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NPR: What’s Going Wrong With China’s Solar Industry?

October 10, 2012

Yesterday, I was on National Public Radio (NPR) talking about the meltdown in China’s heavily subsidized solar industry, as a follow up to my Wall Street Journal op-ed on that topic last month.  You can read the transcript below, or listen to the interview here.

Steve Inskeep talks to Beijing-based economist Patrick Chovanec about too many subsidies in China’s solar energy industry. It is resulting in money-losing companies. One company, Suntech, could soon be delisted from the New York Stock Exchange because it is performing poorly.

STEVE INSKEEP, HOST:  Which brings us to our next story. As Americans try again to heat up the solar industry, let’s get an update on the competition. We reported last week on the West Coast solar power company that is trying to succeed where companies like Solyndra famously failed. American companies have struggled because they’ve been undermined by cheap imports from China. So it is meaningful to note that China’s solar power industry is a mess.

We’re going to talk about that with Beijing-based economist Patrick Chovanec. Welcome back to the program.

PATRICK CHOVANEC: Oh, it’s good to be with you.

INSKEEP: What’s going wrong with the Chinese solar industry?

CHOVANEC: Well, they have a dozen Solyndras. They basically have tried to build up an industry by pouring subsidies into trying to pick winners in that industry and right now those companies are failing badly because there’s a massive amount of overcapacity that’s been created.

INSKEEP: Well, let’s remember, because you say a dozen Solyndras. The company received hundreds of millions of dollars in U.S. government assistance and went bankrupt anyway. And one of the reasons we were given was that the price of solar power equipment has just been going down and down and down because the Chinese were producing it so cheaply, is that right so far?

CHOVANEC: Right. Prices have gone down so much that even the Chinese are not necessarily breaking even. So what you’ve got in China is a massive amount of overcapacity because all these subsidies have attracted so much investment. And you’ve got a number of very large companies, LDK Solar, which is the second-largest solar module company in the world; Suntech, which is the largest solar panel maker in the world, that are on the edge of bankruptcy right now and are really either being bailed out or there’s talk about bailing out to the tune of hundreds and millions of dollars.

INSKEEP: What are the public signs of their distress? Do they report losses? Do they fire workers?

CHOVANEC: Yes. LDK Solar has been reporting losses and they have been shedding about 10,000 jobs. And the local government, in its home province, has pledged about $315 million to try to keep it in business because they’re afraid that if LDK Solar goes down then hundreds of local companies could go under.

And Suntech, Suntech’s in kind of a unique situation. They guaranteed a loan to what is essentially a subsidiary that bought huge amounts of product from them, allowed them to report very high sales. It turns out that the collateral that was pledged, which was supposed to be German bonds to back that loan, doesn’t exist.

INSKEEP: OK. Now wait a minute. That was such a crazy story I want to make sure I understand it. You’re saying there’s a major Chinese solar company that set up another company and used borrowed money to buy solar panels – solar equipment – from itself and now is having a little trouble paying back the loan?

CHOVANEC: Yes. Not as unusual as you might think it in China – these kind of manufactured sales. Essentially what happened was there was a fund that they set up in Europe. Suntech owned about 90 percent of it, so effectively controlled it – it was essentially a subsidiary. That company bought solar panels to use in various projects in Europe. They borrowed money from China Development Bank. The parent company, Suntech guaranteed it. The total amount of the loan was $689 million, and it turns out that the collateral backing that loan just doesn’t exist. And a lot of analysts looking at that company basically say that that’s enough to push Suntech into bankruptcy.

Of course, since the Chinese government can’t allow that to happen, they’re going to have to step in and bail that company out as well.

INSKEEP: If all these cheap solar panels are being made why aren’t people just buying a lot more of them, which would save the companies?

CHOVANEC: Well, one thing that’s happening right now is the eurozone crisis and you have a lot of European countries that were giving very generous subsidies for people to buy and use solar panels. Those subsidies are now being cut severely.

INSKEEP: So what do the Chinese do now?

(LAUGHTER)

CHOVANEC: Well, what they probably do is they dig deep dig into their pockets – the pockets of the central government – and bail out these companies. Because what they’re really afraid of is, you know, we’ve seen this over the past couple of months, that even relatively small companies, when they fail in China they’re so intertwined in terms of their credit relationships and the local economy that essentially everything’s too big to fail.

INSKEEP: Patrick Chovanec is professor at Tsinghua University’s School of Economics and Management in Beijing.

Thanks as always.

CHOVANEC: You’re welcome.

[P.S. -- This interview was recorded a week ago, before the New York Times published a very good article on the crisis in China's solar sector.  In particular, the article sheds some additional light on my answer to the very last question -- what will China do now?  It quoted one top Chinese official -- the head of energy policy for the NDRC, China's powerful economic planning agency -- saying over-capacity is so severe that as many as 2/3 of China's solar firms might have to die off  for the industry to survive.  In fact, it said, "he wanted banks to cut off loans to all but the strongest solar panel companies and let the rest go bankrupt."  However, banks and local governments are resisting such strong medicine and want to keep failing companies afloat by any means necessary:

But banks — which were encouraged by Beijing to make the loans — are not eager to acknowledge that the loans are bad and take large write-offs, preferring to lend more money to allow the repayment of previous loans. Many local and provincial governments also are determined to keep their hometown favorites afloat to avoid job losses and to avoid making payments on loan guarantees, he said.

Central government authorities worry, though, that trying to prop up too many companies could doom the entire industry:

“For the leading companies in the sector, if they’re not careful, the whole sector will disappear,” said Chen Huiqing, the deputy director for solar products at the China Chamber of Commerce for Import and Export of Machinery and Electronic Products.

The article also notes that China's wind energy sector is experiencing similar problems.]

10 Comments leave one →
  1. Brett permalink
    October 10, 2012 11:32 pm

    My guess is that they’ll keep the money turned on for as long as possible, The regime isn’t hurting for cash flow right now at the top level.

    • prchovanec permalink*
      October 11, 2012 7:24 am

      Actually, they’re hurting VERY badly for cash flow up and down the chain, from corporates to banks to local governments.

  2. Hua Qiao permalink
    October 12, 2012 7:31 am

    The tide is going out on not just the solar industry but also steel, aluminum, cement, ship building. A lot of naked swimmers.

    • Shanghaier permalink
      October 14, 2012 9:08 am

      I agree, add the wind power industry to that.

  3. bab permalink
    October 13, 2012 12:59 am

    We’re waiting for your posts on the housing market, professor. Is it coming or not?

  4. October 15, 2012 3:54 pm

    this is not good news ..sorry about all this ..GV can not help?
    thank you

  5. October 15, 2012 11:57 pm

    This process of banks loaning money to failing firms so that they can get their original money back is also known as a pyramid scheme. But why are the banks inflicting it on themselves?

  6. November 15, 2012 3:12 am

    I feel so conflicted for our country. I can’t stand it knowing that we perform some of the sketchiest trade over seas and we never learn from our mistakes. Its sad, and shows low pride for the U.S.

    -Sharone Tal

Trackbacks

  1. China’s solar power sector in deep trouble | Simon Taylor's Blog
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