China's Solar Industry Is Bankrupt

The goal of any business is to sell goods or services for more than it costs to produce said goods and services. If you can't sell goods or services for more than their cost you no longer have a viable business.

It should now be clear that Chinese solar companies are no longer viable businesses as they're currently constructed. Not only are margins so low that it would be tough to make a profit, they all have debt that makes them less competitive than healthier suppliers.

The straw that broke the camel's back
I've been negative on Chinese solar for quite a while, but I've generally kept my strongly negative opinions limited to those with so much debt that it's unlikely they could ever compete. LDK Solar (NYSE: LDK  ) is an easy target and even Suntech Power (NYSE: STP  ) and Yingli Green Energy (NYSE: YGE  ) have terrible balance sheets.

But today's earnings report from Canadian Solar (Nasdaq: CSIQ  ) , coupled with Trina Solar's (NYSE: TSL  ) updated guidance on Monday, have me thinking that China's entire solar industry will eventually be bankrupt, or bailed out in some form. No matter what happens, it is unlikely that shareholders will end up with anything.

These two are important because they are top-tier manufacturers and they both have decent balance sheets, compared to every other manufacturer in China. This should make them more competitive on a global market that now values long-term viability (because of warranties) and quality just as highly as cost.

But both Trina Solar and Canadian Solar are reporting terrible numbers for the third quarter when U.S. competitors are starting to see a light at the end of the tunnel. Trina Solar said that module shipments for the third quarter would be between 375 MW and 385 MW, well below its previous estimate of 450 MW-480 MW. As a result, gross margin would fall to between 0% and 1.5%. That's terrible.

Canadian Solar saw shipments fall 7% sequentially to 384 MW and gross margin fell to 2.2% from 12.4% last quarter. I barely need to mention the $45.1 million loss because there's no way a manufacturer can make money with that kind of gross margin.

The U.S. continues to pull ahead
For years, U.S. manufacturers have pointed to unfair subsidies and low costs in China as their greatest obstacle. What was overlooked is that U.S. manufacturers were building technology advantages to compete while China was building commodity panels.

When the industry reached the point where non-cost factors mattered equally, if not more than cost alone, U.S. manufacturers would pull ahead. After all, why would you buy a panel from a company with billions in short-term debt and a meaningless warranty if it only saves a few cents per watt?

In the last few quarters we've seen this dynamic play out in favor of First Solar (Nasdaq: FSLR  ) and SunPower (Nasdaq: SPWR  ) . Just look at the gross margin trajectory over the past year. China is clearly falling behind.

 

Q4 2012

Q1 2012

Q2 2012

Q3 2012

Canadian Solar

8.7%

7.7%

12.4%

2.2% 

Trina Solar

7.1%

5.8%

8.4%

0%-1.5%

Suntech Power

9.9% 

0.6% 

(10.0%) 

n/a

First Solar 

20.9%

15.4%

25.5%

28.4%

SunPower 

6.8%

9.2%

12.3%

12.4%

Source: Company filings.

If Canadian Solar, Trina Solar, and Suntech are posting minuscule or negative margins how are LDK Solar, JA Solar (Nasdaq: JASO  ) , and other lower-tier suppliers supposed to make money? They simply can't survive in the current environment.

The challenge for the future
The other factor that makes me think China will have major problems competing is a coming wave of new technology. GT Advanced Technologies (Nasdaq: GTAT  ) will soon release its HiCz technology that (if it lives up to expectations) will lead to a jump in cell efficiencies. Companies that have the capital to invest in this new equipment will dominate the next solar growth cycle.

But, as I found out when I interviewed GT's CEO in June, Chinese manufacturers don't have the balance sheets to make this round of investments; demand is coming from Europe, Saudi Arabia, and Japan, not China, who dominated the last cycle. If highly indebted solar manufacturers can't invest in the next generation of solar they'll be pushed off the financial cliff as sales go to more efficient manufacturers.

Foolish bottom line
Most of China's solar manufacturers are functionally insolvent or well on their way there. Without funding from government-run banks and bailouts from local governments many would already be bankrupt. I would stay far, far away from any of these manufacturers.

With that said, this doesn't mean that U.S. companies are a great buy yet. Investors and bystanders alike have been shocked by First Solar's precipitous drop over the last twelve months, and now the stakes have never been higher for the company. Are they done for good, or ready for a rebound? 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.


Read/Post Comments (9) | Recommend This Article (21)

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 November 15, 2012, at 6:22 PM, lagunab1 wrote:

    A few things are CLEAR:

    Climate Change recognition will accelerate Solar and Wind adoption. (efficiency matters!)

    Electrification of transportation will accelerate demand.

    LED plays for energy efficiency will also play a role in demand reduction.

    Of the three markets served by GTAT, two are above, the third, sapphire, will be driven by the next big thing in SmartPhones....sapphire faces that won't scratch.

  • Report this Comment On November 15, 2012, at 10:45 PM, toozie wrote:

    New record efficiency reported by GE Solar (Primestar) -- 18.3%. Take a look at the Wikipedia efficiency chart available under the "Solar Cell" entry... So this should in principle be good news for First Solar as well since it shows that efficiency gains may continue into the future and bring additional benefit to the thin film PV arena.

  • Report this Comment On November 16, 2012, at 4:07 PM, jesper123 wrote:

    I dont understand why the Norwegian company REC has not been mentioned. Rec Group has the best quality products and most efficient production facilities in the world. In addition they have the finance in place. The debt is also very low..

    Any comments or opinions

  • Report this Comment On November 16, 2012, at 4:08 PM, jesper123 wrote:

    Rec also have been awarded for the most efficent panels several years in a row..

  • Report this Comment On November 17, 2012, at 6:49 PM, gene132 wrote:

    The solar panel industry cannot survive ANYWHERE without massive subsidies-both to itself and to the power companies. Germany has been massively subsidizing its domestic panel mfgs.-and yet, none of its firms are profitable. Advanced nuclear reactors are the answer-not inefficient, non-green PV panels.

  • Report this Comment On November 18, 2012, at 2:39 AM, lowmaple wrote:

    gene132: Germany doesn't or didn't like nuclear but your right.

  • Report this Comment On November 23, 2012, at 4:12 PM, artbros wrote:

    Popular German sentiment is heavily against "kernkraftwerk" (their word for nuclear energy). They believe, and rightfully so, that the spent nuclear rods are as big a problem as the terror potential of Jihadist assaults on nuclear facilities.

    In addition, nukes have huge regulatory requirements. You have to plan twenty years out to get one built and we need action now.

    PV may be more expensive but it lacks all of those problems. And sometimes money isn't the only object.

    It is difficult to imagine a terrorist attack on a PV Farm. And one has to question the sanity of transporting highly radioactive material cross-country to be entombed for a thousand years in caves at Battle Mountain or the Goshute Indian Reservation.

  • Report this Comment On November 28, 2012, at 11:47 PM, 1HanSolo wrote:

    Thorium. Cleanest safest. Cheapest.

    Who do I invest in that is a winner in this no brainer option.

    Technology that was invented fifty years ago and ignored because of its lack of weaponizing characteristics. Good luck to us all.

  • Report this Comment On June 17, 2013, at 1:50 PM, sonofTesla wrote:

    You have no idea what you are talking about...hopefully your readers do their own research.

    http://blogs.barrons.com/emergingmarketsdaily/2013/06/17/chi...

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