Should China bailout its solar PV industry?

China’s solar PV industry is stuck in an expansion crisis from which it is hard to extricate itself. Chinese renewable expert Li Junfeng tells Gao Yang some companies are likely to go bankrupt.

Gao YangWhat’s the main obstacle holding back development of the solar PV industry in China?

Li Junfeng:
Without a doubt it’s excess production capacity, and it a serious case of overcapacity. It’s not a problem with the market, nor is it a problem with the government; it’s a problem with the companies themselves. Companies have been blindly expanding without paying attention to market demands, and that’s the problem. This has caused industry profits to slump, even to the extent that the companies are finding it hard to carry on. And it can also cause a break in the supply chain. Many of the upstream industries are struggling. For example, some well-known crystal silicon manufacturers in China are really struggling; globally some companies have gone bankrupt because of this reason. Furthermore, this has brought international trade friction. If things were going well, why would this happen?

Chinese companies all want to be first in the industry, if there were no market restrictions they would just expand unchecked. In the end, every company would be left fighting for the last drop of blood. Big enterprises wouldn’t be able to stay big, and small enterprises wouldn’t be able to survive. The domestic solar PV industry in China took between three and five years to walk the same road that it took overseas companies 10 years to walk, so now there’s nowhere for them to go for the next 10 years.

Explosive growth is bound to bring about an explosive crisis. Excess production capacity will give rise to a chain reaction: First of all, serious overcapacity will cause a large backlog in solar PV products, forcing factory owners to slash prices on their stock. Secondly, as the prices for solar PV products slides, traders will adopt an attitude of buying when prices are rising and not buy when prices are falling, forcing factory owners into panic selling. Finally, the products dumped by large-scale solar PV companies will crowd out the space of small to medium-sized enterprises, forcing them go out of business first, and then even large-scale solar PV enterprises will be in trouble.

Gao Yang:
Should the government step in and save the market?

Li Junfeng:
How’s the government going to save it? Firstly, I need to clarify again what the current problem is with growth in the solar PV industry. It’s not a political problem; it’s caused by the joint push from the Chinese business sector and banks. For example, our banks, especially the China Development Bank, during the past few years of blind expansion in the solar PV industry, has been one of the “chief culprits”.

The most pressing problem we are facing now is serious overcapacity. Last year the worldwide solar PV installed capacity had reached about 27 GW, while production capacity was 70 GW at least. In China there should be more than 50 GW of production capacity, and from time to time new companies with production capacities in the GW arrive on the scene.

Right now there are many business people who say they hope the government can step in and solve the financing problem. I want to ask, after solving the financing problem are they still going to continue expanding production capacity? Will production capacity then grow even faster? Isn’t this just adding fuel to the flames?

So I don’t agree that the government should loosen its vigilance and come to the aid of these companies. Now we should respond to the call of the State Council, take the initiative and control production capacity’s fast growth. The market has limits, it’s not limitless.

Lots of people say the domestic solar PV market has problems, but I say it doesn’t have any problems. For the past few years, it’s grown rapidly, including last year’s financial crisis, and the European debt crisis etc, the global economy is in recession, but our solar PV industry still grew 60%. Does our market have a problem? No.

What we need now is for our industry to have some self-control, and not hope that there will be more government help to save the market. Banking can’t save the solar PV industry, only the solar PV industry itself and solar PV businesspeople can save it.

Gao Yang:
What role should the government play in the solar PV industry?

Li Junfeng:
They should neither not support the industry nor spoil it by being too enthusiastic. Over the past few years, local governments have spoiled things by being too enthusiastic.

Gao Yang:
But the current market doesn’t look fair, particularly the “anti-dumping” trade barriers launched by the U.S. and Europe?

Li Junfeng:
Of course I oppose this kind of trade protection behaviour, but I also don’t agree that because of this, China and the U.S. and Europe should start a trade war, because it’s meaningless. Also, I am pessimistic about the prospects for this “anti-dumping” matter, because it’s all about interests and there are no rules to speak of. But the most important thing is that the problems with the China’ PV industry rest within itself.

Gao Yang:
Is it possible there will be a wave of bankruptcies?

Li Junfeng:
There will be three kinds of situation. Firstly, a group of wise and far-sighted enterprises will choose to make a timely exit. It’s not such a bad thing for these enterprises to close down. These companies can’t survive and so making a timely exit is, to use a financial term, “cutting their losses”.

Secondly, a group of companies don’t make a timely exit, the banks stop lending, the chain of funding breaks down, and they are forced out by bankruptcy.

Thirdly, a group of companies will choose to sweat it out. If the market is bad, perhaps they choose to cut staff, or they choose to stop production. For example, before staff might go on holiday for half a month, now they can go on holiday for three weeks, and the factory stops production. Once the market improves they go back to work. These companies have a lot of choices and they will all cost much less than going bankrupt. In China, businesspeople are always afraid of bankruptcy. They think that if this happens then they will have nothing, and so bankruptcy reorganisation is something they least want. But in the U.S. and Europe bankruptcy reorganisation is a very good choice.

Gao Yang:
So what should the solar PV industry do now?

Li Junfeng:
This is just the right time for a reshuffle and integration of the industry now. The characteristics of the solar PV industry are that there is only space for those companies that are high-tech, are highly efficient and have low costs but most of the smaller enterprises usually have high costs, are low tech and are not very efficient. It doesn’t make sense for these large-scale solar PV enterprises to absorb the small- and mid-sized companies, because it’s not that the production capacity of these large-scale companies is not high enough; it’s that the solar PV market space is not large, and we need to weed out a large part of outdated capacity.

Those enterprises that are left first need to keep on innovating so that their advanced production will never go into overcapacity. Secondly, they need to establish a secure relationship between upstream and downstream businesses. A lot of solar PV companies are in breach of contract now, and have lost the trust of the market. Thirdly, companies need to become more diversified, they need to spread their risk, and not just engage in different sectors of the solar PV industry.

Li Junfeng is deputy director of the Energy Research Institute under the NDRC and general-secretary of the Chinese Renewable Energy Industry Association.

Gao Yang is a reporter for China Economy and Informatization, where this article was originally published on 28th August 2012.

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