China on track to become the global center of solar photovoltaic (PV) manufacturing

February 14, 2011

In the first two financial quarters of 2010, Suntech Power Holdings Company Ltd. (Wuxi, China) surpassed previous industry leader First Solar Inc. (Tempe, Arizona, U.S.) in sales to become the world's largest solar photovoltaic (PV) manufacturer by revenue. During the third quarter of 2010, both Suntech and JA Solar Holdings Company Ltd. (Zhabei, China) surpassed First Solar in manufacturing capacities as well.

PV cells at a Hanwha Solar One  manufacturing facility
PV cells at a Hanwha Solar One manufacturing facility

Such developments were hardly surprising to industry observers. Suntech and JA Solar are the tips of the iceberg in terms of China's enormous PV manufacturing industry, and such stories illustrate the slow consolidation of China as the undisputed center of the PV manufacturing world.

 

 

Clean energy manufacturing leaders in the 21st century

These trends have been establishing themselves for years, and are related to China's emergence in 2010 as the world's largest exporter and the economic powerhouse of the 21st century. However, PV manufacturing has unique conditions as an industry, and the reasons for China's dominance in PV manufacturing tell an important story with global relevance for other nations who seek to remain or become clean energy manufacturing leaders in the 21st century.

This report by Solar Server, with the assistance of iSuppli Corporation (El Segundo, California, U.S.), will cover the emergence of China as the world leader in PV manufacturing. Our focus is on recent developments in 2009 and 2010 and particularly shared characteristics of large Chinese PV manufacturers, as expressed by industry leading companies including Suntech, JA Solar, LDK Solar Company Ltd. (Xinyu, China), Yingli Green Energy Holding Company Ltd. (Baoding, China), Trina Solar Limited (Changzhou, China), and others.

 

Size matters: Scale of the Chinese PV manufacturing industry

Chinese PV cell and module shipments have gained an increasing share of the world PV market every year since 2004. In 2009, the manufacturing operations of six of the top 15 cell manufacturers and seven of the top 15 module producers were based in China.

When taken together, Chinese manufacturers produced 3.84GW of PV cells and 3.60GW of PV modules during the year, representing roughly 2/5 of the roughly 10 GW of PV cells and the 8 GW of PV modules produced. China's market share of crystalline silicon (c-Si) PV is even higher, as c-Si represents the large majority of cells and modules produced in the nation.

As the scale of the global PV industry has grown and the factors leading to such changes have intensified in 2010, it is estimated that both total cells and modules produced by Chinese companies and market shares have increased as well.

 

A Chinese model?

While many will point to one or more factors that have contributed to the success of the large Chinese solar companies, opinions differ as to the importance of these various factors.

JinkoSolar wafer quality control. Courtesy of JinkoSolar
JinkoSolar wafer quality control. Courtesy of JinkoSolar

What can be clarified is that there are common themes in the success of these different companies, and when looking at these together we can attempt to describe a Chinese model. Some of the more significant factors cited by industry analysts are heavy state support, vertical integration and low labor costs. Also, this Chinese model that we are attempting to describe is based on the production of crystalline silicon, as the largest Chinese producers manufacture crystalline silicon PV exclusively.

 

Vertical integration

Vertical integration has become a buzzword in the PV industry. However, for some time many large PV manufacturers have produced some combination of PV wafers, cells, modules, and at times even polysilicon. It is important to note not only whether or not a company is vertically integrated but the degree of vertical integration.

According to research produced by iSuppli Corporation in September 2010, out of 16 leading Chinese PV manufacturers, five produced everything from polysilicon to completed modules and eight produced PV wafers, cells and modules, leaving only three companies with a lesser degree of vertical integration.

However, the Chinese PV industry leader by revenue, Suntech, does not follow this trend and produces only PV cells and modules. Also, some of the larger companies are technically vertically integrated, but in reality such integration is heavily weighted towards one end of production.

In the case of LDK Solar, China's second largest PV producer by revenue at between USD$2.46 and USD$2.5 billion in 2010 sales, the large majority of the company's business is in wafer and polysilicon production, and the company reached only 120MW of annual cell production during the third quarter of 2010.

JinkoSolar polycrystalline wafers. Courtesy of JinkoSolar
JinkoSolar polycrystalline wafers. Courtesy of JinkoSolar

Even if it does not always reflect their current operations, a greater degree of vertical integration is a stated goal of many large Chinese PV producers. Many companies note the cost benefits of such integration, and others, including Trina Solar, also cite advantages in quality control.

Another motivation for the move towards greater integration may be a desire to control costs after the high polysilicon prices of 2008. Finally, there may be a desire to move away from dependence upon imported polysilicon.

It is important to note that this high degree of vertical integration is shared by large PV companies outside of China, including Renewable Energy Corporation ASA (Sandvika, Norway), which has been highly vertically integrated for some time, and First Solar.

 

Relevance of low labor costs

China's inexpensive labor has helped make the nation a destination for manufacturing. And while lower labor costs are certainly an advantage in PV manufacturing, it is unclear that labor costs play as great of a role in this capital-intensive industry as in other manufacturing industries.

Labor costs do not exist in a vacuum, and the value extracted from labor is always a result of its cost and its productivity.  Many observers have noted that Chinese PV manufacturing has a low degree of automation relative to PV manufacturing in other nations, with Chinese manufacturers instead utilizing a larger amount of manual labor. Such higher labor intensity is typically correlated with a lower overall labor productivity, which reduces the cost savings.


Heavy state support

Perhaps the most significant input into the successful mix of factors in explaining China's successful PV industry is the heavy state support that Chinese PV manufacturing firms enjoy, including government loans, research and development assistance, and other supports. No nation gives its PV manufacturing the dollar value of support that China does.

Aide solar manufacturing line. Courtesy of Aide Solar
Aide solar manufacturing line. Courtesy of Aide Solar

Both building a successful renewable energy sector and increasing the volume of high-technology exports have been stated goals of the Chinese government for a number of years. In its 2005 Renewable Energy Law, China's central government announced that a number of policy tools would be used to achieve the former goal, including setting middle- and long-term goals for the development and utilization of renewable energy, creating financial support for renewable energy research and development, offering low-interest loans for renewable energy manufacturers and projects and providing tax benefits to select projects.

This policy direction was supported in China's 11th Five-Year Plan, covering the years 2006-2010, which was released in March 2006. This plan included statements that China will support renewable energy by implementing preferential tax, investment and mandatory market share policies.

The support that China gives its PV manufacturers is particularly evident in capital contributions. Of the USD$41.8 billion invested in the global solar industry in 2010, USD$33.7 came from the Chinese government. The China Redevelopment Bank was the prime source of this capital infusion, providing USD$30.3 billion in enormous loans and credit facilities to seven large Chinese PV manufacturers.

The state-owned Bank of China (Beijing, China) has also been a significant source of credit, and on January 6th, 2011 JinkoSolar entered into a strategic cooperation agreement with the Bank of China which includes the potential for up to USD$7.6 billion in credit facilities over a five-year period.

The Chinese government also supports its PV industry as one of a number of key industries identified in a "Catalog of Chinese High-Technology Products for Export", updated in 2006. As a result PV manufacturers are eligible for additional financial support for research and development and provision of export credits at preferential rates from the Import-Export Bank of China, as well as export guarantees and insurance through the China Export and Credit Insurance Corporation.

Ernst & Young (London, U.K.) placed China's heavy state support foremost among the factors which led the organization to rank China the most attractive nation in the world for PV manufacturing. It is also worth noting that the United States, by comparison, relies upon venture capital for much of the funding for its solar industry, which industry analysts Mercom Capital state has not matched the needs of the industry.

 

Other factors: currency advantages, environmental compliance and economies of scale

China has kept its currency tied to the U.S. dollar at a controlled exchange rate, which some economists and U.S. government officials, including Federal Reserve Chairman Ben Bernanke, have said represents an artificial deflation of the currency and thus an unfair advantage in exports.

Worker sorting PV cells at a Suntech facility. Courtesy of Suntech
Worker sorting PV cells at a Suntech facility. Courtesy of Suntech

Another factor is potential cost advantages of China's comparatively weak enforcement of environmental law. University of Richmond Law Professor Joel Eisen, the author of several articles on Chinese environmental law and renewable energy industries, points out that China has many of the same environmental laws as the United States, but has not yet developed effective enforcement mechanisms at the local level.

 

The results of the externalized costs of weaker environmental law compliance are very difficult to quantify, as is often the case with externalized costs. However, Professor Eisen states that this lower degree of environmental compliance inevitably provides some additional degree of competitive advantage.

Finally, like all large PV producers, large Chinese PV producers also benefit from increased economies of scale, which ultimately mean lower production costs.

 

Low costs per watt

The result of all of the factors above are very low costs per watt for Chinese PV. Chinese producers Yingli, Trina and Suntech produce the lowest-cost crystalline silicon modules in the world, with costs per watt second only to First Solar. Average Chinese module selling prices declined significantly in 2009, from USD$1.70/watt for cells and USD$2.80/watt for modules in the first quarter of 2009 to USD$1.40/watt for cells and USD$1.95/watt for modules in the first quarter of 2010. Chinese producers have been able to achieve these low costs while earning high margins, with average gross margins of 19-22% from the third quarter of 2009 through the first quarter of 2010.

However, even before manufacturing costs declined, Chinese producers priced their PV cells and modules costs very aggressively, and the accusation that Chinese manufacturers maintained low prices in 2009 in an effort to edge out competition and gain market share is supported by industry data. 16 Chinese PV manufacturers surveyed by iSuppli achieved an average gross margin of only 1% in the first quarter and 6% in the second quarter of 2009, with five manufacturers operating at a loss in the first quarter and four in the second quarter.

 

The special case of Yingli and Trina

Chinese PV producers are not an entirely homogeneous mass, and two Chinese PV producers in particular, Yingli Green Energy and Trina Solar, stand out. These companies share a focus on module production within a high degree of vertical integration, a strong emphasis on marketing and branding, and margins that are among the highest in the industry.

These factors might lead one to assume that Yingli's and Trina's PV products are particularly expensive, however according to data from Greentech Media Research, Yingli and Trina also have the lowest adjusted module costs in the industry after First Solar.

Image: Trina Solar monocrystalline PV module. Courtesy of Trina Solar

 

 

Competition for manufacturing: European and North American manufacturers move to Asia

A primary way that European and North American manufacturers have met the challenge of low-cost Chinese PV products is to set up manufacturing in Southeast Asia or China.

Some large PV producers have moved the majority of their operations to the region: American thin-film maker First Solar relies heavily on its Malaysian plants, and has plans to build a PV manufacturing facility in Vietnam. Evergreen Solar Inc. (Marlboro, Massachusetts, U.S.), which has been financially struggling for years, has shifted production to Wuhan, China from the U.S. state of Massachusetts.

Module production at REC's Singapore facility. Courtesy of REC ASA
Module production at REC's Singapore facility. Courtesy of REC ASA

Other large manufacturers which have not moved the bulk of their operations to China or Southeast Asia have a presence in these regions. REC recently opened an integrated manufacturing facility in Singapore, Kyocera Corporation (Kyoto, Japan) uses has a long-standing Chinese presence, and Q-Cells has built Malaysian manufacturing.

Perhaps the strangest example of this trend is Canadian Solar. Despite corporate headquarters in Ontario and strong Canadian branding, the company's research and development and primary manufacturing is in China.

 

Limits: polysilicon, inverters and equipment manufacturing

Despite such tremendous growth in Chinese PV manufacturing, there are still large parts of the PV value chain where the global centers are not in China or Asia. However, the increasing consolidation of Chinese and Southeast Asian PV manufacturing has caused noticeable geographical shifts.

 

Polysilicon

In mid-2010, Chinese polysilicon production stood at 17,560 metric tons per year (MTY). At that time industry leader Hemlock Semiconductor Corporation (Hemlock, Michigan, U.S.) had a production capacity of 36,000MTY at U.S. facilities, with Wacker Chemie reaching 25,000MTY by April 2010. However, Chinese production is rapidly increasing, with new capacity expansions continually being announced.

GCL-Poly polysilicon manufacturing facility. Courtesy of GCL-Poly
GCL-Poly polysilicon manufacturing facility. Courtesy of GCL-Poly

A number of Chinese module producers are attempting to secure their polysilicon supply by owning the production, such as Yingli's development of subsidiary of Fine Silicon Company, Ltd. (Baoding, China).

On January 24th, 2011 the Chinese Ministry of Industry announced new rules limiting new Chinese polysilicon production, which suggests that the Chinese polysilicon industry is now trending towards oversupply.

 

PV equipment manufacturing

PV equipment manufacturing is moving to Asia more slowly, and the world's largest equipment manufacturers remain centered in the United States (Applied Materials Inc.), Germany (Centrotherm AG, Roth and Rau AG) and Switzerland (the Meyer Burger Group, OC Oerlikon Corporation AG). Here, the strategy has been to set up strong regional offices, and Applied Materials' April 2010 establishment of a 32,000 square meter operations center in Singapore sent a strong signal to the rest of the industry.

 

Inverters

Finally, North American and European inverter manufacturers appear to have little inclination to move to China, with the world leader in inverters, SMA (Niestetal, Germany) firmly planted in Germany.

 

2011 and beyond

The future of Chinese PV manufacturing is, of course, dependent upon world PV market conditions, and more specifically, the world market for crystalline silicon PV. This in turn is dependent upon individual national markets and ultimately on political decisions made in those nations.

By investing in massive capacity expansions, Chinese producers and the Chinese government have placed huge bets that the global solar market will continue to grow. Given the tremendous growth of global PV markets over the last decade, this appears to be a sound bet.

 

Short-term future trends

Short-term trends are another matter. Industry analysts including iSuppli and IMS Research are predicting a slowdown in the first and second quarters of 2011, driven by the reduction in Germany's feed-in tariff, and a smaller rate of annual growth in 2011 than in 2010.

Module production at a Suntech factory. Courtesy of Suntech
Module production at a Suntech factory. Courtesy of Suntech

Furthermore, IMS Research and other analysts predict that a greater share of 2011 installed capacity will come from utility PV markets in the United States, a market segment where U.S.-based thin-film manufacturer First Solar has a larger presence.

If these predictions are accurate, the inevitable result is an oversupply of crystalline silicon in the first six months of 2011, accompanied by falling margins and prices. ISuppli Corporation predicts that crystalline silicon module prices will fall 9% in the first quarter and 6% in the second quarter.

Companies with high margins and low-cost production, including Trina and Yingli, are in a good position to weather this storm. However, other PV producers including Suntech, which has much lower margins, are not in as good of a position.

It is unclear what these price declines will mean for Chinese PV manufacturers. As the Chinese government has invested huge sums in these companies, including the China Redevelopment Bank providing USD$7.33 billion in credit to Suntech in 2010, it is unlikely to let larger companies fail outright.

Also, Chinese PV manufacturers showed an ability to cut prices and operate at low or even negative margins in order to gain market share in the first half of 2009, and could do so again.

 

Consistent policy support and competition

While certain sectors of the industry remain in Europe and North America, China has become the global center of the solar photovoltaic industry, and will remain so at least through the mid-term future. Among all the factors supporting this trend, the Chinese government's strong commitment to maintaining a robust PV manufacturing industry stands out.

While nations like the United States, Germany and Switzerland have been able to keep PV manufacturing equipment and inverter industries within their borders, they are already in a position where it will be difficult to compete with established Chinese crystalline silicon PV manufacturers.

The United States has filed suit with the WTO over other export issues, and the U.S. Steelworkers Union has petitioned to the U.S. Trade Representative to take action focused on renewable energy manufacturing. However, such complaints underscore that nation's lack of consistent policy support for both a low-carbon economy and its own manufacturing. A more effective, forward-looking course for the United States, which is unlikely to achieve much on a national level from such complaints, would be to implement stronger policies to support its industry.

PV plant in France consisting of Yingli PV modules. Courtesy of Yingli Green Energy
PV plant in France consisting of Yingli PV modules. Courtesy of Yingli Green Energy

The growth stage of this industry is likely to be far from over, and Western nations can learn from the success of the Chinese PV industry. Nations that want to reap the benefits in job creation and economic development offered by PV and other renewable energy manufacturing industries must aggressively invest in and support these industries in order to remain competitive.