The potential U.S.-China trade war over solar panels picked up steam again last week when Slate's article titled "The World's Dumbest Trade War" got play from outlets like Marketwatch and others across the Internet.
It's easy to say that slapping additional tariffs on imported Chinese solar panels would be terrible for the U.S., making it more costly to install solar, raising costs for the likes of SolarCity (NASDAQ: SCTY), while helping manufacturers like SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR). But the debate being had in Washington and across the industry is far more nuanced than one input and one output. Let's take a look at where the debate stands and what the impact on the solar industry will be if further tariffs are put in place.
What tariffs are being debates?
Before we get into the pros and cons of solar tariffs, it's important to understand what tariffs we're debating. The first tariff put in place were a 2.9% to 4.73% anti-subsidy and a 31.14% to 249.96% anti-dumping tariff put on Chinese manufacturers who exported solar cells to the U.S. The level of the tariff depended on the company.
What followed was a retaliatory 60.2% to 63.5% anti-dumping tariff on U.S. makers of polysilicon, a raw material for solar cells.
The problem with the initial tariffs as written is that U.S. tariffs were limited to solar cells, not the entire module or other components, leaving a huge loophole. Chinese manufacturers were able to overcome the tariff by "tolling" or installing some final components in Taiwan or another country and then shipping panels to the U.S.
The result is almost no impact to sales by Chinese solar manufacturers in the U.S. That's why recently, SolarWorld, who originally brought the complaint and is really a German company doing business in the U.S., sought to close the loophole by making the tariff broader to include panels and other components. Therein lies the contention Slate and even the Solar Energy Industries Association have with expanding solar tariffs because, hypothetically, it would increase the cost of solar, which now employs 140,000 Americans.
The impact of higher tariffs
The thought is that higher tariffs would raise costs and therefore kill the residential, commercial, and utility-scale solar industry. Without looking at where costs come from in solar, it's easy to make this conclusion, as Slate does. But if we look at the actual cost inputs of solar in the U.S., we find that tariffs might not be bad after all.
According to GTM Research, the cost of a residential solar system in the U.S. was $4.72 per watt in Q3 of 2013. At the same time, a solar panel cost about $0.65 per watt, or about 14% of the entire installation's cost.
Let's say that panel costs go up 20% because of tariffs and a shift to higher-cost suppliers, making the average panel about $0.78 per watt. The total system cost would go up a whopping 2.8% to $4.85 per watt. Considering that acquisition costs for a new residential customer are about $0.50 per watt, I'd say that there's more opportunity to cut costs in acquiring customers than any potential loss from a solar tariff. In any case, this would set normal industry cost cutting back a couple of months.
If we look at utility scale systems, which account for more than half of the installations in the U.S., GTM Research says that system costs average $2.04 per watt. And who dominates utility solar in the U.S.? First Solar and SunPower, who are both U.S. companies and don't manufacture in China.
The impact of tariffs would likely be much smaller than Slate or anyone else assumes, in large part because Chinese panels aren't the sole driver of the growing solar industry in the U.S.
China retaliation would hurt itself
The other thing that goes unnoticed in the trade war is that the U.S. actually makes a significant amount of polysilicon for China. The U.S., South Korea, and Europe, who are all in the midst of a solar tariff battle, make 80% of the silicon China uses.
In other words, additional tariffs on polysilicon actually hurt Chinese manufacturers.
Would a trade war really kill solar?
While it's easy to get up in arms over solar tariffs and assume it would kill the U.S. solar industry, reality is more nuanced than that. China does sell a significant number of solar panels in the U.S. but so do U.S. companies SunPower and First Solar as well as Japanese companies Kyocera, Sharp, and a variety of other manufacturers. If tariffs are placed on Chinese solar panels, it would likely just shift where panels come from, not eliminate the industry altogether.
In addition, as the cost of solar panels have fallen, its efficiency, not cost, becomes more important (click here to see an article explaining why). And according to GT Advanced Technologies (NASDAQ: GTAT), which supplies polysilicon and PV equipment that Chinese manufacturers have used to expand production, next-generation equipment demand is coming from Eastern Europe and the Middle East, not China.
To sum all of this up, there are suppliers outside of China who would be more than willing to supply panels to residential solar installers, many of whom are already big players in the market, and commercial and utility installations wouldn't be affected much at all. There may be a small increase in prices but even 20% increase in panel costs, which was my example above, would only set industry cost reductions back a few months.
The U.S. solar market isn't nearly as dependent on China as the media makes it out to be. Additional tariffs would have very little impact on the industry long term.
Who is right in this debate?
The truth of the matter is that the stance you'll take in this debate depends on where you sit. Manufacturers like SunPower and First Solar would love to see tariffs increase because it would only expand margins in the U.S., where they're already head and shoulders above Chinese competitors.
If you're SolarCity, you want to see panels as cheap as possible because you're a buyer and are trying to lower costs as much as possible. Whether or not the subsidies given to solar manufacturers are "fair" or not are meaningless to you.
However, for all of these companies, a tariff isn't a game changer.
Foolish bottom line
I don't know whether or not tariffs will change, but I don't see a lot of impact on the industry either way. I would be comfortable owning First Solar, SunPower, or SolarCity no matter what happens and they pose less risk than highly leveraged Chinese installers anyway.
What we shouldn't do is overreact to this tariff debate because it's already too late to kill the U.S. solar industry. The train has left the station and whether module supplies come from China, Japan, Malaysia, or the U.S., the industry has a very bright future.