Solar energy may not be a new concept, but what is new are the dynamics shaping the industry, whether technological innovation or regulatory matters.
As undercurrents evolve, some companies are bound to skyrocket with growth, while others are destined for failure. Already in the past few months, American companies Solyndra and Evergreen Solar have declared bankruptcy, and more will certainly follow suit.
But today I'm not here to talk about U.S. companies -- more important, I want to list three Chinese companies that have the potential to sink your portfolio.
Consider yourself warned!
On Dec. 4, the U.S. International Trade Commission voted 6-0 in favor of investigating Chinese trading practices with regard to solar production. The bottom line is that U.S. companies feel they are being hurt by unfair practices that boost imports of Chinese solar cells and by-products; practices that include the Chinese government issuing cash grants, discounts, preferential loans, and tax incentives to domestic companies.
It's hard for the average investor to tell how much harm has actually been done to U.S. players in this space. First Solar (Nasdaq: FSLR ) , for instance, is the largest U.S. manufacturer and uses a different technology than its Chinese counterparts. Over the last year, however, First Solar has seen its share price plunge by 64% and is now trading for a ridiculously low P/E of 7.8. SunPower (Nasdaq: SPWR ) , another U.S. company, tends to be a leader in efficiency and so it demands more of a premium than some of the Chinese companies.
Nevertheless, the ITC is attempting to measure possible harm to U.S. companies by Chinese imports, and could determine penalties on Chinese companies as early as Jan. 12. The three biggest Chinese solar companies, Yingli Green Energy (NYSE: YGE ) , Suntech Power (NYSE: STP ) , and Trina Solar (NYSE: TSL ) , could all be extremely susceptible to repercussions from the U.S. government. Yingli currently makes about 10% of its revenue from the U.S., whereas Suntech and Trina both make about 15% from the U.S.
Reactions in Asia
Expectedly so, the Chinese government was none too happy about this news. Officials from Beijing said that "China is deeply concerned with the decision, which does not tally with facts and highlights the United States' strong tendency for trade protectionism." It has also decided to launch its own investigation into certain states' support of renewable energy, looking directly at Washington, Massachusetts, Ohio, and California.
Furthermore, lawyers from both Suntech Power and Trina Solar told the ITC that any added tariffs would increase their costs, and therefore would be passed on to the consumer.
None of this is good news for American companies, like GT Advanced Technologies (Nasdaq: GTAT ) , that export goods to China, considering that any move by the U.S. government would most likely be reciprocated with Chinese tariffs against the U.S.
The Foolish bottom line
Personally, I don't have a problem with any of the three Chinese companies listed above. They've seen great revenue growth in what can be a very lucrative market, and Chinese companies now control about half of the market, positioning themselves well for the future. However, whenever protectionism and/or government regulation gets involved, bad outcomes tend to be inevitable. Solar is a useful and honorable technology, but if you're looking for innovative companies, there are safer plays out there.
In fact, I discovered one such company the other day while talking with our senior technology analyst, Eric Bleeker, which could be one of the greatest disruptors over the next decade. The company is a major mobile player that has roots in some of the most important technological advancements and patents of our time. To check out details about this company, you can read our brand-new, FREE, special report, "The Next Trillion Dollar Revolution." Click here to access it, absolutely free.