Chinese Zombies Emerging After Years of Solar Subsidies

Chinese Zombies Emerging After Years of Solar Subsidies

Only five solar-power vendors remain in a space built for 170 at a sprawling complex of offices stacked three stories high outside Xinyu city in China’s southeast. Locked doors and empty offices are what’s left of the government’s audacious plan to dominate the global solar industry. What happened in Xinyu is being replicated across China, which used subsidies and $47.5 billion of credit to wrest supremacy from Germany, Japan and the U.S., saddling an industry with losses for at least two years.“There is definitely a slew of smaller zombie companies out there that are going to continue to fall one by one,” said Angelo Zino, an analyst at S&P Capital IQ in New York. “You’ll see 10 to 12 names here when it all shakes out. The remaining names will either go bankrupt or be consolidated.”

Government support created manufacturing giants such as LDK Solar Co. (LDK) and Suntech Power Holdings Co. (STP) and made them dependent on financial aid from local authorities. As the price of PV products recovers, those companies remain crippled with debt and overcapacity, leaving a return to profits over the horizon.

China’s backing for the solar industry has left at least one factory producing photovoltaic products in half of the country’s 600 cities, according to the China Renewable Energy Society in Beijing. Panel prices even after gains in the past six months are 60 percent lower than in November 2010 and have forced into bankruptcy dozens of those companies, including the largest unit of Suntech, once the industry’s biggest producer.

Ghost Town

The market, known as Silicon Xinyu, was the first permanent trade fair of its kind in the country when it opened last year. Today, it’s a ghost town, highlighting the unfulfilled promise following China’s investment in building its solar industry.

“The state of the industry is not good,” said Ou Xiaoliang, the 23-year-old operating officer of Money Leopard New Energy, a developer of solar projects in rural China and one of the complex’s remaining tenants. “They went back to headquarters because there were no profits to be had here.”

LDK and Suntech are in the top tier of Chinese solar manufacturers that prospered with state support and sold shares to investors in New York in the past decade. China’s solar industry now accounts for seven out of every 10 solar panels produced worldwide and eight of the top 10 panel makers, according to data compiled by Bloomberg.

Factory Glut

All that building led to overcapacity. Were they to run at full speed, China’s factories could produce 49 gigawatts of solar panels a year, 10 times more than in 2008 and 61 percent more than installed globally last year, according to data compiled by Bloomberg. A gigawatt is about as much as what a new nuclear reactor can supply.

China’s involvement in the industry widened in 2004, when its suppliers began to boost capacity to meet demand created by incentives for solar projects in Germany, according to Jenny Chase, an industry analyst at Bloomberg New Energy Finance.

Sales soared as Europe and U.S. states from New Jersey to California offered incentives for renewable energy. Solar cell prices declined, making even more developments profitable. Annual global solar installations reached a record 30.5 gigawatts last year, more than 10 times that of 2007, according to London-based BNEF.

Bankruptcy Squeeze

Hundreds of manufacturers sprung up including Suntech and LDK. They built bigger and more automated factories than ever seen, squeezing prices lower and hurting Sharp Corp. of Japan, Q-Cells SE of Germany and Solyndra LLC of California. The latter two entered bankruptcy along with at least 30 other companies.

Prices tumbled because of excess supply. The cost of a solar cell is about 41 U.S. cents a watt today, down from $1.46 in 2010 and about $3 in 2004 when Germany started offering its incentives, according to BNEF data. Even Chinese companies suffered.

After years of overbuilding, China’s top 10 solar manufacturers have $28.8 billion of liabilities as of their latest filings, most of it owed to government-supported institutions, according to BNEF. The shakeout has touched every one of the manufacturers.

“The Chinese government has been pushing for consolidation to get just 10 or 20 major international players,” Chase said. “They realized that supporting them through manufacturing loans wasn’t really working.”

LDK Shrinks

At its height in 2011, Xinyu-based LDK had 30,000 employees churning out silicon wafers and solar panels. It now has about 10,000 workers, $2.8 billion in debt and ended the second quarter with $85 million in cash, the least since 2009. Its shares are 98 percent lower than their peak in September 2007.

LDK Solar failed to fully repay $23.8 million of dollar-denominated convertible bonds that matured April 15.

To stay alive, the local government is helping LDK negotiate 2 billion yuan ($327 million) in loans from lenders including China Development Bank Corp. and the China Construction Bank Corp. (939), a company spokesman said. LDK, which has had nine straight quarters of losses, this year sold a stake equivalent to 25 percent to Fulai Investments Ltd., led by Chinese businessman Cheng Kin Ming.

Other solar manufacturers in China are treading a similar path. Jiangsu-based Suntech, once the world’s largest solar-panel maker, defaulted on a $541 million equity-linked bond in March, forcing its main unit to enter into bankruptcy proceedings.

Directors Resign

Three of Suntech’s directors, including the former chairwoman, resigned in late August, saying the drain on the company’s cash flow is severe and that talks with bondholders are difficult. Suntech’s U.S.-listed shares, trading at about $1, are down 99 percent from a high of $88 in December 2007.

“Smaller companies are going to find it very difficult to survive as margins have narrowed,” Lewis Wan, Hong Kong-based chief investment officer at Pride Investments Group Ltd., which oversees $300 million.

The outlook is only now beginning to improve. JinkoSolar Holding Co. reported its first profit in almost two years in the second quarter, and LDK expects to return to profit this year. Yingli Green Energy Holding Co., which became the world’s biggest solar panel maker after Suntech ran into trouble, has been narrowing its losses.

Full Capacity

While LDK is a third of its peak size, its production of solar wafers — the silicon disks that convert sunlight into electricity — is running at almost full capacity compared with 30 percent at the beginning of the year, according to Chief Executive Officer Tong Xingxue. He’s planning to hire 2,000 to 3,000 more workers and rejects the notion that the government has wasted its money on subsidizing the industry.

“Our company is a taxpayer, we paid more than a billion yuan of taxes a year even during the most difficult period,” Tong said in an interview. LDK didn’t “suck blood from the government or waste money from taxpayers. People who think otherwise are childish and short-sighted.”

Even so, China’s solar industry is shrinking, and the bits that are prospering are doing so because of continuous support from the government.

China’s solar factories were running at half their capacity last year, Meng Xiangan, vice chairman of the Renewable Energy Society, said in an interview. Local governments are choosing which companies to champion and which to abandon, said Meng.

‘Own Children’

“This means lending a hand when potential problems occur,” Meng said. “The industry is like our own children. They will make mistakes before becoming adults. It is every family’s job to help and train them.’

The national government’s response is to boost purchases of solar panels within China, once a tiny market. This year, China and Japan are forecast to surpass Germany and Italy as the world’s biggest market for solar panels.

‘‘They’ve shifted to subsidizing the demand side,” said BNEF’s Chase.

China estimates it will spend as much as 1.8 trillion yuan ($294 billion) on renewable energy in the five years to 2015, Xie Zhenhua, vice chairman of the National Development and Reform Commission, said at a conference in Beijing in July.

In Xinyu, a city of 1.1 million in China’s Jiangxi province 1,615 kilometers from Beijing, the trading market was built with backing from local government and LDK, Xinyu’s biggest taxpayer, according to Peng Shaomin, the company’s director of media.

Fair’s Backer

The goal, according to a report in the Jiangxi Daily at the time of its opening in April 2012, was that the market would serve as an incubator, bringing together raw material providers, equipment makers and developers — all with the help of the local government. LDK was a principal backer of Silicon Xinyu, known officially as the Xinyu Photovoltaic Trade Market, and remains one of the main employers in the town.

Now that the building is mostly empty, it’s more obvious that there has “been some misallocation” of credit, said Zino, the analyst for S&P in New York. “For them and the other bigger, tier-one companies, the Chinese government will continue to support them to make sure those companies continue to run due to the number of employees they have.”

To contact Bloomberg News staff for this story: Feifei Shen in Beijing at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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