Commentary on Political Economy

Wednesday 10 April 2024

Chinese solar companies pay a high price for an unassailable lead

10 Apr 2024

Europe and China’s battle over the solar industry has been going on for two decades. Chinese solar-panel makers are winning with an unassailable lead: they now account for 80 per cent of global production capacity. But the cost of that victory is now looking too high.

China dominates the solar panel sector’s entire supply chain. Prices, which are nearly two-thirds lower than those of US counterparts, have helped it to win market share. Every year, this price gap widens. There was another 40 per cent price cut in 2023.

China’s dominance has come from years of investment. It ploughed more than $130bn into the solar industry last year. Chinese makers are able to build more than 860 gigawatts of solar modules annually.

Due to the sheer size of the domestic market — which added a record 217GW of solar last year — Chinese companies invested heavily in larger-scale manufacturing and automation.

Another 600GW of annual capacity is expected to start operations this year. That would be enough to cover the world’s total demand until 2032, according to energy research group Wood Mackenzie.

Clearly, the fact that there is now more than enough affordable supply of solar products is good news for the environment and global efforts to shift to cleaner forms of energy production. But the problem is the pace of growth has been much too fast. Even its vast domestic market cannot soak up that excess capacity.

The weak stock performance of Chinese solar cell manufacturers reflects that mismatch. Longi Green Energy Technology, JA Solar Technology and Trina Solar are down more than 50 per cent in the past year. Longi, China’s largest business in the sector, trades at 18 times forward earnings — less than half the valuation of smaller US peers. Operating margins have halved over the past four years.

The European Commission has started probes into bids by Chinese firms for projects in the region. The EU’s solar industry has blamed a flood of Chinese imports for losses and plant closures by several European panel makers. With that market looking increasingly unlikely to provide the growth Chinese makers need, the forecast looks decidedly cloudy.

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