Yesterday I read a Raymond James analyst report (by Pavel Molchanov and Alex Morris) mentioning a Financial Times report that a senior Chinese government official said the country’s solar industry was like a “patient on life support,” that it would have to go through a painful series of cutbacks that would need to take place through “powerful market competition and cruel elimination,” and that support from the central government would not be forthcoming.
That’s tough love, especially considering many feel Chinese solar subsidies (through loose credit terms) are what drove the industry to its current 2X oversupply situation. (To be fair, it didn’t help that many Western countries cut installation subsidies at the same time capacity was exploding.)
Unfortunately, as Raymond James and the FT also reported, it is local Chinese governments that have been giving manufacturers support lately. The cities of Xinyu and Wuxi have given LDK and Suntech $80 million and $32 million, respectively. This looks like a classic case of loss aversion, which as I explained in another post makes humans prone to make unfortunate gambles when facing difficult choices.
Here’s the dilemma I imagine local Chinese government officials face: “Well, we have invested $100 million in our local solar champion. In any event, they employ hundreds (or thousands) of people here. If they fail we will lose our investment and all those jobs. Everyone says there is going to be a shakeout and that by 2014 companies will be able to make money. So, if we invest another $30 million, we give our champion a chance to succeed. We may get our entire investment back, save those jobs, and have an industry for the future. I also won’t have to explain why we lost $100 million. Besides, even if the whole thing goes south, losing $130 million isn’t really any worse for me politically than losing $100 million. On the other hand, if we don’t invest our company will almost certainly fail and we will lose all of our initial investment and those jobs. Seems like $30 million is worth it to give ourselves a chance at total redemption if the alternative is almost certain failure.”
Thus, while a capacity rationalization may make sense for the PV module manufacturing industry as a whole, it may take a while if governments or investors play a high-stakes game of chicken hoping their companies will be among the survivors.
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