China’s Solar-Panel Boom and Bust

If one city epitomizes China’s role as cheap manufacturer for the world, it’s Wuxi, a sprawling metropolis of more than 4.5 million people a short bullet-train ride northwest of Shanghai. Out beyond the old town, with its ancient temples and canals, much of modern Wuxi is a massive industrial park, a seemingly endless grid of wide, straight roads fronting squat factories bearing the names of international brands: Epson, Nikon, Panasonic.

Wuxi’s industrial zone also is the epicenter of the global solar-energy industry, a sector now in the throes of convulsive growing pains. Specifically, the zone is home to the gleaming glass-fronted headquarters of Suntech Power Holdings Co., which over the last decade sprang from local startup to world’s largest solar-panel maker — and then, this spring, declared that its main business unit was bankrupt.

Lesser versions of Suntech’s bust are repeating themselves throughout China’s solar sector, as other once-triumphant panel makers flirt with insolvency. They grew too fast, propelled by inefficient environmental subsidies in Europe and the United States and by billions of dollars in backing from governments and banks in Wuxi and across China. The Chinese solar stampede was a mad dash for easy money, and at first it seemed unstoppable. But then Western governments dialed back their solar largesse, demand for China’s solar panels failed to keep pace with the industry’s torrid production increases, and inventory began piling up. The result: Manufacturers’ balance sheets began turning red.

In China, many powerful people — from officials in local governments to leaders of the biggest banks — helped fuel the solar glut. Now, to save face as well as their investments, they are racing to rationalize the industry by consolidating companies and restructuring incentives. Leaders of solar companies in danger of being squeezed out of business are scrambling for continued support.

This is the latest in a long line of attempted economic corrections in China, a country where the boom-bust manufacturing cycle is an industrial rite. How it plays out will shape the global solar-panel industry, which China now dominates. More broadly, it’s an early glimpse at the kind of shakeout that could hit other clean-energy sectors showing signs of overheating, from advanced batteries to energy-efficient light bulbs.

At issue: whether governments and private investors that helped fuel the go-go first stage of the global clean-energy drive can exercise enough discipline to put it on a more economically sustainable path. In the first stage, governments hungry for jobs, energy security, and environmental gain competed against each other to pour incentives into these new industries. But those subsidies — and the private investment that followed — caused the markets they stirred to boil over. Now, in the second stage, China and other countries are trying to devise more efficient financial and policy tools to keep an energy shift cooking along.

Sitting in a soft chair in a large conference room in an office tower overlooking Wuxi’s downtown, Jiang Guoxiong says he’s gotten wiser about the solar industry. A wiry man with carefully groomed hair and a smartly tailored shirt and sport coat, Jiang is chairman of the Wuxi Industry Development Group Co., an economic-development arm of the Wuxi municipal government. It provided tens of millions of dollars to Suntech through investments and loans to help bankroll the solar company’s expansion. “The lesson learned is that government support needs to be very business-driven and rational,” Jiang says, puffing on a cigarette as two aides look on.

In China, as in the rest of the world, solar is a tiny slice of the energy pie. It produced just 0.2% of China’s electricity in 2012, Yuanta Financial Holdings, a Taiwan-based firm, estimated in a recent research note. Even if China meets aggressive targets it has set out for installing more solar panels over the next several years, it will generate only 1.3% of its electricity from solar in 2020, Yuanta said.

But those minuscule numbers mask how important China’s export-focused solar-panel industry is to the country. That importance is partly about image and partly about money.

For all the goods that China’s factories crank out under foreign companies’ names, China has produced precious few globally recognized brands. But China’s solar-panel companies, including Suntech, sell their wares under their own names around the planet. It’s a particular point of pride in China that the country, often criticized in the West as a polluter and a maker of inferior goods, has come to dominate an industry widely seen as green and futuristic. To be sure, the solar-panel industry uses a lot of coal-fired electricity, consumes huge quantities of chemicals, and cranks out what’s basically a commodity product. But those inelegant details tend to be lost in the public discussion.

The Suntech saga illustrates the Chinese solar industry’s rise and fall. The company was founded in 2001 by Shi Zhengrong, a Chinese scientist who studied solar technology at Australia’s University of New South Wales, a leading solar-research center, and came back to China to start a business. Shi located the company in Wuxi, which, as Jiang points out, lacks much in the way of natural resources but makes up for it in enthusiasm for cranking out product. The Wuxi Industry Development Group was an early investor in Suntech. “The Chinese government and the Wuxi government are very service-oriented,” Jiang says. “If you are here, I will come to you and ask, ‘Do you need any help?’ ”

Suntech went public on the New York Stock Exchange in 2005. Within months, its stock pricemore than doubled, spurring public offerings by other Chinese solar firms. In the next few years Suntech surpassed Japan’s Sharp Corp. as the world’s largest solar-panel maker. Shi graced magazine covers as China’s richest man. And Suntech kept expanding its manufacturing capacity, using largely money it borrowed from governments and banks.

Across China, the Suntech euphoria created a “herd effect,” says Peter Xie, head of international solar-farm development for GCL-Poly Energy Holdings Ltd., a Chinese company that’s one of the world’s largest producers of polysilicon, used to make solar panels.

As in Jiangsu, the province in which Wuxi sits, provincial officials around China gunned to build their own local solar-panel titans. They dangled tax breaks and other subsidies before their corporate targets. Xie recalls traveling around to various cities, all of which seemed to be developing competing solar-manufacturing parks.

“The government officials said, ‘You come here, you deploy a factory, I’ll give you loans; I’ll give you no taxes,’ ” he remembers. Expansion was the religion, and Xie says he felt he had to adhere. Failing to grow as fast as other companies would mean “you just become not relevant,” he explains. “So you have no choice. You just have to follow.”

At the time, following the herd made sense. It wasn’t uncommon for solar-panel companies to rake in annual profits of 33%, Xie recalls. “There was no reason they should have made 33% margins. The technology is not that fancy,” he says. “It’s a commodity business.”

Banks fed the herd. Terry Wang, chief financial officer of Trina Solar Ltd., one of China’s biggest panel makers, recalls banks competing against each other to back solar companies they thought could “become number one in a few years.” Because the solar industry was young, banks typically loaned money to panel makers who put forth a plausible argument that they were on a path to dominating the industry, he recalls. The typical outcome: “They believe your analysis. And then, you get the money.”

Investors in Chinese solar farms found cash similarly easy to come by. In 2009, China’s central government rolled out an incentive called Golden Sun, designed to spur construction of solar farms. Under the program, the government pays half of solar-farm developers’ costs.

The program is based on a key inefficiency. It pays developers based on how much money they spend on a solar farm, not on how much electricity their solar farm produces. So the subsidy doesn’t spur developers to install the most cost-efficient technology or to pick the most cost-effective sites.

More egregiously, Wang says, some Chinese solar developers have built solar farms, pocketed the Golden Sun subsidy, and then removed the solar panels and installed them elsewhere.

In 2011, China’s solar rush hit a wall. The feverish expansion by Chinese manufacturers created an oversupply of panels that sent prices plummeting some 40% in that year alone. European governments cut back their solar subsidies; given the lower panel prices, they reasoned, they didn’t have to give away so much money. Those subsidy cuts reduced investors’ interest in building solar farms. And that erosion in demand further ate into solar-panel makers’ margins.

One result, announced this March, was the bankruptcy of Suntech’s main operating unit, Wuxi Suntech Power Co. A Suntech spokesman declined to comment. On May 15, Suntech announced that holders of some Suntech bonds had agreed to give the company through late June to repay them.

The fallout in China from the global solar-panel meltdown extends far beyond Suntech. As of 2012, China’s 10 largest solar-panel companies had a cumulative debt of $27.7 billion, said Yuanta, the Taiwanese financial firm, in a recent report. Their average debt ratio — debt as a percentage of total assets — was an eye-popping 75.8%, Yuanta calculated.

Soon after Suntech declared bankruptcy, the Bank of China, one of the country’s largest lenders, reported that 21% of its solar loans were “nonperforming,” meaning they were in or near default. The bank said it had set aside only enough money to cover 11% of those loans going bad, Religare Securities Ltd., an India-based firm, noted in a recent report.

Now, scrambling to rationalize the solar industry, China’s government and banks are pushing consolidations by cutting back on subsidies and loans. Dozens of small Chinese solar-panel makers — some of the hundreds that were cranking out panels at the height of the boom — have closed.

The Golden Sun program, widely panned for failing to produce much solar energy, is likely to be replaced by a subsidy that China’s central government contends will be more efficient. That would follow a recent announcement from the government that it intends to scale back another solar subsidy: a so-called feed-in tariff, which guarantees solar-farm investors they can sell their power at a premium price.

Back in Wuxi, Jiang, the chairman of the Wuxi Industry Development Group, which invested in Suntech, remains bullish about solar’s future. He believes that Suntech will survive bankruptcy and emerge healthier, likening it to another multinational giant that followed that path: General Motors. “It’s just like the GM reorganization,” he says. “No one can say Suntech is dead.”

Still, Jiang is hedging his bets. He’s talking with new solar firms about locating in Wuxi — companies with cutting-edge technologies that he thinks could slash solar costs further. And one thing will be different, he vows: Wuxi will provide the solar industry with “support, but not unconditional support.”

Jeffrey Ball, formerly The Wall Street Journal’s environment editor, is scholar-in-residence at Stanford University’s Steyer-Taylor Center for Energy Policy and Finance. This piece was originally published by Stanford Graduate School of Business, and will appear in print in the Summer 2013 issue of Stanford Business magazine.