Should you move  to China?

No U.S. exec I’ve interviewed in the last ten years has said they want to move engineering or manufacturing departments to China or another emerging nation.

Instead, they are compelled by the advantages: low costs; high-quality engineering; tax breaks; shiny new industrial parks. China can't cure everything. Solyndra panels would still be tough to make in China and Evergreen Solar's cells would have still been a weird size. And SpectraWatt would still be one in a long line of foiled experiments from Intel. Nonetheless, benefits exist.

Dave Pearce, a hard drive industry veteran and founder of MiaSole, is currently in the midst of mapping out a China strategy for his new company, a copper indium gallium selenide (CIGS) solar module maker named NuvoSun. (Dow Chemical has invested in NuvoSun.) NuvoSun already has a design group in Shanghai.

We asked Dave about what one could expect from China and here is what he said:

--Engineering labor costs are 20% to 50% of the cost of U.S. engineering labor. Very few ex-pats are really required. Chinese employees with some U.S. experience or training get paid more, but there is a good pool of local engineers with reasonable English skills that are on the lower end of the pay scale. 

There is an even more substantial difference with manufacturing labor, particularly when compared to the Bay Area. Direct labor rates one or two hours outside of Shanghai are around one-eighth what they are in the Bay Area.  Insurance and other employee benefit costs are also substantially less. 

--A typical deal for an incoming business would include a significant amount of subsidized land and space at a government-sponsored high-tech park. The tenant might have no out-of-pocket costs the first two to three years at the facility. The land, which is heavily subsidized, and the facility can typically be bought two to three years later at its original cost in a transaction easily financed through the banks (government again). 

For a really desirable tenant, there may also be direct investment by a government entity. 

--The tax rate in the U.S. is 35% at the federal level plus state and local taxes. In China, the tax rate for a solar plant is 15% but the local portion is frequently abated for five to ten years as an inducement to attract a company. The 15% rate can thus go to 10.2%. 

--Materials like low-iron temperate glass or parts to maintain equipment are lower. The large domestic PV industry drives the supply base and thus lowers prices below what can frequently be obtained in the U.S. The factory, tax, and labor savings, of course, spill over into material cost savings. 

--Electricity rates are lower than in the Bay Area, but perhaps higher than in other parts of the U.S. For thin film, electricity rates are not a huge cost driver. Electricity rates are critical for polysilicon feedstock purification.

--My estimate is a 10 cent to 15 cent/watt cost advantage at the module level for manufacturing in China vs. the U.S. with the higher number in comparison to the Bay Area. This may not sound like a lot of money, but it can amount to a 10% price advantage. 

--The other major difference is the easier access to expansion capital and working capital. Companies operating in China typically have higher debt to equity ratios and a lower overall cost of capital. There is lots of money floating around looking for good ideas. 

--It feels like China has a real industrial policy. Local governments forego taxes for extended period of time and invest in buildings and land to attract industry. There is no sales tax on manufacturing assets, unlike California with the recent exception of SB71. 

There are definitely added transportation costs to reach world markets, but you can get a lot of modules in a 40-foot container which can cost as little as $3,000 to get to the West Coast. 

--I believe there is a viable model where one makes cells in a large consolidated factory in a low-cost county and then assembles modules in smaller factories around the world in closer proximity to major PV markets. This approach will generate some freight savings but more importantly drive local content and thus attract more business or perhaps a slight premium.

NuvoSun plans to have more Silicon Valley module assembly capacity than we have cell capacity, with the excess cells coming from a future plant that we expect to open in China. 

If you can’t beat them, join them!