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WSJ: China’s Solyndra Economy

September 13, 2012

I had a new op-ed in yesterday’s Wall Street Journal, which you can read below or view the original here.  At the very last moment, one paragraph was cut from the final version, presumably due to space limitations.  I have restored it here in italics, because the crisis facing Suntech (the world’s largest solar panel maker) make it clearer that what we’re seeing here is an industry-wide problem and not something restricted to a single troubled competitor.

China’s Solyndra Economy

Government subsidies to green energy and high-speed rail have led to mounting losses and costly bailouts. This is not a road the U.S. should travel.

By PATRICK CHOVANEC

On Aug. 3, the owner of Chengxing Solar Company leapt from the sixth floor of his office building in Jinhua, China. Li Fei killed himself after his company was unable to repay a $3 million bank loan it had guaranteed for another Chinese solar company that defaulted. One local financial newspaper called Li’s suicide “a sign of the imminent collapse facing the Chinese photovoltaic industry” due to overcapacity and mounting debts.

President Barack Obama has held up China’s investments in green energy and high-speed rail as examples of the kind of state-led industrial policy that America should be emulating. The real lesson is precisely the opposite. State subsidies have spawned dozens of Chinese Solyndras that are now on the verge of collapse.

Unveiled in 2010, Beijing’s 12th Five-Year Plan identified solar and wind power and electric automobiles as “strategic emerging industries” that would receive substantial state support. Investors piled into the favored sectors, confident the government’s backing would guarantee success. Barely two years later, all three industries are in dire straits.

This summer, the NYSE-listed LDK Solar, the world’s second largest polysilicon solar wafer producer, defaulted on $95 million owed to over 20 suppliers. The company lost $589 million in the fourth quarter of 2011 and another $185 million in the first quarter of 2012, and has shed nearly 10,000 jobs. The government in LDK’s home province of Jiangxi scrambled to pledge $315 million in public bailout funds, terrified that any further defaults could pull down hundreds of local companies.

Meanwhile another NYSE-listed Chinese solar company, Suntech, revealed on July 30 that the German government bonds an affiliate pledged as security for a $689 million bank loan it guaranteed never existed. Suntech, the world’s largest producer of solar panels, claims it was the victim of fraud. Considering Suntech already owed $3.6 billion (for a debt-asset ratio of 82%), and lost $149 million in the fourth quarter of 2011 and $133 million in the first quarter of 2012, many analysts believe the company could go bankrupt without a sizable government bailout.

Chinese solar companies blame many of their woes on the antidumping tariffs recently imposed by the U.S. and Europe. The real problem, however, is rampant overinvestment driven largely by subsidies. Since 2010, the price of polysilicon wafers used to make solar cells has dropped 73%, according to Maxim Group, while the price of solar cells has fallen 68% and the price of solar modules 57%. At these prices, even low-cost Chinese producers are finding it impossible to break even.

Wind power is seeing similar overcapacity. China’s top wind turbine manufacturers, Goldwind and Sinovel, saw their earnings plummet by 83% and 96% respectively in the first half of 2012, year-on-year. Domestic wind farm operators Huaneng and Datang saw profits plunge 63% and 76%, respectively, due to low capacity utilization. China’s national electricity regulator, SERC, reported that 53% of the wind power generated in Inner Mongolia province in the first half of this year was wasted. One analyst told China Securities Journal that “40-50% of wind power projects are left idle,” with many not even connected to the grid.

A few years ago, Shenzhen-based BYD (short for “Build Your Dreams”) was a media darling that brought in Warren Buffett as an investor. It was going to make China the dominant player in electric automobiles. Despite gorging on green energy subsidies, BYD sold barely 8,000 hybrids and 400 fully electric cars last year, while hemorrhaging cash on an ill-fated solar venture. Company profits for the first half of 2012 plunged 94% year-on-year.

China’s high-speed rail ambitions put the Ministry of Railways so deeply in debt that by the end of last year it was forced to halt all construction and ask Beijing for a $126 billion bailout. Central authorities agreed to give it $31.5 billion to pay its state-owned suppliers and avoid an outright default, and had to issue a blanket guarantee on its bonds to help it raise more. While a handful of high-traffic lines, such as the Shanghai-Beijing route, have some prospect of breaking even, Prof. Zhao Jian of Beijing Jiaotong University compared the rest of the network to “a 160-story luxury hotel where only 11 stories are used and the occupancy rate of those floors is below 50%.”

China’s Railway Ministry racked up $1.4 billion in losses for the first six months of this year, and an internal audit has uncovered dangerous defects due to lax construction on 12 new lines, which will have to be repaired at the cost of billions more. Minister Liu Zhijun, the architect of China’s high-speed rail system, was fired in February 2011 and will soon be prosecuted on corruption charges that reportedly include embezzling some $120 million. One of his lieutenants, the deputy chief engineer, is alleged to have funneled $2.8 billion into an offshore bank account.

Many in Washington have developed a serious case of China-envy, seeing it as an exemplar of how to run an economy. In fact, Beijing’s mandarins are no better at picking winners, and just as prone to blow money on boondoggles, as their Beltway counterparts.

In his State of the Union address earlier this year, President Obama declared, “I will not cede the wind or solar or battery industry to China . . . because we refuse to make the same commitment here.” Given what’s really happening in China, he may want to think again.

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28 Comments leave one →
  1. Sarah Ryan permalink
    September 13, 2012 2:29 pm

    Well done you!

    Sent from my iPad

  2. Terry C. permalink
    September 13, 2012 3:58 pm

    Great article!! I had to search it out yesterday as it was subscription restricted on WSJ. Is a perfect example of the distortions in market that occur when governments try to “run” an economy. Result almost always equals “unintended consequences”.

  3. September 13, 2012 9:50 pm

    Anything taken to excess is usually a bad thing. Had China been smarter with its subsidies, it might have succeeded in establishing itself as the “only game in town” in this new industry. Using government subsidies to move more quickly down the experience curve in a new industry that promises to be huge and very profitable may not be the “American way”, but that will not prevent some countries from reaping long term dividends from subsidies in some cases, especially when the subsidy offsets negative externalities that impose social costs that are not fully borne by the producers or their customers.

    Further, it may be too early to call China’s solar industry a failure. It is conceivable that a consolidation may concentrate experience curve advantages in the strongest players remaining in China’s PVC industry. It wouldn’t be the first time a government has “bought market share” and experience curve advantages only to reap the benefits in later years.

    The important question in this is not whether industries are subsidized by the US government, but in whether foreign countries are gaining a long term sustainable advantage in an industry with strategic and economic importance. I would rather governments stayed out of business completely. But buying future market share is not an unquestionably bad strategy, and once your competitors start doing it, what is the right strategy? I don’t think we can count on every case of government subsidies in a fledgling industry with huge potential benefits to turn out badly for the subsidizing country.

    Few question the value of the head-start US firms got from the technological developments in the publicly funded US space program. But wasn’t it, after all, a form of government subsidy? Haven’t China’s government subsidies hurt the US economy badly over the past decade? And doesn’t the US continue to subsidize industries like corn production, oil, aerospace, ethanol, coal, nuclear power, and others that create negative externalities which solar energy would not?

    As with so many things in life, it may be prudent to avoid saying “never” in the real world, even when economic theory suggests it’s a “bad” idea.

    • gladRocks permalink
      September 16, 2012 3:00 am

      You really didn’t even pay attention to what this article was saying…not one little bit…

    • Nyongesa permalink
      September 16, 2012 11:18 am

      Well reasoned

    • Karen permalink
      September 28, 2012 10:28 am

      Rick, I agree with what you say, but I suspect government subsidy works best when the goal is to make the product (solar energy, for example) more available rather than to create “winner” companies to profitably dominate the industry producing that product. The former goal is easily pursued by simply throwing money at the problem, something government can do well. The latter goal is a lot more tricky, and in an environment where innovators can thrive, innovation is all too likely to leave the government’s chosen “champions” in the dust. Especially if government decisionmaking is much affected by corruption or cronyism.

      I don’t know myself what the Chinese government was trying to accomplish in the areas of solar energy, wind energy, and high-speed rail, but have read a lot of opinion that they were trying to take business away from foreign firms rather than to aid the spread of solar, wind, and high-speed rail to every home, business, and/or transportation corridor.

  4. Jack Meof permalink
    September 13, 2012 11:43 pm

    Shameless service to Republican ideology.

  5. lark permalink
    September 14, 2012 4:24 am

    I would like a guesstimate as to how much more vast the Chinese subsidy program is than anything that Obama has done or is proposing. Seriously, I think the factor may be something like 10000 – or much more. It doesn’t make sense to discourage all subsidies on our end because their economy is built on them. Two extremes don’t make a happy median.

    • gladRocks permalink
      September 16, 2012 3:02 am

      What you and these other yahoos fail to understand is that subsidies won’t help industries that have no serious demand. They simply are not viable businesses because they do not compete with current technology. This fact has been proven time and again. Yet, you remain stubbornly oblivious.

    • Gary hemminger permalink
      September 16, 2012 8:15 am

      Are you not reading the article lark and Jack Meof. My friends in Bejiing say that the entire industry of solar and wind turbines are build on fraud and corruption. this is what happens when governments drive industry. Clearly you two are diehard haters of oil and anything fossil fuel related. I will bet anything that you believed in peak oil until now it has proven to be a false theory. In the 70′s Jimmy Carter got in front of the whole US and told us that we will run out of oil in 8 years. What a bunch of bullcrap.

  6. Hua Qiao permalink
    September 14, 2012 6:23 am

    @jack
    Thanks for sharing that insightful comment. Tell us analytically what is flawed in patrick’s analysis. You may argue that government support for fledgling green industries is an important social cost to develop technologies that help preserve the environment. But essentially name calling does not advance the intelligent argument any more than me calling you a Tree hugging socialist.

  7. Iskar permalink
    September 14, 2012 7:18 am

    That’s some lame scare-mongering, but I expect nothing less than horrible analysis from the WSJ. The two countries are just not comparable. The US has been under-investing in infrastructure for years at about 3% of GDP, whereas China which has been over-investing in the recent past at about 9%. The modest spending proposed by the Obama administration on rail represents fractions of a percent of GDP, In 2009, spending on new rail in China was almost $70B, whereas in the US about $8B was budgeted for HSR. And let’s not forget HSR systems in other countries are quite successful (Japan, for instance – perhaps you’ve heard of it?) Just because deeply corrupt China didn’t execute its program with due care doesn’t mean other countries, including the US, will do the same.

    I would find numbers on wind and solar to see if the comparisons are equally poor, but given the tone of the column, I am pretty sure facts are considered stupid things around here, and I needn’t bother.

    • gladRocks permalink
      September 16, 2012 3:03 am

      You are not underinvested if it’s something no one wants.

    • Alex K. permalink
      September 16, 2012 10:08 am

      How is our supposed under-investment in infrastructure and China’s over-investment relevant to the question of solar and train subsidies? Even if we’ve spent insufficiently on roads and bridges, it does not follow that we must spend money on trains. We need to determine whether they merit allocation of resources. The answer from China would appear to be “no.” Regarding Japan, I believe the sole profitable high speed line is the original Tokyo-Osaka one. The others are a perpetual drain–they bankrupted JNR in the 70s and continue to bleed money. France’s program too relies on perpetual subsidies from SNCF. The burden of proof remains on your side, and the evidence continues to mount against you. Next time, please bring facts instead of mistaken assumptions.

      • xiongtx permalink
        September 23, 2012 4:37 pm

        I wouldn’t worry too much about public transit, e.g. HSR, not making a profit. Public goods rarely do. The US highways system costs billions of dollars each year to maintain, money which inevitably comes out of our taxes.

        The more important question is, is there enough demand for HSR to justify the costs? Personally, I don’t think so. Perhaps a few areas of high population density, like New York-New Jersey, could pull it off. Others, like the proposed line from San Francisco to Los Angeles, are dubious at best.

  8. September 14, 2012 10:33 pm

    What the Bubble Got Right Paul Graham
    http://paulgraham.com/bubble.html
    “Recognizing an important trend turns out to be easier than figuring out how to profit from it. The mistake investors always seem to make is to take the trend too literally. Since the Internet was the big new thing, investors supposed that the more Internettish the company, the better. Hence such parodies as Pets.Com.

    In fact most of the money to be made from big trends is made indirectly. It was not the railroads themselves that made the most money during the railroad boom, but the companies on either side, like Carnegie’s steelworks, which made the rails, and Standard Oil, which used railroads to get oil to the East Coast, where it could be shipped to Europe.”

  9. Careless permalink
    September 14, 2012 10:52 pm

    Lark: so just 10,000 times what the US blew on Solyndra would be over $5 trillion. Just how many tens of trillions of dollars do you think the Chinese government spent?

  10. lrs91 permalink
    September 15, 2012 8:36 am

    Reblogged this on Lemons of Noble Note and commented:
    Excellent article on error of state-led industrial policies in China.

  11. September 15, 2012 11:34 am

    I thought to speak up even though I never have before. Generally I really like your pieces and I come to your blog daily. Your articles are fabulous in my opinion. This article was the only one that I thought to make comment on though. Here, the content on various aspects of Chinese energy policy is in line with previous analysis. The only problem is the stretch to make a partisan point in US politics. To be honest, it seems like someone gave you a checklist of Obama slams and asked you to integrate your immense knowledge of the Chinese economy into that rubric. Before anyone pounces on me for being a dirty liberal or not even worth spitting on(because our national dialogue is now just that pathetic) I want to say that I’m a centrist voter, and my mind is not at all made up in the 2012 election. However, I also know that there is such a vast gulf between economic policies in China and what happens here in the US, just as Iskar and many others point out. The lesson from China is not just that regulation or government involvement in anything is an absolute bad. Of course I will still come to read you because I think you’re the only game in town as far as tearing apart what is really going on in China. I also know that you’re right on China from having lived in China and experienced the method of development there. You spoke directly to my experience there. I guess it’s just a little disappointing because I know how nuanced your understanding and analysis generally is. I’m afraid that for me this is quite a step down

    • gladRocks permalink
      September 16, 2012 3:06 am

      Sorry, if you are undecided on Obama, you’re not in the “center”. You either vote your “feelings” or you’re a leftist, which is pretty much two sides of a coin.

    • Nyongesa permalink
      September 16, 2012 11:17 am

      How can you be a centrist and yet still not have made up your mind about the coming election. We have a republican congress dominated by the far right, we have the potential for republicans to take over the senate, and we have a republican presidential candidate who has vassal like qualities. A centrists main focus during this election should be keeping these intuitions split and divided, so as to limit the damage these lawmakers can do.

  12. Daniel From Paris permalink
    September 15, 2012 11:12 pm

    “The only problem is the stretch to make a partisan point in US politics. To be honest, it seems like someone gave you a checklist of Obama slams and asked you to integrate your immense knowledge of the Chinese economy into that rubric. Before anyone pounces on me for being a dirty liberal or not even worth spitting on(because our national dialogue is now just that pathetic) I want to say that I’m a centrist voter”

    +1

    Certainly the same feeling a French “centriste”. That applies to many financial blogs. The partisanship is alas distorting the level of “financial analysis”.

    As a fully external party to the US political game, I should admit that it if even worse on liberal blog.

    “Naked capitalism”, for instance, was certainly a decent source of information even when one is no liberal. It is now useless from an economics pov.

  13. September 16, 2012 12:12 am

    The only reason Solyandra failed is because Republicans are rascists. The only reason China’s subsidies won’t work is because of the Opium war and the Japanese occupation of the Diaoyutai Islands. This article hurts the feelings of the Chinese people.

  14. Hua Qiao permalink
    September 16, 2012 7:49 am

    Wow, the critics of this article are particularly sharp this time around. I suspect it must be over the frustration of the “failure” of the market to embrace these emerging technology, thereby damning us to more fossil fuels for the forseeable future. Patrick’s article merely applies China’s penchant for susidizing strategic, pillar and key industries to these emerging industries. Remember, China spews more particulate matter into the air and consumes more oil than any other nation.

    Green technology is not at all an environmentally driven phenomenon anymore than high speed trains or automobile production. It’s merely an economic market that China seeks to capture a dominant market share. Just like rare earth metal production was…whcih by the way, contibutes to significant groundwater pollution.

    The green aspect merely provides China with political cover for subsidization in a ruthless pursuit of market domination.

  15. September 17, 2012 7:24 pm

    No mention of the elephant in the room… energy costs that are too low.

  16. Shanghaier permalink
    September 18, 2012 2:08 pm

    I think some of the critical comments are right and a bit misunderstood. I don’t think we can judge now if this is a failure or not, maybe in 10 years or so. But there are points that suggests that China’s investment i Wind Power are very badly planned.
    This doesn’t say that any subsidy is bad for all industries. Some forms of subsidy has certainly helped. Although, the more direct the subsidy, the worse. As Rick pointed out, the space program helped the US and a lot of companies.
    My own country, Denmark, has a very well thought out energy policy relying more and more on wind power, and it seems to work. However, this is planned since the early 90′s and slowly implemented. The early wind power industry was also subsided along the way, but unhealthy parts were also allowed to go bust.

    Oh, and i work in the wind power industry in China

    • xiongtx permalink
      September 23, 2012 4:44 pm

      I think you’ve made an excellent point. What the US needs to do is fund public research. This benefits the entire industry as opposed to specific companies.

      When a company gets a DoE loan, it’s going to build the product whether there is a market for it or not. When better technologies are made available through research, a market will gradually emerge. In addition, Americans are particularly good at taking technology out of the lab into profit-making ventures.

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