The Solar Trade War Has Begun

The solar trade war has officially begun, and it will affect nearly every company making solar modules. Last week, the International Trade Commission finalized tariffs that will be 23.75% for Trina Solar (NYSE: TSL  ) , 35.97% for Suntech Power (NYSE: STP  ) , and 30.66% for most other manufacturers. This was the first shot at China for subsidizing its solar industry, but it's just the beginning.

Europe piles on
The European Union is now investigating whether it will take similar actions to penalize Chinese solar imports that account for $27 billion of product in Europe. The investigations will focus on dumping, or providing product at below cost, and whether or not low-cost financing and easy regulation has skewed the solar market toward China.

Europe was once home to the biggest manufacturer in solar, Q Cells, but the company was forced to file bankruptcy because it couldn't compete with Chinese panel prices.

China fights back
Don't think that China is taking all of this lightly. China filed a case with the World Trade Organization, accusing the EU of favoring panels that were produced in Europe. China exports about 60% of their solar panels to Europe, so anything that hinders their business has a huge impact on sales.

This complaint is in its early phases, but it shows that China has complaints about subsidies, too.

Can't we all just get along?
The truth of the matter is that the U.S., Europe, and China have all subsidized solar manufacturing in different ways. Europe had rules relating to the amount of product that had to be made in the EU, the U.S. backed loans to companies like Solyndra to boost domestic production, and China has handed out billions in loans to build its industry. Depending on your point of view, you could say that one of these is better than the other; but we can't deny that all three have subsidized solar.

What it really means
Most solar analysts believe that the impact to Chinese companies exporting to the U.S. will be relatively minimal on an absolute basis. Companies can "toll" their products in Taiwan, which will impact prices by about $0.08 per watt according to GTM Research. This may not sound like a lot, but it's a big deal in solar.

Manufacturers are now differentiating themselves with strong balance sheets, warranties, and efficiency differences. A few cents per watt will make it even more difficult for Chinese solar firms to compete in markets where they're already behind on these fronts, even if they're still cheaper by a penny or two.

In the past, I've shown that Chinese firms like Suntech, Trina Solar, and Canadian Solar (Nasdaq: CSIQ  ) are falling behind U.S. rivals First Solar (Nasdaq: FSLR  ) and SunPower (Nasdaq: SPWR  ) . Well, third quarter results aren't in from China, but the evidence shows that the trend will continue.

Trina Solar lowered its shipment guidance to 375MW-385 MW in the third quarter, from the 450MW-480 MW that it expected just a few months ago. Gross margin is expected to be 0% to 1.5% in the quarter. Since Trina is one of the strongest and most established solar manufacturers, it's reasonable to assume that other Chinese competitors will experience similar results.

Compare this to SunPower's margin of 12.4% and First Solar's margin of 28.4%, both of which were up sequentially, and you can see that even the smallest impact on China's cost advantage is proving costly.

What I think we're seeing is that China will run into far more problems than U.S. or European solar companies, because China is trying to export modules. Yes, China's domestic demand is growing, but it's likely to eat up domestic supply, and a loss of sales in China will have minimal impact to First Solar and SunPower, in particular.

Foolish bottom line
I have no idea whether trade authorities will find China guilty of dumping products on Europe, like they did in the U.S., or if Europe or the U.S. will be found as subsidizers that impact China. In the end, a solar war is bad for costs globally, and bad for the growth of the industry.

But I don't think it's necessarily bad for U.S. manufacturers First Solar and SunPower. These tariffs help level the playing field, and have resulted in improving margins for these two manufacturers. They're still the best way to play solar, because Chinese companies can't come close to a profit, and their performance is deteriorating every quarter.

If you're looking for our recommendation on how to play First Solar, along with continuing updates and guidance on the company whenever news breaks, we've created a brand new report that details every must know side of this stock. To get started, just click here now.


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Comments from our Foolish Readers

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  • Report this Comment On November 14, 2012, at 12:25 PM, jargonific wrote:

    How good can a report be for ten bucks? Readers, I'm asking. Also, does anybody at MF know of SOCR, the Solpower Corp? It's a fuel additive. In times like these, couldn't it be desirable? It was a new IPO on October 18, 2012 and the co is described as: "Solpower Corporation, engaged in the sales and distribution of Soltron, a fuel-enhancing product. The Company has the worldwide sales, distribution, marketing and manufacturing rights to the product, Soltron."

    So its a fuel additive apparently. The description on our trade interface continues: "Soltron is an enzyme-based liquid fuel-enhancing product that was developed at the Japanese Institute of Bio-Energy. Soltron can be added to all liquid fossil fuels, including gasoline, diesel and light and heavy oils at the fuel pump or in bulk fuel tanks. Soltron is marketed as a natural enzyme product."

    BUT, then we found this: http://solpower.info/menu-e/notice.html

    Notice to interested parties on our status and our Products

  • Report this Comment On November 14, 2012, at 12:42 PM, jargonific wrote:

    So might The Motley Fool be interested in having one of their "fools" help to document what is possibly a solar "fraud"? I'm not sure mind you, I am just wondering. The web link on my trade interface at Etrade does not work and I have notified them of this problem. They informed me that we just service you, the trading part, up to YOU the investor. HA! I pointed out to them that there have been many instances thus far of banks where there were crimes later established and people got robbed using their interface, and within their site who knows how many times there were buy/sell assists within the context of criminal profits that have now been absorbed into the whole US "Debt Crisis" that Wall St. is being impacted by.

    So friends, the link to solpower states that their product has at least one co. that only claims to be selling Soltron, but could not be within their Patent.

    I seem to have picked up a fairly large amt of shares from a co. with a URL link that no longer works, a product that may not be what they claim it is, and distribution for Japan that may not be "real".

    Fool on!

    Jargonific!

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