Is China a Villain or Hero in Solar?

The solar market has exploded over the past decade in large part because Chinese manufacturers have brought a level of scale to the industry that never existed before. Scale brought lower cost, lower cost brought increased demand, which led to technological advancements that lowered costs further and the cycle continued.

At the center of this downward cost/price cycle was a massive flow of funding to solar manufacturers from government controlled banks in China. LDK Solar (NYSE: LDK  ) , Suntech Power, Yingli Green Energy (NYSE: YGE  ) , Renesola (NYSE: SOL  ) , and a plethora of other solar suppliers were given billions of dollars by the government to expand their operations. They built and built, not caring about overcapacity even after prices began to plunge and margins went into negative territory. After all, China is about full employment, not making a profit.

Meanwhile, around the world solar companies were going bankrupt week after week because of the competition brought on by Chinese manufacturers. Some might say that this is capitalism at its best, the low cost producers will win. But let's not forget that most of the solar manufacturers in China wouldn't exist, certainly not at the scale they have now, without government support. Had the Obama administration made dozens of investments in solar that were multiples larger than Solyndra we would be up in arms.

All of this leads us to today when the U.S. government and European Union are employing measures to "protect" the solar industry. The U.S. imposed tariffs on Chinese solar cells, which will either kill solar imports from China or just force companies to be creative in how the product gets here, depending on an individual company's strategy. In Europe, similar measures are currently being debated.

Chinese companies cry foul, as Yingli, Trina Solar (NYSE: TSL  ) , and Suntech have done in the last 24-hours, but they never mention the subsidies they've received in their complaints.

The good
The valid point that Chinese manufacturers have is that they've played a large roll in making solar viable, which is the underlying goal of the industry. In Suntech's response, its executive chairman said, "Our industry's mission is to make solar affordable for everyone and we are concerned that trade barriers will only delay the industry from fulfilling this."

This is a fair point by Chinese manufacturers. The solar industry would advance more quickly if their products were sold around the world, subsidized or not.

The bad
The problem is that countries view solar as the next big opportunity in energy. If they're able to build large sustainable solar industries, then thousands, if not millions, of people will be employed by the growth.

There's also existing local manufacturers and potential new companies to think about. If China is given a leg up because of subsidies, then Chinese solar companies will just expand their footprint around the world, squeezing out local competition. This is already beginning to take place, with manufacturing moving even to the U.S.

The bottom line
Is protectionism against Chinese subsidies the right move for the U.S., Europe, and other countries hoping to grab a piece of the solar pie? It depends on your perspective. Some companies will benefit, others will suffer, but the bottom line is that it puts a cloud over the stocks in the solar industry. Chinese stocks have already been battered because of low margins (think dumping) and huge debt loads, so these stocks are off limits. But protectionism may help manufacturers like First Solar (Nasdaq: FSLR  ) survive until its thin-film efficiency can take a big step forward.

I'm not suggesting in any way that the predicament governments are in today isn't China's fault. It's Chinese subsidies that have caused governments to react -- there's no question about that. But the question we should ask ourselves is: Where would we be today if China hadn't subsidized the companies that led to the low-cost solar we see today? Maybe the solar industry should be thanking China instead of vilifying it?

It's a question worth thinking about as we see more countries "protect" their solar industries from threats in the Far East. To learn more about the industry and First Solar check out our premium report on First Solar. It comes with a year of updates and is chock-full of great information about the company. Click here to find out more.

Fool contributor Travis Hoium does not own any shares mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 07, 2012, at 11:52 AM, happysolar wrote:

    What do I do with all the shares I've accumulated in Chinese solars.

    The more I buy the more the price goes down,

    In one company I have over 1million shares and I'm wondering If I keep buying what will happen If I can buy the entire float. Does the stock stop trading....

  • Report this Comment On September 07, 2012, at 1:02 PM, TMFFlushDraw wrote:

    @happysolar

    Unless you think China is going to forgive the debt of solar companies I wouldn't be betting on them. None of them are making money and there's no reason to think they will in the next year or two. There's too much supply in China, very little differentiation, and they're fighting on cost. That's a losing battle.

    Travis Hoium

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