Light warfare

This week WiC introduces the Bayerischer Klaps-Tanz as a management tool. For those more attuned to McKinsey terminology, this one translates from German as the Bavarian Slap Dance. We think this folk jig is particularly worthy of study for the bosses of Chinese solar firms.

Why? The dancing style seems to sum up relations with their German counterparts. One moment they are arm-in-arm with a friendly chap in lederhosen, the next they’re on the receiving end of a stinging slap to the face.

That follows news last week that German solar firm Solibro was saved from financial disaster by a little-known Chinese peer called Hanergy.

Smiles all round, for that one.

But only a few days before Solibro’s rescue, another German solar manufacturer was in the mood for slapping. Its US subsidiary led a campaign against its Chinese rivals, claiming price dumping and unfair subsidies.

The US authorities agreed, imposing punitive tariffs. Now it looks like Europe will be the next battleground for a similar trade dispute and the fear is that the Chinese response could be aggressive too.

That’s the problem with this particular Bavarian jig: no dancers can escape being slapped…

Have you heard of Hanergy?

That’s a question also asked by people in the industry – such is the company’s rapid emergence as a solar panel maker.

Billing itself as China’s largest non-state-owned enterprise in clean power, Hanergy was established as a hydropower firm in 1994. Later it branched out into wind farms before making a bigger move (not much more than two years ago) into solar, with a series of new plants focusing on thin-film panel production.

The most recent facility broke ground in Haikou on Hainan island this year and the company says that its production there will take its thin-film photovoltaic (PV) capacity to around 2GW, making it the world’s largest thin-film cell maker.

As such, Hanergy’s rise marks a wider trend in which Chinese firms have raced to dominance in solar panels – from just 1% of the world’s total in 2001 to 45% in 2010.

So is Hanergy going to be hit by the US tariffs?

The duties, which are likely to be confirmed in October, were imposed by the US Commerce Department in response to a complaint from seven firms operating in the US, led by Germany’s SolarWorld. Fortunately for Hanergy, its own operations don’t fall within the scope of the complaint, which has targeted crystalline silicon solar cells.

Hanergy’s own strategy is to build thin-film panels, which rely on amorphous silicon or another substrate technology called CIGS (copper, indium, gallium and selenium) rather than the more commonly used crystalline silicon. Thin-film production is the less established solar technology and it has its detractors, especially when mainstream silicon prices are lower.

But its fans say it will soon reach a similar sunlight-to-electricity conversion rate to silicon-based solar panels. Design-wise it has the advantage too that it can be integrated into roof coverings and it weighs less. Importantly, Hanergy claims thin-film panels will cost a lot less to make in future.

Most of the other Chinese solar manufacturers concentrate on silicon panel production and many have been caught up in the US tariff net, with provisional tariffs of 31% slapped on 61 firms. Other companies deemed to have failed to respond to the US Commerce Department’s inquiries were hit with much bigger tariffs – in some cases equating to two and a half times their panel prices.

The case was based on unfair cost advantages for the Chinese?

Industry research suggests that the costs for Chinese firms are between 20% and 30% lower than those for equivalent American production. But the complaint from the group led by SolarWorld is that the Chinese couldn’t afford to sell panels at these levels without subsidies, especially preferential loans, cheap land as well as tax exemptions, incentives and rebates.

The Chinese response is that its manufacturers have got prices down through savings that come from more efficient production, especially via scale and vertical integration. They also bridle at the accusations of industry subsidies, pointing out that governments in Europe and North America have devoted billions of dollars to consumer incentives and production credits designed to get more consumers to switch to solar.

How about the Hanergy business model?

Hanergy’s rapid rise has led to questions in the Chinese media too, especially about how it is funding its expansion.

The firm’s bosses say they rely on cash flows from their other business lines, most notably hydropower. They have also been able to access financing from the China Development Bank (CDB), starting with a loan of Rmb4.3 billion ($674.8 million) in 2010. A further Rmb30 billion credit line was extended by CDB in November last year. But it’s also likely that the local governments hosting Hanergy’s new factories have been footing some of the early bill.

The problem, says Liu Wenping, vice president at Hongya Shidai Investment Advisory, is that working out the terms of this financing is tricky. And Liu told NetEase Finance, a news site, that Hanergy looks like it is using land granted by its hosts as collateral to obtain loans for equipment and early running costs. “Hanergy is one of the enterprises using government resources to the limit,” he warned.

So why buy a firm in high-cost Germany?

According to Jason Chow, senior vice-president of Hanergy Industrial Photovoltaics Group, the prize is Solibro’s thin-film technology – its expertise in CIGS, particularly – where Hanergy sees scope to drive production costs down a lot more in future.

After the completion of the acquisition, Solibro will increase its yearly capacity to 100 MW to supply customers in Europe. But although Hanergy bosses say that Solibro’s plant in Thalheim will stay open, the goal is surely to replicate production at home in China, bringing costs down further.

That’s because China already has too many solar panel producers, which has led to the global glut in supply and falling prices. The survivors will be those who can get to lowest-cost production, or strike out on their own with a more proprietary technology.

With its thin-film strategy, Hanergy is hoping it will be able to do both.

The Solibro takeover also highlights some contrasting experiences in the industry. While Chinese panel production has risen, there is still hardly any domestic market for the final product, with levels of local installation still low. Usha Haley and George Haley told the Financial Times last month that the country’s current solar manufacturing capacity is 32 times greater than China’s domestic consumption.

Of course, it doesn’t bode well that China is exporting 95% of its panels when trade tensions are on the rise in some of its key foreign markets.

In Germany the focus is different – more on slowing down the rate of panel installation, following legislation a decade ago in which power firms were obliged to buy electricity generated by green producers at higher prices.

Struggling with budgetary conditions, the government has been trying to reduce the payouts on these feed-in tariffs.

Another difference: solar markets like Germany’s are now deep into a painful period of consolidation. But in China, the mood remains robust – unsustainably so, if you ask some commentators.

Solar firms retort that they expect to get another boost from renewed stimulus spending in the sector this year. Of course, that would do little to convince SolarWorld and its fellow consortium members that their complaints of unfair competition are off the mark.

Meanwhile the Chinese firms see investment opportunities and even plan to buy struggling North American and European panel makers.

In Germany’s case the first Chinese bid for a struggling solar company was in January, when LDK Solar purchased Sunways. Now Hanergy has made its move too. “The industry is obviously in consolidation. With more companies filing for bankruptcy, that means mergers and acquisitions are necessary and will become the norm,” Hanergy’s Chow told reporters.

But what happens next with the anti-dumping action?

The tariffs look like being confirmed in the US in October, despite warnings from opponents that they will have little effect in boosting the business prospects of US-based solar manufacturers.

That’s because the duties apply to silicon solar cells, not to the modules that they are assembled into, so Chinese manufacturers will probably look to serve the US market by buying cells from alternative sources. One expectation is that many will source from Taiwan, dodging the new duties. In the meantime, the dispute can only add to a tense trade mood between Washington and Beijing. The Chinese Ministry of Commerce reacted to the ruling last month by expressing its “strong displeasure” and complaining that the US was “deliberately provoking trade friction in the clean energy sector”.

But the next stop could be the European market, after SolarWorld’s chief executive Frank Asbeck told Bloomberg that he saw the action in the US as “a first step”. He added: “It’s a signal for Europe, where we plan to file a similar complaint at mid-year.”

Last month’s move also opened up deeper splits within the solar industry in North America. The rift is between the firms that make solar panels and the companies that install them (and who oppose tariffs on the grounds that they make solar power more expensive).

But the deepening row is also pulling in a third group: those selling solar manufacturing equipment and other upstream products, especially silicon, to Chinese buyers. Factor in these export revenues, and the US is actually running a trade surplus with the Chinese at industry level, despite the pre-eminence of the Chinese in the panel-making segment.

For these companies, the fear is that the tariffs will trigger retaliatory action in Beijing that will hurt their own businesses. And sure enough, the first signs of escalation occurred just days after the tariff move. China filed a trade complaint with the WTO challenging America’s countervailing duties against 22 Chinese export products including solar cells.

The next steps in this particular dance look like it could hurt all parties.

Keeping track: in WiC154 we looked at Hanergy’s ambitious M&A strategy, with the little-known Chinese solar firm purchasing Germany’s Solibro. In spite of troubled times for the sector, the Chinese firm said it was betting big on new thin-film cell technologies, and acquiring the technology by purchasing overseas firms. This week Hanergy upped its commitment with the announcement that it is purchasing MiaSole, another thin-film solar firm, this time from the US. The cost of the deal was estimated to be just under $120 million. Hanergy’s boss Li Hejun commented: “We believe the trend of global solar development is to be thin-film. The secret to survival depends on whoever has the technology.” (Jan 11, 2013)

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