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.
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
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..