Germany and Japan enjoy a cozy position as top solar-industry producers. But that could all change. Advantages, like low labor costs and manufacturing incentives, are shifting the power structures. As a result, China is on the rise and heading in a direction that could topple its international competitors.
But at least one high-level industry superstar isn't worried. "In terms of production, I think we are in quite a good position here in Europe," said Winfried Hoffmann, president of the European Photovolatic Industry Association, at the European Photovoltaic Solar Energy Conference and Exhibition in Milan.
While China's advantage is its notoriously low labor costs, a vast part of solar manufacturing relies on machines. "Automated equipment doesn't need a lot of labor to be incorporated," he said. "Therefore, what is always argued about the cheap labor in China is something where we will be threatened? I don't see that argument," he said.
But that just responds to one aspect of the discussion. China has other advantages, including a 1.3 billion-population country full of untapped local markets.
Last year, those markets helped China overtake the United States in solar-electric production. China now sits in third place, behind Europe and Japan, according to PV News, an analyst-written newsletter published by Greentech Media and the Prometheus Institute.
Safe For Now
But, for the short term, China can still be viewed as a sleeping dragon. In the last few months, Chinese solar stocks have had a rocky ride.
Solar-cell manufacturer China Sunergy (Nasdaq: CSUN) and solar-panel manufacturer Canadian Solar (Nasdaq: CSIQ) saw shares drop after posting second-quarter losses. Both had netted profits in the same quarter last year. Even Trina Solar (NYSE: TSL), which in August reported that net income grew more than fivefold from a year ago, saw shares drop 9.2 percent after reporting that its gross margin decreased to 18.9 percent from 27.5 percent in the second quarter of 2006.
But Michael Rogol, managing director of Photon Consulting, said a number of Chinese companies should do well in the future. "China companies' cash flows appear secure," he said. "This is the main reason they have been able to raise billions on the New York Stock Exchange and Nasdaq."
In particular, JA Solar, Motech Industries, Yingli Solar, Renesola, Suntech Power, Trina Solar and LDK Solar are "important companies with very low cost structures," he said. LDK, for example, can process silicon into ingots and wafers for 30 to 50 percent less than many non-Chinese competitors and is driving down costs quickly, he said.
A major reason for the current stock-price slump could be the shortage of solar-grade silicon. China Sunergy blamed the tight supply for its missed earnings, reporting that the cost of making its cells more than doubled from the last year and cutting a planned expansion from six production lines to four.
Because some of the newer companies don't have long-term silicon contracts, they are stuck paying spot prices, which analysts have estimated at up to four or even five times the prices of long-term contracts. Even the ones that do have longer contracts - such as Suntech Power, which has large deals with suppliers such as Hoku Scientific, LDK and MEMC - have had to pay higher prices to get them, compared with older companies with pre-existing deals.
But if the supply shortage eases, Chinese companies' costs could drop lower than their competitors'.
Suntech (NYSE: STP) surely thinks so. "What the Chinese companies will do in terms of generalization is bring the industry to grid parity faster than it otherwise would have," said Steven Chan, chief strategy officer for Chinese solar-panel titan Suntech Power.
Chan is talking about the point when solar electricity is equal to or cheaper than conventional electricity. Among those leading the charge will likely be Suntech, a maker of low-cost solar cells.
Suntech has been growing more than 100 percent per year since starting production in 2002. According to second-quarter figures posted in August, net revenues grew 147.7 percent year-over-year to $317.4 million.
And Chan talks big about the power Suntech can wield. "We think we can bring the whole industry to grid parity within five years," he said. When that time comes, Chan said Western companies probably will be okay. But there will be an element of struggle.
Contrary to Hoffmann's suggestion, Chan said lower labor costs will play a heavier role in the global solar market, especially once the industry recovers from the silicon shortage (see Silicon Steals the Spotlight, Again).
Suntech's cost structure is skewed, with 75 percent of costs going to silicon, he said. But with the hefty silicon bill out of the equation, Suntech will be spending about 70 cents per watt to make its products while competitors spend more than $1 per watt, Chan said.
That's when the pressure will really hit for companies in places like Europe, he said. "We can compete them down if we wanted to. To drive the weaker competition out of the market."
But Chan indicates competitors don't need to worry. "I don't think we'll do that," he said. "We don't look to compete [with] a solar competitor to the point where they are insolvent."
That might not be as placating as he intended. It also begs the question: Will everyone play as nice?
- Greentech Media Editor Jennifer Kho contributed to this report.