China's not-so sunny solar sector

After years of state-sponsored overspending, China's solar industry needs restructuring amid huge debts, poor margins and widespread bankruptcy.

China’s solar power sector showcases the very best and worst of Chinese industrial policy. In a short few years, the industry has sucked up billions of dollars of cash, gained a dominant position in the global market but now needs restructuring amid huge debts, poor margins and widespread bankruptcy.

The country’s top 10 solar companies are $16 billion in the red, according to the ministry of industry and information technology. Across the entire industry, debts of $7.1 billion are coming up for repayment next year and several big companies are already either bankrupt or negotiating with creditors.

New York-listed Suntech Power, which was once the world’s biggest solar panel maker, is the most high profile victim of the uncontrolled expansion. The company’s lenders – eight Chinese banks – put it into bankruptcy after it defaulted on $540 million of convertible bonds in March.

“The default came as no surprise,” said one banker with experience of working for solar manufacturers. “The bonds were yielding close to 500% back in March, which made the rest of the industry look positively creditworthy.”

The inevitable bankruptcy sent its share price plummeting and prompted three directors to quit in August amid criticism of Suntech’s lack of internal controls and its failure to chart a route back to solvency. Its chief executive, David King, left in September.

However, the company has now reached an agreement with creditors, led by Clearwater Capital Partners and Spinnaker Capital, to convert the debt into Suntech shares and to take on a new strategic investor.

Help is close at hand. According to reports in the Chinese media, the company’s home town of Wuxi in Jiangsu province is bidding for Suntech through a consortium with GCL-Poly Energy, another local solar company. And yet another Jiangsu-based solar company, Shunfeng Photovoltaic, has also said that it is bidding.

This progress has come since Suntech appointed two experienced restructuring specialists: Michael Nacson and Kurt Metzger, who together have more than 45 years of experience in Asia. Metzger is a principal at Gem Advisory and previously worked for Ferrier Hodgson, a corporate debt restructuring and turnaround adviser, while Nacson is a principal at CSL, an Asia-based corporate transactions advisory company and outsourced CFO provider.

“Important steps forward are being taken towards a new Suntech,” said Zhou Weiping, Suntech’s president, in a statement. “The restructuring will allow us to cut our costs and optimise our margins and production. Although there is expected to be substantial dilution for our existing shareholders, we believe that these measures will put us in a better and stronger position.”

Suntech is the tip of the iceberg. LDK Solar also has huge operating losses and was late in paying debt, while the rest of the industry is beset by similar problems.

Special case

At a time when Xi Jinping, China’s president, is trying to reduce state support to the economy, the solar industry remains a special case. At the end of September, the finance ministry gave solar manufacturers a 50% value-added tax refund aimed at boosting domestic demand for solar projects.

Ministry officials have also set more ambitious targets for the installation of domestic solar capacity.

“The government’s increased target is primarily meant to help domestic solar panel manufacturers, which are facing numerous challenges,” said Ivy Poon, an analyst at credit rating agency Moody’s. “The government expects the rise in domestic solar power generation will help shift export sales of solar panels to local consumption.”

Throwing money at the problem is one solution, but no amount of cash can create scientists and engineers with the skills and experience to develop innovative new technology. Rather than going into research and development, China’s investment  — including credit lines of more than $40 billion — has flowed where it was easiest to deploy: even more capacity.

Suntech, for example, is still churning out panels despite being bankrupt for more than six months.

But the volume game is also under threat as the flood of cheap panels has provoked trade disputes with export partners. “After spending billions to build supply capacity in its solar industry, China is now committing billions more to create the demand,” said the banker.

China’s level of investment has put the EU and US in a difficult position. China’s support for renewable energy is laudable, given its primary dependence on coal, and an abundance of cheap solar panels seems like a good problem for the world to have. But the dominance of Chinese firms has been linked to solar bankruptcies in Germany (Q-Cells), Japan (Sharp Corp) and the US (Solyndra).

This has angered some Western manufacturers and created political pressure to put a stop to China’s aggressive state support.

As recently as 2010, China imported more solar products from the US than it exported, but that turned around completely during 2011, when the US recorded a $1.6 billion trade deficit in solar products, compared to a $400 million surplus a year earlier.

“A leading cause of this reversal is a massive surge in Chinese exports of dumped and subsidised solar cells and modules,” according to an inflammatory report by the US solar manufacturing industry.

“These subsidies include cash grants; discounted inputs such as polysilicon and aluminium; discounted land, power and water; preferential loans and directed credit, including multi-billion dollar loans and loan guarantees to individual Chinese solar manufacturers; tax incentives and rebates; export assistance grants; and many others.”

China has dumped even more panels in Europe. Exports to Europe totalled $28 billion during 2012 and comprised 90% of total overseas shipments, so it is no surprise that Europeans have been even more annoyed by China’s generosity to its solar industry.

In retaliation, the EU launched anti-dumping and anti-subsidy investigations against China and proposed a 47.6% duty on imported Chinese panels earlier this year. That issue is now settled after the two eventually agreed a deal in July.

“The agreement between the EU and China will set a minimum price for Chinese panels sold in Europe, which effectively ends a serious trade dispute,” said Rodney Stevens, manager of Ascenta’s Special Situation Resource Fund, one-third of which is invested in solar.”

However, EU manufacturers are already challenging the agreement and Chinese industry officials are clearly aware of the need to lead the industry into different markets.

China’s market leaders such as Yingli Green Energy, the country’s biggest, and JinkoSolar are returning to profitability after two years of losses, thanks largely to growing Asian demand. They will not be affected by the new rules, according to a report from Citic.


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