China’s solar panel industry was meant to be a shining success. Trillions of yuan of government subsidies and cheap loans were poured in to what was designated as a strategic emerging industry. It was green, technologically advanced and would help China meet both the country’s growing power demands and its people’s growing expectations of a cleaner environment. It had a huge potential export market in sun-kissed lands where China pursues much of its commercial diplomacy. And it was a rare opportunity to both move up the manufacturing value chain and leapfrog developed nations.
Yet into every story a little rain must fall. New entrants flooded into the industry. Manufacturers, new and old, ended up with excess production capacity and then tried to price cut their way out of it, causing billions of yuan of losses all round, and an industry debt burden estimated to be $17.5 billion by Maxim Group, a New York firm of financial analysts. Chinese solar panel companies listed on the New York Stock Exchange became penny stocks.
Meanwhile, European and American solar panel producers, equally battered by the sorry state of the market–90% of the Chinese manufacturers’ output was exported–complained that China’s subsidies broke world trade rules. China maintains they don’t. However, the U.S. imposed countervailing tariffs. The EU, China’s largest export market for solar panels, worth $27 billion a year, started the process to follow suit.
So Beijing is falling back on a tried and trusted measure to get a troubled industry into some sort of competitive shape: large scale consolidation. The State Council announced last week that mergers of manufacturers will be “encouraged”, with local officials instructed not to prop-up small home-town favorites. Subsidies will be cut and some manufacturers allowed to go bust. Details of the new policy remain sketchy. If the forced consolidation of the coal industry is any guide, solar panel manufacturers that will be pushed under will be the small and least technically advanced ones.
The questions are whether the consolidation will be sufficient to eliminate the over-capacity, and where will shrinking production capacity meet global demand that is still growing at a rate of 14% a year. While cutting internationally contentious subsidies to manufacturers Beijing quietly approved this month 7 billion yuan ($1.1 billion) of subsidies to more than 100 projects that will use solar power, stoking up domestic demand. China plans to have the capacity to generate 21 million kilowatts of power from solar by 2015, six times the current installed capacity. Solar remains a strategic emerging industry for Beijing.