The Solar Bloodbath

Obama has repeatedly said that the US cannot afford to lose to China in the solar panel industry.  Well, I am (not) pleased to report that the US is being very competitive in this race.  Very.

Surely you are saying to yourself: SWP has finally lost it.  Has he forgotten Solyndra? Abound Solar?  First Solar?

Of course I haven’t forgotten these testaments to industrial planning and the miraculous insights that Nobel Prize winners in physics bring to it.  It’s just that the vaunted Chinese have done just as badly.  The competition to lose the most is very fierce indeed:

As solar panel prices continue to march lower, Chinese solar companies are struggling with heavy debt loads, triggering expectations many will be forced to seek a new infusion of funds through takeovers or mergers.

Suntech Power Holdings (STP.N) could be liable for hundreds of millions in new payments after it disclosed a potential fraud by a partner, while peers such as LDK Solar (LDK.N), JA Solar Holdings Co (JASO.O), Trina Solar (TSL.N) and Yingli Green Energy Holding Co (YGE.N) are also feeling pressure.

With prices for solar panels barely covering the cost to build them, dozens of small Chinese solar companies are believed to have shut their doors, and equity investors have fled the sector, sending share prices of the U.S.-listed Chinese companies down more than 85 percent since early 2011.

Most of the Chinese solar companies will be able to stay open only if government lenders continue to keep lines of credit open despite forecasts of several more quarters of red ink.


Since Jiangxi LDK Solar Hi-Tech Co. Ltd. settled in Xinyu, in southeastern China’s Jiangxi Province, the local government has gone out of its way to give it preferential treatment, making the company a focus of the local economy.

However, the manufacturer of solar modules, along with other similar Chinese firms, has encountered difficult times of late. In the past few years, these companies have built up large inventories even as demand has fallen off and profits all but disappeared. Naturally, LDK Solar ran up large debts.

All of this left the government with a choice: let the company fend for itself, or intervene, doubling down on its support. In fact, this wasn’t much of a choice, as the government has reflexively lent even more support to the troubled company, bringing into full view the relationship between government and business in China.

Governments at the city and provincial levels have taken steps to protect LDK Solar’s creditors and prevent the firm from filing bankruptcy. At the same time, the government has tried to find a white knight to buy the company, which employs thousands in Xinyu.

The situation in China’s solar industry and especially at LDK Solar shows the degree to which government becomes involved, for better or worse, in the market in China and how some companies become too big to fail.

Isn’t Chu a Chinese name?  Just wondering.

The Chinese and Americans join the Germans and Spanish in the solar bloodbath.  Billions have been thrown down this rathole.

Remind me again why we have to-HAVE TO-win this competition?  If the Chinese want to subsidize the production of solar panels, far be it from me to stop them.  Consumers around the world can benefit from China’s beneficence-and stupidity.  There is no reason for us to imitate it.

In the comments on an earlier post, pahoben and I exchanged views about the analogy between China circa 2012 and Japan circa 1990s.  I remember that in the 1990s, Smart People like Lester Thurow told us that America’s economic fate hinged on who “won” the flat panel display industry.  Really?  How’s that looking now?  And what is so wonderful about “winning” the competition to produce products that will inevitably become commoditized-as flat panels did?

Now we are being told by Smart People like Tooltime Tom Friedman and our very own POTUS that solar is the future, my boy.

How is that supposed to work, since everybody who tries to force feed this “business” loses money?

I’ve seen that movie repeatedly.  I know how it comes out.  Badly.

Profits are a signal that guide resources to their highest value use.  If subsidized companies can’t earn a profit, what does that tell you?

It tells me that this is a competition that we should gladly let some other sucker win.  But the Smart Set in the US seems hell bent on winning the Biggest Sucker competition.  Can’t we just be slacker losers instead?  It’s much cheaper.

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About Craig Pirrong 238 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

Visit: Streetwise Professor

1 Comment on The Solar Bloodbath

  1. You show a complete lack of understanding of the energy sector and of technology. You should stick to writing about something you know something about.

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