Financial Review
Anna Bernasek
Like Ye, Chinese industries have powered past global competitors. Whole industries have started from scratch and not just prospered but decimated former leaders. Take the solar industry. Invented in the US in 1882 with the first working solar cell, Americans dominated until recently.
That reality hit home last August when three big US solar power companies filed for bankruptcy, unable to produce solar panels in the face of plunging world prices.
China has three-fifths of the world’s production capacity and supplies more than half of the US market for solar panels.
Like other industries dependent on R&D, US companies developed technology and techniques for mass production, then disseminated their know-how. With its low cost base and cheap funding, Chinese solar companies have driven down prices and crushed competition. Industry insiders watched in amazement as solar panel prices fell 50 per cent in the past year alone – how can China keep doing what nobody else can?
Lately we’ve got a few clues to China’s amazing success. Earlier this year, the US Commerce Department determined that Chinese companies benefited from government subsidies allowing them to sell their product below cost. In response, new tariffs were imposed.
For years, Chinese manufacturers benefited from indirect subsidies as well. Solar companies could get cheap bank loans and extremely cheap land for production facilities. Consequently, many manufacturers are saddled with significant debt.
There may also have been wrongdoing. Reports this week suggested the largest Chinese solar manufacturer, Suntech Power Holdings, was involved in a complex fraud scheme. This week Suntech announced that certain bonds used as security for loans it arranged for its customers might not exist.
Any time a company lends money to customers so they can buy product, it’s a matter of concern. Unless the company has a high degree of integrity, it may succumb to the temptation to artificially inflate its business.
Suntech, through an affiliated company, arranged financing for customers to buy solar panels. The loans didn’t come from the company but a Chinese state-owned bank. The bank asked Suntech for collateral, which it arranged by having a European affiliate pledge almost $US700 million in German government for security. Lo and behold, those bonds might not actually exist.
Borrowing at low rates to build facilities gave Suntech a nice boost. And giving customers loans to buy product was pretty clever too. But the underlying economics of its business have caught up with Suntech. Despite low interest rates, high debt levels have put pressure on its business. Worse, as Chinese capacity grew, demand in the US and Europe fell.
Other Chinese manufacturers have also come under pressure due to the collapse in demand. In order to keep market share, the companies cut prices, damaging their ability to service debt.
The consequences are becoming clear. US-listed Chinese solar firms have had a terrible year. On average, the solar index is down about 75 per cent, with shares in Suntech down about 79 per cent.
So when Americans wonder how the Chinese can keep doing it, maybe we’re beginning to find out. In some cases, they just can’t.
There are no moving parts so you don't have to worry about replacing anything. In fact, most people generate electricity for 1000s of hours with little or no maintenance.
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