China Continues to Give Away Solar

Suntech Power isn't the only solar company in China struggling to pay its bills. Across the board, companies are struggling with huge losses, stoked by excess supply in the industry.

In the U.S., many of these companies would have failed by now, but China funds solar companies through state-run banks such as the China Development Bank. Just last week, ReneSola, which has $902 million in debt and had a gross margin of just 3.3% last quarter, signed another $50.9 million loan agreement with the bank.

This free flow of money has nearly every Chinese solar manufacturer giving away solar panels.

Another bad quarter
Today's news comes from JA Solar (NASDAQ: JASO  ) , one of the largest manufacturers in the world. The company shipped 500 MW of solar products in the fourth quarter but managed just $263.2 million in revenue and had a negative-4.6% gross margin. On the bottom line, the company lost $102.4 million, or $2.65 per share, almost as much as the entire company is worth.  

JA Solar shipped 80 MW more product than it anticipated, but even higher shipments couldn't bring the company close to a profit. If you have to give away solar product at 4.6% below cost, even when you're running close to capacity, there must be something wrong.

Hanwha SolarOne (NASDAQ: HSOL  ) also recently announced a bad quarter. Shipments were 198.9 MW and revenue was $134.3 million, but the company had a negative 31.3% gross margin and lost $104.4 million, or $1.24 per share. In this case, that's more than the entire company is worth.  

These aren't unusual results in the Chinese solar market. Trina Solar (NYSE: TSL  ) and Yingli Green Energy (NYSE: YGE  ) , two more of the world's largest solar manufacturers, also reported low-single-digit gross margins for the fourth quarter, despite strong shipments. The only hope is that all of this will lead to long-term profits as the solar market grows.

A means to an end -- sort of
The goal for China is to basically starve everyone else out of the market. It's worked in a way. Q.Cells, Energy Conversion Devices, Solyndra, and many others have gone bankrupt trying to compete against subsidized Chinese companies.

The U.S. and Europe are fighting back with tariffs on Chinese solar products, with some success. Companies have had to rely on China for more of their sales recently, and they're having a hard time charging reasonable prices in the U.S. and Europe. But can companies survive long enough for supply and demand to get back into balance? And will they still be relevant by the time they do?

Fighting against the grain
The problem with China's strategy is that they've invested so much in technology that will eventually become obsolete. GT Advanced Technologies (NASDAQOTH: GTATQ  ) is constantly improving the efficiency and cost effectiveness of equipment it supplies to solar manufacturers. This summer, the company should be releasing a new HiCz product that brings efficiency to a new level, something forward-thinking solar companies should be investing in.

But when I talked to GTAT's CEO last year, he said Chinese companies simply don't have the money to buy new equipment. Demand was coming from the Middle East, the U.S., and Europe, where new entrants are trying to build the next generation of solar equipment.

If Chinese solar manufacturers are selling products below cost now, what will they do when more efficient products hit the market? Eventually, even a free panel wouldn't be worthwhile to installers because the added efficiency is worth the cost. In an article late last year, I highlighted why cost matters less as efficiency improves.

Foolish bottom line
The latest earnings reports are another data point showing why investors should avoid Chinese solar. Just because China keeps dumping money into these companies doesn't mean you should. They're on the wrong side of the industry, and their strategic position is only getting worse.

A solar company worth looking at
Investors and bystanders alike have been shocked by First Solar's precipitous drop over the past two years. The stakes have never been higher for the company: Is it done for good, or ready for a rebound? If you’re looking for continuing updates and guidance on the company whenever news breaks, The Motley Fool has created a brand-new report that details every must-know side of this stock. To get started, simply click here now.

 


Read/Post Comments (3) | Recommend This Article (4)

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 March 26, 2013, at 8:52 PM, winnerli wrote:

    Great article. There are too many Chinese solar companies (even listed in US). Stay away from all Chinese Solar stocks. Here is the list of Solar companies, you have count yourself how many of them from China: http://relationalstocks.com/showgroup.php?op=showgroup&g...

  • Report this Comment On March 27, 2013, at 9:57 AM, dsong wrote:

    This article is very partial.

    First, is solar going to more prosperous or is going to distinct as chemical film.

    Second, is solar industry born to lose money and no profits for ever?

    The answers are clear for those questions. China solars now are ungoing a consolidated phase. The over capacity and excess inventory are reduced dramatically since now.

    Third, the gov support solar as its stragetic energy structure change. This is big advantage

    than other solars that you should not worry they will fail. STP is an exception because its ceo did not cooperate.

    You should buy China solars as much as you can

    NOW. Because, in more two quarts those companies are going to profit and the margin will

    be increased greatly. Of course, the price should be double-ten folders from here.

  • Report this Comment On March 27, 2013, at 11:07 AM, dsong wrote:

    There are couple typo errors for last post

    Therefore it is reposted:

    This article is very partial.

    First, is solar going to more prosperous or is going to distinct as chemical film.?

    Second, is solar industry born to lose money and no profits for ever?

    The answers are clear for those questions. China solars now are undergoing a consolidated phase. The over capacity and excess inventory are reduced dramatically since now.

    Third, the gov support solar as its stragetic energy structure change. How it is giving away

    from its solars as the topic of this article. This kind support is big advantage than other solars that you should not worry they will fail. STP is an exception because its ceo did not cooperate.

    You should encourage to buy China solars as much as you can NOW. Because, in more two quarts those companies are going to be profit and the margin will be increasing greatly. Of course, the stock price should be double-ten folders from here too.

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