Waste of energy

Shi: once China’s richest man, he’s been ousted from his bankrupt firm

As far as symbolic steps go, it was quite a potent one. Shi Zhengrong’s family returned home one day and were surprised to find that their swimming pool had been filled in with concrete. Shi told them that he had ordered this because the pool was a waste of energy and resources.

This is what you might expect from a scientist with a mission to end our reliance on fossil fuels. And just as Shi was calling in the cement mixers, his company Suntech Power was emerging as the world’s biggest maker of solar panels. Shi said his goal was to wean power stations off their reliance on coal and help the world in its battle against global warming.

In January 2009 Shi and his firm had reached a peak: Suntech’s New York-listed stock hit $90, valuing his personal stake at $1.7 billion. He was being cited as a model example of China’s new class of globally influential tycoons.

Shi was actually born to a poor family called Chen in 1963. But he was given away by his parents and his surname was changed. A smart child, he was able to enroll in university at 16 and earned a scholarship to study under the Australian solar scientist Martin Green. By 1995, Shi had already registered 10 patents relating to solar cell technology, and in 2001 he returned to China planning to use its low cost manufacturing expertise to commercialise his innovations.

Suntech was soon selling its panels in over 80 countries and listed in the US in early 2006. For a short period Shi was even ranked as China’s richest man. However, the past eighteen months have been bleak for Shi and Suntech. As we reported in WiC187, the firm was declared insolvent by a Chinese judge in March after it was unable to repay massive debts to its banks, and it also defaulted on a $500 million international bond.

The problem? In the last couple of years the price of solar panels collapsed, leading the formerly high-flying Suntech to go deep into the red. Shi was initially ousted as CEO last August and subsequently lost the company chairmanship role early this year too. By the time of the firm’s bankruptcy, Suntech’s stock was trading at $0.39 and its net debt was 10 times its market capitalisation.

The Chinese authorities then confiscated Shi’s passport to stop him going abroad. Local newspapers thought this had something to do with his control of Asia Silicon, a Suntech supplier. CBN described as “suspicious” a contract Suntech had signed with the firm to buy polysilicon at “high prices”. There was also scrutiny over advance payments and interest free loans Suntech made to Asia Silicon.

Nor was Suntech the only clean energy firm in trouble. In WiC 196 we noted that the wind turbine maker Sinovel was also experiencing problems. Its charismatic founder – like Shi – had grabbed an opportunity to build a firm with staggering speed. But Sinovel also sank into losses, much of these stemming from industry overcapacity. Indeed, after going public in Shanghai in 2011 at Rmb90 ($14.65) per share, Sinovel’s stock had dropped to about Rmb4 in June. Two rounds of chairmen have suddenly resigned and the company has been forced to admit to an accounting error that overstated 2011 profits.

Investors were further spooked when the regulator announced that it was launching a further investigation into the company. Sinovel is struggling with Rmb8.5 billion of unsold inventory and analysts worry that, like Suntech, it could go under too.

How has this happened in clean energy, an industry that Beijing has determined to be a priority? The hope was to focus on the solar and wind sectors as a means to leapfrog from low-value manufacturing to industries more likely to benefit from scientific innovation and worldwide sales growth. But it was also because of China’s own environmental concerns. As we reported in WiC178, air pollution is now a major problem. For instance, the capital Beijing was suffering from a toxic smog this January that produced PM2.5 readings (PM2.5 is a type of soot) around 25 times greater than levels said to be safe in the US.

Much of China’s air pollution can be explained by the way that it generates power. Around 75% of electricity is made by burning coal. So if it is to improve air quality, China needs to bet big on renewable sources like solar and wind.

The problem? Having seen renewable energy classed as a strategic industry, the banks and local governments rushed headlong into financing it. This led to overcapacity in both solar and wind. In the case of solar, Chinese firms made panels capable of generating 37.66 gigawatts of solar power, much of them for export. But output surged just as demand in places like Europe was falling away. Panel prices collapsed to a point where production was lossmaking after debt servicing was taken into account.

To make matters worse Chinese producers were then hit by tariffs in the US after allegations of dumping. Threats of European levies have followed (sparking talk of a trade war with the EU and reprisals from China on wine, see WiC197).

By last year it was obvious that the commercial situation for wind power firms was also deteriorating. Again, the rush to manufacture turbines meant that there was more output than customers were demanding. Another problem was identified by planners in China’s energy industry: turbines were being installed on wind farms across China that weren’t being connected to the power grid in what looked like another classic case of wasteful spending.

This points to one of the central contradictions in Beijing’s industrial policy. China has shown it can scale up in new industries quicker than others. As we pointed out in WiC30 back in late 2009 GE’s Jeff Immelt and venture capitalist John Doerr jointly penned an opinion piece for the Washington Post in which they said China was already investing 10 times as much as the Americans in clean power and had a “breathtaking commitment” to winning the race to dominate alternative energies.

But while resources can be marshalled quickly, they are rarely mobilised in an efficient way or in a manner in which businesses in the sector can survive without cheap loans or government subsidies.

The other flaw in the system is the way in which rival provinces plunge headlong into encouraging their own local champions to build more and more capacity. The absence of market-based lending is somewhat to blame, leading to serious misallocation of capital. Indeed, in the same article featuring Immelt and Doerr three years ago (headline: Green but is it sustainable?), we cited a warning from local magazine Oriental Weekly that a bubble was already inflating in China’s solar panel production.

Of course, some companies will ultimately prosper. Renewable power remains hugely important as China and the world tries to combat global warming.

But in the shorter term, it looks like a painful round of consolidation is required. The overcapacity isn’t going away soon, and a smaller number of stronger players will be better placed to tough it out. The question is whether local governments will thwart takeovers to keep control of the firms they backed.

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