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How China Won the Solar Industry (& Why Germany Lost)
If you want to watch the video, it is below:
Having done more than a few of these type videos for the channel, I am surprised by how often policy can transplant an industry from one spot to another - usually in Asia - simply by purchasing equipment machinery. This theme will come up a lot in the future Japanese watch video.
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 accounted 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.
Germany and Q-Cells
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.
Business Dynamics of the Solar Industry
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.
Expanding into the Value Chain
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 Solar Bear Market
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.
What Happened to Germany's Solar Companies?
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.