in 1999, renewable  energy technologies were included as   one of the Chinese government's key  fields of emphasis. They sought to   build indigenous knowledge regarding the  industrialization of photovoltaic technology.   Rural electrification and tax policies  were established to encourage this.

Not much happened during the direction's initial  stages. There was just one recorded investment   by company Yingli Green Energy. This Hebei-based  company, established in 1998, leveraged the policy   to purchase and set up three complete production  lines for making advanced photovoltaic cells. Then at the end of 2001, China entered the  World Trade Organization and turbocharged   its export machine. This was a critical point  in the history of the Chinese solar industry.  

As the founder of LDK Solar attested: > If China had not become a member of the WTO,   there would have been no market for our PV  products and I might not have founded LDK Solar The Chinese government seized on this loosening  of trade barriers to catch up with the West,   bring its solar industry to the  leading edge, and make a lot of money. Local and provincial governments helped with cheap  loans to start up solar companies. One city in   Jiangsu offered a 50% refund on loan interest  incurred buying solar manufacturing equipment. But American capital also heavily  backed these Chinese companies.  

It is arguable that none of these Chinese  companies would have gotten to their current   position without an influx of American money.  Many of these Chinese companies listed on American   stock exchanges - including Suntech (the biggest  tech IPO of 2005), Trina and Yingli Green energy. Soon afterwards European countries like  Italy began shifting their energy grid   towards renewables like solar, expanding the  market yet further. Chinese solar products   were quite competitive. Because they  bought the best manufacturing equipment,   they were able to offer solar panels  in line with the best in the market.

China's lower production costs and  increased productive competitiveness   disrupted the overall solar cell market.  Companies saw prices drop and had to respond.   Profits were being sucked out of certain  areas. For instance, profits in the module   making business - putting cells onto panels  - went to just 9% in 2006, a pittance. There are a few strategies that companies  in this situation can undertake.   One is to attempt to expand throughout the  value chain: A vertical integration strategy.   So if you started out in manufacturing then you  want to get into R&D, installation, or the like.

You have to be careful in choosing where  to go. Some of this vertical integration   would turn out to be a failure. There is such a  thing as being way too integrated. For example,   let’s take polysilicon - the super-pure  silicon that is a solar cell raw ingredient.   At the time, just a handful  of firms in Germany, Japan,   South Korea and the US controlled the market and  they had margins over 50%. During the solar cell  

boom years, polysilicon prices reached 300  USD per kg. It cost just 35 USD/kg to make. Naturally, the polysilicon incumbents were not  willing to share their technology with China.   Chinese companies attempted to purchase expertise  from Russia but such purchases failed to create   silicon as pure. It would take more time and  expertise to get to the same level as the West. Yingli would pour significant resources into  the creation of its own polysilicon factory   in Liujiu - a joint venture with American  company GTAT. It worked for a while, but   the factory became a cost burden when the solar  bubble popped and polysilicon prices crashed.

Other types of vertical integration  saw much more success. For instance,   the way Chinese solar companies began  localizing solar cell manufacturing equipment.   Local equipment held a strong cost advantage  - up to a third of what it cost to import   from abroad - and eventually performed  better than their foreign counterparts. Over the span of five years, Chinese  manufacturers reduced their dependence   on foreign technology by half. They actually  preferred local equipment to the imported stuff.  

Two Chinese manufacturers entered  the top 15 global rankings. There is also no denying that Chinese solar  companies took the lead in producing leading   edge products. In 2009, Yingli Green Energy  announced a new line of "Panda cells" that   can achieve up to 19.6% solar efficiency in the  lab. This research was done in conjunction with  

companies and universities in the Netherlands,  highlighting the solar industry's global nature. Chinese companies' technological advancements  and integration work further extended their   cost advantage, shocking the industry  by reaching the cost of 1 RMB per KW. The Global Financial Crisis and the  European debt crisis would have a   devastating effect on the Western solar industry.   Feed-in tariffs were reduced and the solar bubble  popped, leading to a series of bankruptcies. Every company suffered. Suntech, once  a high flying American tech stock,   defaulted on a $541 million bond payment  and was forced into insolvency in 2013.

Yingli Green Energy had to  restructure their debt in court   in what was essentially an undeclared bankruptcy. Solyndra Corporation, an American  solar startup with some promise,   went bankrupt. The US Department of  Energy took a $500 million loss on   a loan it gave to the company. It turned  into a political lightning rod back home. The German companies took an especially bad  beating. They could not close the cost gap   with their competitors in time and many went  bankrupt. Solon and Solar Millennium in 2011.   Scheuten Solar, once the largest solar  module manufacturer in the world, in 2012.  

Solarhybrid, Odersun, and  finally Q-Cells quickly followed. In the political fury that followed, the  US and EU pursued anti-dumping measures   against Chinese solar manufacturers.  From the Chinese point of view,   this trade litigation unfairly targeted them.  I guess I can say that they have two points:

First, as I have implied in this video, the  Chinese solar industry was and is more globalized   than most others. Yes, the Chinese government  did hand out a bunch of loans and subsidies.   But far more capital and expertise  naturally flowed into these Chinese   companies from places like Europe and the  United States. Much of the high tech R&D   stayed in Europe. American investors bid up  shares in companies like Suntech and Yingli,  

giving them hefty financial firepower. You can  argue that they all should bear some blame too. And second, there is the thing that every YouTube  commenter loves to say: "Everyone does it". German   government money had backed German companies.  American government backed American companies. In my view, this is a weaker argument  to make. I always say in return,   "Sure. But does that mean, you got to  sit there and let it happen to you?"  

If you think that is alright, then I  would love to visit your store one day. In the end, despite the massive  political uproar from the Chinese,   the EU anti-dumping litigation persisted. A  two-year compromise was finally reached in 2013.   The Chinese government would request its exporters  raise their solar panel prices to the same level   found in the Korean market. Most of them did  as requested, and the rest received a tariff. The European Commission held that “this  (action) is not about protectionism,   and not about a trade war, but about  re-establishing fair market conditions”. The Americans followed suit with a 31%  anti-dumping levy and a 73% anti-subsidy levy.   Various trade organizations in the US argued  against this action, citing the Wal-mart effect   of American consumers benefitting from  these cheap panels. More on that later.

So why did German and European companies like  Q-Cells lose the solar manufacturing market?   They held a slight technology  lead in solar manufacturing,   being first to market with highly efficient  solar cells. There are a few reasons. First, despite the high amount of automation,   there remained significant differences in  production costs between China and Germany.   Being a great employer of technologically  sophisticated people is expensive.

Second, the biggest buyers are businesses. They  looked at the tradeoffs of buying "European" as   opposed to buying "Chinese" and still  decided to buy Chinese. Q-Cells was   a great employer with a high amount  of corporate social responsibility,   but their customers did not value  that enough to prefer their products. German companies bet too much  on the "Made in Germany" label   meaning something to buyers. It  did not. When the crisis came,   they should have shut down their domestic  manufacturing lines and moved them overseas. Lastly, we have to look at the part played by the   German government in the defeat  of its domestic solar sector.

Germany and the EU did not stem the flow  of foreign companies in their own markets   until it was too late. The anti-dumping and  anti-subsidy duties came only after the damage was   already done. Of course, this is to be expected.  Governments are slow - European governments more   so than others - and they take time. It did bring  some relief, but too late for many solar startups. And finally, the German government sealed  the fate of its domestic solar industry   when it suddenly cut the feed-in tariffs that had  been the lifeblood for Q-cells and other domestic   companies in the sector. You might call it good  budgeting. You might call it corporate welfare. You would be right. But it also plunged the  European domestic solar manufacturing industry   into a crisis, a crisis that only  the Chinese companies survived.

Today the German solar industry  is doing slightly better.   The pop of the solar bubble and  the anti-dumping trade litigation   gave time and cover for the industry survivors  to recover and catch up. (They expired in 2018.) The cost advantages between Germany  and China have narrowed. There are   a few companies today doing alright in the  market. But an entire generation of European  

solar companies were wiped out and their  technical leads absorbed by the Chinese. Note on the Japanese market. The Japanese  incumbents also suffered during the solar   overproduction period. But after Fukushima  in 2011, the government refocused on its   domestic solar market. The Japanese solar market  continues to be one of the largest in the world.

Chinese companies, as leaders in the industry,  pivoted. They began exploring other markets like   Africa, South East Asia and South America. They  began lobbying the Chinese domestic market, which   up until then had been rather moribund as compared  to the foreign export market. And the government   has been responding a little bit, growing their  installed solar capacity across the country. Looking back at how China came to  dominate the global solar industry,   we need to give credit where credit is due.  Chinese companies worked and competed hard.   They ramped up or down faster than  their competitors. And they pushed  

the industry's technical envelope - breaking  solar efficiency records. These achievements   were beneficial for the entire world, as  we all need to move away from fossil fuels. But the industry would have never  gotten the chance to get those   first advantages into the industry had  they not globalized from the start.  

The fact that Chinese companies could buy advanced  German equipment to first produce solar cells.   That they got funding and backing from American  investors. That Chinese nationals learned the   latest in solar technology abroad and then brought  their expertise back home. All of this mattered   just as much to the Chinese solar success as the  government's "unlimited funds" and subsidies. And side note. This experience  is something to think about   in context of the semiconductor  trade issues going on right now.

I want to bring it back to this. The threat  from climate change is global. It affects   everyone. Solar and other renewables are part of  the solution. The technical progression in solar   technology from the Chinese and the rest of the  world has helped make it that way. On the whole,   I think that's a good thing - despite the  losses that might have been taken along the way.

2021-05-17 18:14

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