The Most Ineffective Trade War You Should Know About

by: Value Hound


There is a raging trade-war going on in the past few years in the solar industry.

The trade-war is fueled more by politics than economics.

The long-term solar demand growth is not likely to be significantly affected.

Since about the middle of the last decade, the solar industry has been in a state of war. Before I can start bringing you up to date about this matter, I'll start by letting you know the goal of this article is to make you feel comfortable with reading the headlines regarding solar trade issues, knowing that you are not taking political opinions too much into consideration while making investment decisions.

There are not a lot of sectors that get positive/negative headlines so frequently. This happens for plenty of reasons, but the major one is the trade war, or what's left of it.

I want to avoid getting into politics, or my opinion on East vs. West. I was born and raised in Israel, which is conveniently the geographical middle between both.

When you're entering your office, about to make some investment decisions, you should try your best to leave your emotions outside of your office. When making investment decisions, you should focus on the facts and how they affect your investments, whether you agree with them or not.

The Two Sides: China

The 11th 5-year plan

As a country, since 1953, China has operated by drafting and following five-year plans. Very generally speaking, China is trying to develop its economy as fast as it can. One of the means to achieve economic growth is by identifying domestic industries that can win on the international market. China decided to include the solar industry in the "Decision of the State Council on Accelerating the Fostering and Development of Strategic Emerging Industries."

During the 11th 5-year plan (2006−2010), China's solar industry grew about 100%/year. By 2010, China's solar production was 50% of global production. The Chinese Polysilicon industry grew from virtually no production capability to 45,000 metric tons/year. The industry achieved high efficiency rates, making the Chinese solar module, efficiency-wise, comparable to Western solar modules.

While it was still in its diapers, the Chinese market for solar panels grew rapidly, accounting for about 800 MW of installed capacity by 2010. Ninety percent of production went to exports. The industry reached about 10 GW of production capacity in 2009.

The 12th 5-year plan

Spanning from 2011 to 2015, this plan continues to show China's interest in expanding its solar industry to lead the global market. Most of the plan underlines the great amount of support the government has put into growing its solar industry to be the world leader. Most of the numbers mentioned in the plan have been smashed by actual results. For example, the plan goal for solar cost is about $1.12/watt in 2015. We are in the middle of 2014, and Chinese cost leaders are already showing costs of less than $0.50/watt.

The Chinese government had put forth a target of reaching 35 GW in installed solar capacity domestically, by 2015. It seems fairly certain that target is going to be achieved, easily. You can say whatever you want about the Chinese, but they managed to increase their yearly solar panel production by 2600% in just three years. That didn't come with expense on quality, as Chinese solar panels show efficiency comparable to international peers (those that have survived, anyway).

We are approaching 2015, and China has executed its plan regarding solar seamlessly. How have they done that, one may ask?

Well, a lot of financing. Plenty of financing was made accessible to many solar manufacturers. Actually too much financing. So much so, that many companies struggled to manage their rate of expansions and jumped the gun.

What would you have done? If you have a tiny set-up for making solar panels, and the bank suddenly informs you that you're eligible for tens of millions (or hundreds) of dollars in comfortable loans, it's more bad news than good. Your tiny company is not skilled enough to manage that size of an expansion and compete in international markets.

That put many amateur players out of the game pretty quickly, but not before they went on and built large manufacturing facilities all over China. Competition intensity went up, and prices plunged. Many solar makers found themselves with huge facilities to operate and razor-thin gross margins, which caused extraordinary losses.

Reaching the end of the 12th plan, only the most skillful managements made it through this harsh period. Out of those companies, some carry a lot of debt, and some acted smarter, constraining debt levels at manageable levels.

The Two Sides - The West

Facing a determined China, the West (Europe and the U.S.) had nothing much to do. There was no Western government leading a plan to support their solar industries. Not a lot of companies managed to compete with the costs of Chinese manufacturers. The Chinese solar capacity build out created a massive economy of scale, which enabled Chinese manufacturers to achieve superior costs.

If that wasn't enough, the debt crisis that hit Europe forced countries to cut support for their domestic solar market. At that particular moment, when prices of solar panels were very high, bloated subsidies were needed to make installing solar, profitable. Those subsidies encouraged many companies to rush to enter the sizzling solar market. When subsidies were cut, companies went bankrupt one after another, like domino tiles.

Two high profile bankruptcies in the U.S. were of Solyndra and Evergreen. The reasons were the same. The Chinese economy of scale had made it impossible for many Western manufacturers to make money selling solar panels. The Chinese offered a much better price, which was a result of their superior cost structures.

As we approach 2015, we can safely say that except for a few Western solar companies led by brilliant managements, the solar industry outside China is pretty much dead.


Dumping is the act of selling your product for less than what it costs you to make it, willfully. That strategy, illegal in many countries, is the means by which a foreign company tries to push local companies out of business. The foreign company, usually large, is willing to take a loss in the short term, in order that in the long term it will remain the sole survivor of the market and, thus, earn big.

In order to dump your product, you need to have a lot of cash to burn in the process. A company that is involved in dumping is losing a lot of money by doing so. One of the complaints by the U.S. and Europe has been that the Chinese are dumping product into Western markets using Chinese banks/government cheap money. That was found to be true in a few cases and led to a dispute mainly between China, the E.U., and the U.S.

The dispute was solved by enacting duties on Chinese solar panels to make their domestic price comparable to U.S.-made or E.U.-made panels. Given that global production capacity shifted to be mainly located in China, in order for the U.S. or the E.U. to meet their own demand and solar installation targets, they have to use Chinese solar panels.

Western governments are shooting their leg by trying to artificially support their domestic solar industry using duties. This may lead to increased profits for a few, small domestic players, but will seriously interfere with those governments' races to reach their solar targets.

I think that this will cause the trade wars to be ineffective at best, serving some political needs more than actually stopping trade with China. Now, when the costs of Chinese solar companies are at/below the $0.50/watt mark, they have no need to engage in dumping. The Chinese industry has already won, and current trade disputes are just a case of "leftovers" from the previous years.

To see that, you can just take a look at the facts. In 2012, the U.S. started to impose anti-dumping duties on Chinese solar products. Recently, another complaint was made about a loophole the Chinese companies are using to avoid duties. The same name comes up in both cases: SolarWorld (OTCPK:SRWRY). SolarWorld is a German company operating in the U.S. and according to its website it has 500 MW worth of capacity in the U.S.

SolarWorld's complaints had met resistance by SunEdison (SUNE) and MEMC, saying SolarWorld has failed to compete against foreign producers. My lengthy research has led me to the same conclusion. First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) are both able to compete in the international markets (mainly because their production is concentrated in the East); the others are not. There's no need for dumping for the Chinese; they are already the clear market leader, cost-wise.

In the new SolarWorld complaint, the preliminary decision was to enact tariffs on Chinese-made modules. My opinion on that decision can be found here. In short, it says there are several Chinese companies that will see a minimal negative effect from the decision. Over the long term, given the robust and globally diverse demand for solar, this is nothing more than a tiny dent in future growth.


I keep monitoring the trade war situation closely. I think this issue is now a lot more about politics than about actual dumping. By monitoring the ASPs Chinese companies get in international markets outside China, it's easy to see they are not selling below costs, nor have they had any reason to do so, given their very low cost.

I see the solar trade wars as ineffective and unable to stop the growth in solar installations around the world. From an investment point of view, global demand for solar panels keeps rising.

China succeeded in building its solar industry, which was a costly endeavor. We, the rest of the world, have profited from an enormous economy of scale in the solar industry, in the form of cheap solar panels. If not for the Chinese, it's not certain at all if that huge production capacity would have ever been built.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.