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.