China’s solar boom a failure for its major stakeholders

Sat Nov 02 2024
Lucy Harlow (4126 articles)
China’s solar boom a failure for its major stakeholders

Why China’s solar surge is a setback for its top contenders? This represents a pivotal opportunity for Longi, a leading manufacturer of solar-power equipment globally. Longi, along with several other Chinese firms, holds a commanding position in the global solar industry. Their home nation is currently experiencing an extraordinary surge in installations, having added over 100 gigawatts of capacity in just the first half of this year.

In the paradoxical landscape of the Chinese solar sector—and numerous other industries within the nation—the apparent boom translates into a bust for the companies engaged in it. Zhong Baoshen, chairman of Longi, is striving to mitigate losses in the face of the downturn he foresaw last year, anticipating that an oversupply of capacity would soon inundate the sector. In the United States, the singular global market where prices persistently remain elevated, Zhong faces skepticism regarding China’s national objectives. His previous efforts to harness U.S. demand encountered geopolitical challenges. “We expended billions in tuition fees” to master the intricacies of U.S. politics, he remarked.

The 56-year-old entrepreneur’s existence exemplifies both the remarkable achievements and the inherent risks of China’s industrial landscape. Alongside two colleagues from the physics department, he established a company that reached a valuation of $80 billion at its zenith. Longi did not merely replicate Western or Japanese technology; it embraced innovative risks that transformed the industry. The oscillation of government policy, coupled with efforts to foster a market for solar panels, has left Zhong’s company in a precarious position on two occasions: initially over a decade ago and once more this year.

The trend remains consistent: Beijing extends its backing for renewable energy, leading local governments to increase subsidies for newcomers in an effort to cultivate a local champion. As capacity expands, competition intensifies, leading the industry into unprofitability. During the initial six months of 2024, polysilicon prices, essential for solar panel production, experienced a decline exceeding 40%. The cost of wafers and cells has decreased by fifty percent.

In the first half of the year, Longi reported a loss of $740 million, with its stock price having plummeted by 80% from its peak at one stage before experiencing a partial recovery. Zhong is confident in its ability to endure the forthcoming consolidation in the market. Numerous others will not. In the summer of 2003, a college acquaintance, Li Zhenguo, reached out to Zhong with an intriguing revelation: a burgeoning industry known as solar energy was experiencing significant growth. Li operated in the silicon-ingot sector for semiconductors, securing a $2 million overseas order that was subsequently returned by the customer to China, where it was acquired by a domestic solar company for $6 million.

Before long, the two individuals, who had embarked on distinct entrepreneurial paths, found themselves collaborating with a third classmate, engaging in the trade of ingots and various materials for solar-panel manufacturers. In the past decade, two strategic technological investments have positioned Longi at the forefront of the Chinese solar sector.

Solar panels are produced through the extraction of silicon from quartz, which is subsequently shaped into cylindrical ingots. These ingots are then sliced into wafers and undergo chemical treatment to develop the cells. Longi took a calculated risk by investing in monocrystalline cells, which are composed of a single silicon crystal, at a time when the majority of the industry favored polycrystalline alternatives. The single-crystal material demonstrated superior energy conversion capabilities, albeit at a higher production cost during that period. Longi has developed a method for more efficient production. A further advancement involved the development of a diamond-coated metal wire saw designed for the precise cutting of wafers. Longi and its collaborators discovered that the cultivation of synthetic diamond-powder particles enhanced the durability and longevity of the saws. By implementing these enhancements, manufacturing costs were reduced by two-thirds between 2012 and 2016.

In 2020, Longi dispatched approximately 25 gigawatts of solar modules, surpassing the total installed capacity in the United States for that year. In that same year, Chinese leader Xi Jinping committed to achieving ambitious climate targets necessitating an increase in green energy sources. Longi’s annual reports indicate that direct government subsidies have consistently remained below 1% of its annual revenue, in contrast to the approximately 6% allocated to its own research and development efforts.

Jonas Nahm, a professor at Johns Hopkins University with expertise in China’s industrial policy, noted that for robust companies like Longi, the primary government support comes from policies aimed at incentivizing renewable-energy initiatives. This guarantees a demand for solar panels. Zhong is aware that a significant number of Americans believe that firms like his have thrived due to governmental support. He asserts that the success of Chinese companies can be attributed to diligence, expertise, and a fully integrated supply chain.

By the end of last year, substantial investments amounting to tens of billions of dollars were being directed towards clean energy initiatives in China. A dairy company has established a solar-cell plant. Official statistics reveal that solar power accounts for two-thirds of the new power-generation capacity in China. Within the span of a single year, it is contributing approximately the same amount as the cumulative construction efforts of the U.S. throughout its history. However, as prices plummeted, Longi experienced a 40% decline in revenue during the first half of this year.

Currently, the United States stands as “the only place where anyone is making any money,” remarked Yana Hryshko, the global head of solar at the energy consulting firm Wood Mackenzie. Protected by tariffs and supported by subsidies from the Inflation Reduction Act, a solar panel in the U.S. is priced at three times that of its counterparts in China and Europe, as reported by Wood Mackenzie. The United States represents a mere fraction, under 10%, of Longi’s solar module sales, and the pursuit of growth in this market has become increasingly complex.

A stringent U.S. law targeting forced labor has effectively curtailed the importation of solar products utilizing high-grade silicon sourced from the Xinjiang region of western China. Longi reported that it dedicated almost a year to demonstrating to the U.S. that its supply chains were devoid of such practices. It asserted compliance with U.S. laws and regulations. Longi believed it could evade U.S. tariffs by establishing manufacturing facilities in Malaysia and Vietnam. Over $1.4 billion was expended in this endeavor, only for the White House to eliminate the loophole in May following a two-year grace period.

Zhong noted that following those expensive lessons, Longi recognized that to operate effectively in the U.S. market, it was essential to establish a presence within the country. In the previous year, it acquired a 49% ownership in a joint venture named Illuminate USA, while Invenergy, a renewable energy developer based in Chicago, secured a 51% stake. In February, a facility was inaugurated in Pataskala, Ohio, dedicated to the assembly of solar modules, with Invenergy claiming the creation of 1,500 jobs in the local economy. Certain residents of Pataskala expressed concerns regarding Longi’s connections to the Chinese Communist Party. One speaker at a city council meeting in January characterized the joint venture as akin to inviting a “mortal enemy” into the community.

Rep. Carol Miller (R., W.Va.) asserted that promoting companies like Longi to establish operations in the U.S. merely heightens reliance on the Chinese Communist Party within our supply chain. She has put forward legislation that would effectively prohibit Chinese firms from receiving clean-energy subsidies. Timothy Brightbill, an attorney at Wiley Rein representing a coalition of American solar manufacturers, asserted that the U.S. ought not to allocate taxpayer funds to companies implicated in decimating the domestic solar industry through what he termed inequitable trade practices.

Longi asserts its status as a private entity, while Illuminate USA identifies itself as an American firm. Invenergy secured $4 million in incentives from an economic development agency in Ohio, while the plant benefited from a 15-year tax abatement on property enhancements. “The fact remains that the U.S. relinquished its leadership in solar manufacturing to China many years ago,” stated Jim Murphy, president of Invenergy. The plant is leveraging Longi’s manufacturing expertise to assist the United States in revitalizing segments of the solar supply chain. Zhong indicated that Longi is exploring the establishment of a solar cell manufacturing facility in the United States. “The United States must articulate its objectives clearly,” he stated. “There is a desire to cultivate the renewable energy sector.” China possesses the entirety of the technology and expertise. Without China’s assistance, development will prove challenging.

Tags China, Longi, Solar, U.S.
Lucy Harlow

Lucy Harlow

Lucy Harlow is a senior Correspondent who has been reporting about Equities, Commodities, Currencies, Bonds etc across the globe for last 10 years. She reports from New York and tracks daily movement of various indices across the Globe