There was a lot of celebration about the apparent victory achieved by the American solar industry in the aftermath of the preliminary ruling on May 17th. The Department of Commerce decided in the matter of dumping of solar cells by Chinese solar entities, with the issuance of single document. The government, as many news networks condescendingly reported, has “slapped” Chinese companies to a tune of a 31% tariff for every exported cell price, payable retroactively to 90 days back from the day of the announcement. Excluding few subsidiaries on the published list, we have identified 46 companies, including two from Taiwan, committing the crime of manufacturing solar cells in Mainland China. Those were Motech with 500MW of cell capacity and DelSolar with 400MW. The findings are not final, and the companies listed have a chance to argue their case. Everybody else in the People’s Republic of China, which is not on the list, will pay a 249.96% tariff, conclusively closing their aspiration to reach the US market.
The news took few by surprise as anyone with exposure to the stock market knows that nine of the 46 companies on the list are US exchange-listed public entities, with quarterly releases clearly describing costs and average selling prices. Since China is not recognized as a free economy by the US government, it appears that none of those organizations received consideration for the global status and following covenants of the American regulatory bodies, including financial and operational disclosure. Instead, they were allocated by the Department of Commerce to economies of Thailand, a country currently without scale in solar, particularly due to lack of investment incentives. Most of the 300MW production in the country is in the solar module category, which imports the largest number of cells from China and Taiwan. Thailand is also a fertile land for solar plant development with new FiT, second to Australia in demand in Asia-Pacific, but this is not the fabrication exercise needed to benchmark cell production. Whether the objective was to use bureaucratic standards to purposely illustrate the high cost of production, or the commission lacked experience in assessing the state of the solar industry and its achievements, the outcome was going to be the same. Thailand would never match the scale, craftsmanship, and ultimately, the low costs of Mainland China.
Since the Department of Commerce never disclosed the calculation of the tariff formula and used another country to support its case, the decision was obviously disputed by the Chinese companies and China’s government using the very emotional word “unfair” in the rebuttal language. Wikipedia’s definition of "dumping" states and I quote, “a standard technical definition of dumping is the act of charging a lower price for a good in a foreign market than one charges for the same good in a domestic market”. It's simple enough for even an average investor to understand that pricing in Mainland China is below one on American markets, rendering the tariff inapplicable. Even if one replaced the word "domestic" with "Thailand", this author still believes that Thai ASP would not be that much different from American ones, or perhaps even lower. So what it comes down to is the part of equation that is not in this definition, the cost of production.
The cost of production for the nine companies on the list are documented and announced. The Chinese are the best in efficiency and cost; if one was comparing the costs of US companies like Sunpower and First Solar, they are higher than the Chinese. I do not think anyone can argue the statement that cell production costs are lowest in China, and certainly the nine US-listed companies found on the DOC list are exceling in it. Using American GAAP, those companies have never sold their product below the cost of production, so how then does the DOC assign the tariffs?
It is dangerously non-coincidental that the 250% tariff assigned to PRC-wide cell products exported to the US matches the pre-decision and the petition request made by SolarWorld AG (ETR:SWV), the most Americanized German company of late, and also the initiator, the advocate and the lobbyist for the American solar industry. If one knows the results of tariffs prior to the announcement, perhaps they have inside knowledge. In addition, if they can influence the results of tariffs, then certainly the objectivity is missed.
What this decision does to the American solar industry requires a definition what the American industry is, particularly through the eyes of CASM (Coalition for American Solar Manufacturing), whose founding fathers include German SolarWorld AG, Italian MX Solar and Helios Solar Works, a company associated with the French group Heliene. The other four companies who started CASM continue to remain anonymous, to avoid apparent retaliation from China. The CASM website features a list of 210 companies employing 17,000 American workers; among them: AGC (Association of General Contractors, Georgia Branch) with 3,500 members, without a word regarding the role solar plays for them; Allied Building Products, 3,500 strong, a company which currently advertises modules from ET Solar, a name found on the DOC list; Rexel Electric with 1,500 workers, a company headquartered in France and with branches globally, including China; and Sunfusion Solar, which adds 1,500 employees. This company features logos of every Chinese company on the DOC list, since their business orientation is module installation. What is confusing is that the majority of all the featured organizations do not produce cells, with the exception of the founding fathers, and dominantly SolarWorld. It appears that electricians, installers, enthusiasts of solar and individuals, since CASM features companies employing one person, could simply make a choice of not buying Chinese cells and modules, and that choice would make any Chinese product lose its 100% value without tariffs. With the exception of SolarWorld, tariffs on Chinese solar cells do not benefit 90% of the CASM members. SolarWorld has 1000 employees in the US.
The combined capacity of companies expected to pay 31% or up is around 20GW of cells and around 25GW of modules globally. The remaining PRC-wide companies exposed to the 250% tariff are good for another 8GW of cells and 9GW of modules.
So it appears that the American market, which is probably worth 2 to 3GW of demand in the current year, has been preserved - at least for time being - for SolarWorld, but is this the conclusion?
The reality is that with no competitive Chinese cells in the space, the gap will fill quickly with Taiwanese, Korean, Japanese and European cells. Based on some discussions and commentaries from various executives from the Chinese tier ones, they have already prepared measures to cope with the situation, and 9GW of cell capacity from Taiwan is waiting with open arms for new orders to send the modules that are free of tariff at a slightly higher cost, but deeply below the best weekend discount sale offered by SolarWorld.
So, what about the staples of the American solar industry, First Solar (FSLR) and Sunpower (SPWR), companies that chose to stay away from the noise and took no sides in the dispute? Unlike many American contractors, Applied Materials and other equipment manufacturers - all the experts in the country, including the majority of solar analysts - who chose the camp CASE (Coalition for Affordable Solar Energy) opposing the German action in the US, the two largest solar manufacturers remained neutral. Is this to their benefit?
First Solar just shut down its production in Germany and curtailed plans to build manufacturing in Vietnam. The home location was also reduced, plus some of the company’s lines in Malaysia are also staying idle. Another homegrown company, Sunpower, which now belongs to the French Corporation and oil giant Total, reduced its fab by 125MW in the Philippines and is running fewer orders from M.Setek, a Japanese corporation owned by Taiwanese AU Optronics. MEMC Electronics (WFR), which stopped selling wafers to third parties for the purpose of pushing on with EPC business, is using its own modules built for them by Asian-located Flextronics, made from wafers from factories located in China and Malaysia. It is painfully obvious that the industry’s leadership is not currently using USA as a place for the manufacture of cells. The solar industry is global, with manufacturing in places where the low cost of module assembly (not as much automated) and production of cells offers transition of this low cost to consumers. The Chinese have the best technology in the world, using equipment made by the US, German and Swiss companies. They currently produce a product that is better than those of the majority of European operators, including SolarWorld. The claims of inferiority in quality are part of a smear campaign; companies that expand tend to purchase state of the art equipment, while those who shrink do not. SolarWorld has been reducing its workforce and capacity; the Chinese have doubled in the same period.
If the above does not convince the reader that the whole purpose of this action was a direct act of political showmanship using the Chinese as a walking target to criticize their annoying strategy of support of renewables, and worse, penalize them for their success, no facts will matter.
So, what happens next? Those who know the industry are speaking against the action. REC Solar, a Norwegian company with a polysilicon plant in the US, strongly criticized the decision. Hemlock Semiconductor, another producer of poly, with its parent Dow Corning, sided against the ruling. Real people having real jobs and real businesses are getting worried that on the verge of energy revolution, where the price of solar is affordable and comparable to other sources of energy, a few malcontents incapable of competing will throw an obstacle against it, making the US an outsider.
China may also retaliate. Applied Materials is moving its solar business to China; Manz AG, another German company, is doing the same. There is a real threat that US companies could lose billions in sales of all other materials if China copies this illogical and emotional move.
In a time when Saudi Arabia plans to have 43GW of renewable sources of energy, when the EU is looking for more and more energy independence, seeking cost reduction over subsidies and allowing solar to grow on its own set of legs without financial backing, the USA is set to become the only country in the world where prices for solar energy may actually go up.
Ironically, none of the companies on the list will remain idle. Almost certainly all US-listed businesses will be selling into the US market for years, using its global connections and the power of their balance sheets. Suntech (STP), LDK (LDK), Canadian Solar (CSIQ), Jinko (JKS), and Hanwha (HSOL) have arrangements in North America for the production of modules, and in the case of Suntech, cells from Canada. Suntech has a module assembly plant in Arizona, as well. Trina (TSL) and Yingli (YGE) have each announced alternative arrangements to avoid the tariffs for the time being, with strong conviction statements to protect their own interests in the USA and defend themselves as well as possible.
The first move has been made, but the first move may not be the winning one, and despite CASM cheers nobody has truly won anything. The players just got moved around on the board. For the sake of the global growth of this excellent source of energy, and the technological revolution leading to the cleaner and greener future, hopefully the next move will have more logic behind it.
