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  • China Blamed For US Solar Troubles, But Is This Right? 0 comments
    Oct 4, 2011 8:40 AM | about stocks: GE, FSLR
    As we covered previously with the fallout of the Solyndra collapse and the subsequent aftershocks in the solar industry, both US stocks and Chinese solar stocks have been deeply wounded. Indeed, the entire solar industry is being re-evaluated by everyone from government to industry to investors. Much of this has led to highly emotionally charged reactions rather than a rational reassessment, and has as its complement fueled equally highly charged rhetoric. An added chorus of blame has arisen also from the ashes of the Solyndra downfall, which might have been a predictable one to even the most casual China watcher: China's getting blamed.

    Projected Photovoltaic/Solar Installation For China

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    One should say China's getting blamed again. Unfair trade complaints against China were voiced by US politicians as well as some executives from the solar industry. Not only was Solyndra's failure in part laid at the doorstep of the practice of Chinese subsidies for its own solar industry, but Senator Ron Wyden (D-Oregon) wrote in a letter to President Obama that the US solar industry is being challenged to a point where it may ultimately fail unless the administration leads in pursuing the unfair trade complaint matter against China. Jonathan Silver, Department of Energy executive director of its loan program told a Congressional panel that China provided $30 billion in credit last year to its solar manufacturers, 20 times the amount of US. Other voices such as international vice-president of the United Steelworkers Thomas Conway were even more blunt, saying that the US should start a trade war with China.

    The Real Reasons For Solyndra's Failure

    Let's go back to what the catalyst was for the hard feelings and inflammatory words against China. You'll recall that the kickoff for this was the Solyndra failure. Although there are those who maintain that Solyndra's failure was due to overseas competition, including California state officials who filed for aid on behalf of Solyndra workers who lost their jobs, there are other voices who maintain that Solyndra's downfall was all its own doing. Senator Orrin Hatch (R-Utah) said it wasn't Chinese competition that caused the failure of Solyndra, but its business practices. Hatch said Solyndra's costs for its solar devices were higher than those of US competitors, and that it was simply "a failed business model."

    What specifically about Solyndra's business model led it to its downfall? An SEC filing from when Solyndra had planned for an initial public offering, plans which were canceled after its auditor warned the company that it would have trouble maintaining its business, is revealing. Solyndra was building its solar panels at a cost of $4 per watt while selling them at $3.24 per watt. Solyndra had also built a plant which cost $733 million to manufacture panels, but when demand for its product failed to grow, the capital expenditure for the plant no doubt weighed the company down as well. Fast forward; in addition to the poor business model cited by Hatch, the House Energy and Commerce Committee is now investigating Solyndra. So clearly, it's reasonable to suggest some strong dynamics other than Chinese policies played into the failure of Solyndra in a major way.

    Debate Over Subsidies

    Wang Baodong, Chinese Embassy spokesman in Washington, has previously pointed out the debate over subsidies is "not a new issue." Wang cited also China's commitment to green policies of its government as environmentally friendly, designed to ensure sustainable development, and that the policies are in line with World Trade Organization rules. Many US solar manufacturers, on the other hand, argue that the Chinese subsidies to its own solar manufacturers do violate global trade rules and provide the Chinese solar companies with an unfair advantage.

    Complex Issues

    There are a number of complex issues facing the solar industry. While 60% of the solar panels are now manufactured in China, whose solar companies export their products to Europe and America as well, American manufacturing for solar, despite the Solyndra and other failures, still has a bright future. General Electric (NYSE: GE) is committing $600 million to build the largest solar factory in the world in the US. Labor costs, which are perhaps 6% to 8% of the cost of manufacturing panels, are falling due to automation. US still can't compete with cheaper Chinese labor costs, and additionally, the Chinese subsidies for its companies may include free land, low-cost loans, and low cost or even free power to run their plants. But these actual loans are for far less than the credit facilities allow, and repayment is at 4% to 5%, higher than the 1% for DOE loans.

    Government Loans To Solar Manufacturers

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    Whether these subsidies are in violation of WTO rules or in compliance will be determined if and when any US complaint is pursued. But it must be pointed out that Solyndra notwithstanding, the US solar companies are innovative and doing their best to compete. First Solar (Nasdaq: FSLR), arguably the leading US solar manufacturer, has found a way to produce its thin-film modules for 75 cents per watt, cheaper than China's lowest cost of $1.15 per module. There have also been suggestions that the US, rather than pursuing complaints about Chinese subsidies or support of its domestic solar manufacturers, should dramatically ramp up its own subsidy program. The US is within its rights to pursue any legitimate claims it has against China with the WTO, but it's worth pointing out that a calmer, more reasoned approach to pursuing fair competition is in everybody's interests, both the US and China's.

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    Global Profits Alert (GPA) is published by Trippon Financial Research, Inc. a financial media organization with offices in the United States, Hong Kong and Mainland China. GPA is written by Jim Trippon in conjunction with George Wolff, Sunny Wang, Todd Shriber, Kelley Damiani and J. Daryl Thompson.

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    Stocks: GE, FSLR
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