The opportunities for foreign companies in China’s solar sector are changing

As the European solar market demand continues to decrease and other countries are slow to fill the gap, China’s upstream solar sector will face an even greater oversupply situation throughout 2012-2014.  This oversupply will severely impact the opportunities available to foreign companies selling into China’s solar sector.

Background

As in other export industries, the Chinese central and provincial governments’ primary motivation for supporting the solar pv industry over the past 5-10 years has been based on the sector’s ability to create thousands of jobs and boost GDP growth.

As many of these suppliers ability to survive is threatened by a substantial global oversupply and solar incentive reductions in Europe, China will likely continue its support for its domestic solar industry, but in a different way.  While some of the strongest suppliers will continue to receive beneficial financing in the form of loans and grants, support will mostly shift downstream.  Due to the diverse benefits of supporting the downstream domestic solar sector, from political and environmental to economic, this support will likely continue strong for the coming few years.

What specifically are these benefits?

  • Preserve domestic jobs by creating an end market for the increasing module inventory
  • Help leading manufacturers stave off bankruptcy and ride out the industry downturn
  • Sustain a leading position in global pv manufacturing
  • Add much needed power generation capacity
  • Bolster its claims to Chinese citizens that it is taking real action to curb air pollution

Regarding pollution concerns, the government’s reputation among Chinese people as placing economic development before environment is becoming an increasingly serious issue.  As the communication between citizens across the country continues to expand through websites and mobile phone applications like Weibo and Weixin, the government will be faced with either the increased expense of controlling ever more information, or the expense of taking more action to actually reduce air, water and soil pollution which is the source of the criticisms themselves.  We will most likely see a mixture of both in the coming years.

Shifting landscape

As the market in China shifts from being strictly upstream to a more balanced market with domestic downstream demand, so do the opportunities afforded by foreign companies hoping to come to China and capitalize on the industry growth.

From 2005 – 2010, the opportunities for foreign companies were primarily around providing equipment, technology and services to the poly, wafer, cell and module manufacturers who’s products were historically competing on a global field.  Now, as the domestic projects market grows and upstream players keep their capital expenditures low, an opportunity is arising to provide products and technology to these domestic projects and project developers.

Whereas before, using foreign brand equipment and technology was seen as an advantage by mono and polysilicon pv module manufacturers who needed to prove to doubtful foreign project developers of their products’ quality, when selling to domestic projects the foreign brand can be a sign of disadvantage.  Take inverters for example; if GCL were to buy inverters for a domestic project, it will have the option of buying from one of more domestic inverter suppliers including well known names like Sungrow and Guanya.  Though Guanya’s quality may not be as proven as SMA’s, they do have local reference projects,  local service teams that can be deployed quickly in the event of product failure, and they are familiar with the difficult payment terms Chinese projects offer.

Some other key differences in the Chinese market include:

  • The pricing of non high-tech products such as modules, inverters and racking systems is fiercely competitive, with pricing below that of international rates.
  • Project margins are lower in China than in countries like Spain, Germany, and Italy, who in the past have had rich FITs which allowed project developers to use premium brand modules and inverters while still earning a healthy return on investment.
  • The primary buyers of energy and energy projects in China are the 5 major state-owned power generation companies.  Having connections within them is advantageous to securing sales.

New opportunities

An approach that is working for some foreign companies is to joint venture with Chinese partners who offer a local management team with strong sales-related connections, lower cost engineering and manufacturing staff, and easy access to lower cost component suppliers.  That said, the standard module and inverter technologies are already here and the quality continues to improve.  In order to garner the attention of a Chinese company that is worth partnering with, bringing improved technology plus a team of innovators who can help the company compete long term is a great method.   Bringing something new to the table is as important as ever.

Financing will be difficult for foreign investors to stomach because the payment terms are onerous for utility scale projects leading to a level of risk much higher than in more established markets like Europe.  However, changes happen quickly in China, sometimes overnight, and so if at some point the government decides they would like to have foreign lenders involved in projects, maybe we will see favorable changes here as well.

On this new playing field and with the new challenges, capitalizing on China’s solar sector has become even more difficult, yet not impossible.  With 2012 pv installations expected to reach 5-8GW, and 2013 expected to increase even more, the opportunity to sell into the downstream sector cannot be overlooked.  The sheer number of projects is leading to opportunities in Storage, Smart grid applications, Inverters, and O&M.  Without acting fast however, the landscape will surely change again.

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