The United States solar industries increasingly find themselves navigating the political arena, time that would be best spent on innovation strategies. Beijing's massive supply side loan subsidies have helped China's energy industry giants, but more nimble service oriented manufactures have found short term windows of opportunity in countries offering demand side tax credit incentives. Windows open and close and energy investors may be best served by choosing manufactures that take a long-term approach.
On the political front, President Obama gave a broad outline for a new energy policy saying,
As we recover from this recession, the transition to clean energy has the potential to grow our economy and create millions of jobs - but only if we accelerate that transition. Only if we seize the moment.
How exactly do we seize the moment? Analysts are unclear if the President's directive suggests domestic loan subsidies, energy credits or a hands off approach. No doubt solar industry leaders are deciphering this statement for clues.
US solar panel manufacturers face an uneven playing field marked by highly subsidized foreign competition and competing domestic energy policy directives. While some US analysts point to countries such as Germany where tax credit incentives have stimulated demand, others believe that all subsidies are bad business. The latter see the US government's $535 million subsidy to Solyndra and its inevitable collapse as a case in point.
Beyond the rhetoric, the scale of the subsidy disparity is enormous. The US Department of Energy estimates China's solar manufacturer subsidies at $34 billion compared to the US at 1.3 billion. It is important to note that US solar subsidies were part of the general stimulus package.
Unlike the hands off approach of capitalist economies, China's manufactures benefit from implicit government cooperation in planning production objectives. On Dec. 15 2011 Reuters reported that China's Ministry of Industry and Information Technology called on PV manufacturers to reach 5 gigawatts of annual capacity and revised the solar generating capacity target to 15 gigawatts by 2015. The five year plan calls on polysilicon producers to reach 50,000 tons of annual production capacity by 2015. China's manufacturers have a clear directive and the financial backing to meet these goals.
In terms of the nature of subsidies, east and west perspectives are distinctly different. As a result two general solar energy business models have emerged. China's large vertically integrated manufacturers are the direct result of a variety of government subsidies (including long term low interest loans issued by banks) that are highly influenced by government control. Western manufactures are typically less vertically integrated and defined more by component installation systems and services. In contrast to China's supply side loans, US subsidies for solar energy have been in the form of consumer tax credits, a demand side stimulus that benefited installers more than manufacturers.
An example of China's solar industries intentions can be seen in a press release from PRNewswire-Asia Changzhou, China, Feb. 23, 2012. China based Trina Solar Limited (NYSE: TSL) recently posted 2011 fourth quarter results. TSL had a 2011 gross profit of $332.6 million, a decrease of 43.1% from 2010. Chairman and Chief Executive Officer Jifan Gao said:
We finished 2011 with annual shipment growth of approximately 43% over 2010. With vertically integrated production capabilities TSL has positioned itself to weather decreases in the average selling price ("ASP") of solar modules and weak global demand.
Some, including the Obama administration, have referred to these facts as evidence of "dumping". The message being sent to western companies is innovate and consolidate or be driven out of the market. With the backing of Beijing, TSL is betting on long-term dominance over a dwindling set of competitors.
In an attempt to fight back a group of manufacturers are seeking legal actions. The Oregonian reported in Oct. 2011 that Solarworld Industries America Inc., (SRWRF.PK) along with several other PV manufacturers, filed a trade complaint with the U.S. International Trade Commission and the U.S. Commerce Department. The pending complaint accuses China of illegally subsidizing various domestic manufacturers thus creating artificially low-priced solar products.
The merits of unseating China's tactics and dominant market position through legal means are debatable. Energy investors and US installers might best find opportunities in low solar panel prices.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.