In November 2013 the European Union decided to put tariffs up to 42.1% on Chinese solar glass imports. This comes after earlier agreements to put price minimums and volume limits on the import of Chinese solar panels until the end of 2015. Recently China slapped big tariffs on imports of American polysilicon, and the U.S. decided to further investigate the imposition of tariffs on Chinese solar manufacturers.
Given the continual threat of trade wars and tariffs it is critical that investors understand which public solar manufacturers face the biggest risk from geopolitical strife.
The U.S. parties
First Solar (FSLR 2.94%) is in a good position to weather American-Chinese trade disputes. In Q3 2013 North America, Europe, and Latin America together accounted for approximately 75% of its potential booking opportunities. The rest of its opportunities are pretty evenly split between Southern Africa, North Africa, India, and the rest of the Asia Pacific (APAC) region. In the end China is really not a big item on First Solar's radar.
First Solar is profitable and responsible with a 12.2% profit margin and a low total debt-to-equity ratio of 0.05. Thanks to its healthy financial position and focus on the Americas and Europe, it is in a great position to weather any Chinese-American or Chinese-European trade war.
SunPower (SPWR +0.00%) is not highly dependent on China, with the entire APAC region comprising just 14.6% of its 2013 revenue. Japan is a big focus for SunPower, making China even more of an afterthought.
The situation may change as SunPower is slowly taking steps to grab a bigger part of Chinese growth. It recently created a joint venture to produce its C7 tracker in China for the Chinese market. In the event that American-Chinese trade relations decline SunPower could find itself in the crosshairs, but its use of a Chinese joint venture on Chinese soil should help deflect some of Beijing's angst.
SunPower's improving profits mean that now it is in a better position to deal with any possible trade war. It posted profits in the last three quarters of 2013 and full year earnings of $0.77 per share. Chinese trade wars and protectionist policies present a threat, but SunPower is diversified enough that it should be able to deal with these difficulties.
Chinese challenges
Chinese manufacturers like Yingli (NYSE: YGE) and Trina Solar (NYSE: TSL) are in a difficult position. In Q3 2013 27% of Yingli's shipments went to the U.S. In the same time period the U.S. provided 19% of Trina's revenue. In the event of a big Chinese-American trade war Yingli and Trina Solar would face significant challenges.
Yingli and Trina Solar also need to keep a small eye on Japanese-Chinese relations. Japan represented 7.4% of Yingli's Q3 2013 shipments and 11.2% of Trina Solar's Q3 2013 revenue. Behind the scenes China and Japan are struggling to define the new Asian balance of power. In China anti-Japanese sentiment periodically boils over, pushing consumers and companies to abandon Japanese goods. Just as easily the Japanese could easily start boycotting Chinese goods, hurting Yingli and Trina Solar.
In addition to these difficulties Trina Solar and Yingli are still searching for the level of profits enjoyed by their U.S. brethren. In Q3 2013 Trina's operating margin improved significantly, but in absolute terms it was only 1.1%. Yingli has also seen its operating losses improve, but it still posted an operating loss of $11.5 million in Q3 2013. In the end Chinese solar manufacturers carry a good amount of risk.
Be carefully optimistic
History shows that trade wars are not rare occurrences, and we need to invest with future trade wars in mind. First Solar and SunPower have little to worry about, though SunPower's new ventures in China need to be watched carefully. The Chinese firms Trina Solar and Yingli are a different story. The U.S. and Europe are important parts of their customer base, and trade wars could put a serious dent in their revenue and profits.
If you are risk-averse, sticking with U.S. manufacturers is a good idea.
