The U.S. Will Never, Ever Catch China in Clean Energy - Not a Reason to Stop Investing

Includes: ESLRQ, LDK, SOL
by: Cornelius Downs

Today's New York Times article on "illegal" Chinese behavior favoring their domestic producers of clean energy products with massive subsidies brings up the question of whether the American clean energy industry can compete with China. The answer is no. Not today and not tomorrow either.

There may be new products or inventions in the future which Americans produce and the Chinese are only left to imitate. However, in terms of today's industry, Chinese manufacturing of solar cells, wind turbines, and other equipment is far beyond that of America. The Chinese government has executed a coordinated trade policy to nurse this clean energy industry domestically for years.

Can you imagine American policiticians in Washington DC actually coordinating, year after year, a domestic industrial policy for a new, capital-intensive, R&D-intensive, industry? Of course not. That is Fantasyland talk in this country. But in China, that's a reality. Yes, single-party rule, ethnic homogeneity, and some liquidity has advantages, it seems.

The story today is specifically about the United Steelworkers union filing a grievance accusing China of breaking WTO rules. Okay, go ahead, but it makes no difference. Even if this leads to "sanctions" (which it won't), or damages (which don't matter), or a tilt in leverage during trade negotiations, this is small potatoes. The Chinese have the upper hand in bringing their clean energy industry up right, and no one can beat their labor costs. Their domestic consumption of clean energy products is enormous, and sales to Europe are going to grow immensely.

Even if China agrees to change its behavior, an unlikely scenario, it doesn't matter because they won't follow live up to their promises anyway. Americans or Europeans or the WTO can't monitor Chinese behavior. And the Chinese know exactly what they're doing. The Western world has the IMF and World Bank, dishing out stupid advice to developing nations who have no choice but to enact some of their bogus ideas. The Chinese, on the other hand, don't believe in ridiculous Western free-market, austerity theories.

The New Trade Theory of the late 1970's and 1980's suggested that countries have good reason to subsidize infant industries. This new "theory" followed decades of common sense theorizing and the growth experience of the Asian Tigers. The value of nurturing domestic exporting industries is understood throughout Asia. And certainly, the Chinese understanding of economic policy trumps that of typical American politicians like John McCain, who is a true economic know-nothing, just like many (if not most) Republicans in DC these days.

What's more, clean energy will be perhaps the single biggest world-wide growth industry during the next couple decades. The Chinese advantage will only grow. Venture capitalists in Silicon Valley may be prepping for a clean energy boom there, but let's be honest - the skill and talent of these venture capitalists is massively overblown. They are just ultra-aggressive financiers with MBA's. A well-educated Chinese scientist with a background in biology or chemistry and some talent for business makes a Silicon Valley VC look like a poorly behaved kindergarten student.

American companies like Evergreen Solar (ESLR) have decided to move operations to China. Well, their technology will probably be stolen, but regardless, ESLR's incompetent management is the real problem. CEO Richard Feldt is not up to snuff, not even close. Shareholders will be lucky if the transition goes well enough for ESLR to be acquired by a Chinese operation, ideally before half of Asia knows the specifics to String Ribbon technology.

Still, Michael El-Hillow, ESLR's CFO, has a nice quote in yesterday's New York Times article: "You can’t get a penny in the United States, it doesn’t matter who you call — banks, government. It’s awful. Therein lies the hidden advantage of being in China." Meaning that even beyond the deep structural and cultural problems I have outlined above, American credit markets don't move these days and Americans still have a prejudice against solar and wind energy. American clean energy entrepreneurs face an uphill battle here, while in China they are helped along the whole way.

Investors should buy Chinese clean energy companies and hold them. Chinese solar stocks, for example, have been in the doldrums for two years now. However, these once-glamour-now-dog stocks will be coming back to life within the next year or two as the global economy picks up and demand for clean energy products rises with it. ReneSola (NYSE:SOL) and LDK Solar (NYSE:LDK) have been on three-month long tears, returning 84% and 57% respectively. This sector will be glamorous once again, possibly as soon as next year.

Disclosure: Long ESLR, SOL, and LDK.