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21 November 2019

Chinese solar manufacturers still chanting “grow or die” mantra

The backlog of global solar energy projects is growing, causing manufacturers to go into overdrive, with production capacity likely to double between 2018 and 2020. But with China dramatically reducing solar subsidies, as well as the continued trade-war with the US, the race for market share is likely to have a few casualties, allowing larger players to streak ahead if they stay aware of supply chain innovation.

Following quarterly figures last week, Canadian Solar announced its plan to increase its 11.2 GW PV module annual production capacity to 15 GW by 2020, largely relying on Chinese solar cell producers to help it keep up with module demand. South Korean rival Jinko Solar was not slow to follow suit, stating on Thursday its intention to grow production to 20 GW, from today’s level of 14.5 GW. As shipment levels in these companies operates extremely close to production capacity, this growth is an obvious move to grab more market share as solar orders start causing a backlog among other suppliers.

This follows the continued trend of production capacity growth within major players in solar manufacturing. Since 2018, Hanwha Q-Cells has grown its module production capacity from 5.6 GW to 10.7 GW, with LONGi also increasing from 7 GW to around 10 GW. In the US, First Solar has managed to sustain growth, with a comparatively modest capacity of 5.5 GW, up from 2.6 GW in 2018, but will hope that it will have a home-ground advantage in a US market subject to 30% trade tariffs.

From published information, we initially estimate that the annual global production capacity of solar modules will nearly double between 2018 and 2020, led by market leaders. The top 10 manufacturers accounted for approximately 65% of the 2018 market share, which will rise to around 70% in 2020 based on linear projections, when we would expect to see a global production capacity for PV modules of around 180 GW, with product shipment not falling far short.

This may however neglect the possibility of casualties within the industry, which may become more likely as Chinese manufacturers are squeezed by tariffs on US export and lack of subsidy.

China announced this week that it will cut subsidies for renewable power by 30%, hoping that large solar power stations will be able to compete with coal fired utilities with “grid price parity”. The $1.15 billion budget for subsidies in 2019 will be reduced to $806 million in 2020, primarily focused on subsidizing wind farms, biomass generators and distributed solar operators, but NOT utility-scale solar.

The squeeze on Chinese manufacturers has already started to show as the country has tried to eliminate solar subsidies, with ReneSola, Trina Solar, JA Solar among ‘Gigawatt-scale’ manufacturers all went private since 2016. The latter did so with a surprisingly low sale valuation of $362.1 million, despite revenues of $2.6 billion in 2017. This low price was likely to be a means of simply getting the deal done before Trump’s tariffs were introduced in 2018.

Going private for Chinese manufacturers means cutting ties with US investors, which could otherwise prove volatile due to the uncertainties around trade tariffs and ITC tax credits. Following the developer’s unwritten obligations to their own country, companies will be more confident to guarantee sustainable profit through domestic projects and supply chain.

With more domestic manufacturers, the Chinese marketplace has been crowded by large developers. While this is not an imminent threat as orders are rising, economies of scale will mean that companies with the largest production capacity will start to be preferable at auction and will find it easier to grab chunks of market share as small developers lose out. This week Shunfeng, which are by no means the smallest, indicated signs of cracking under this pressure, halting trading in its Hong Kong traded stocks as it tries to offload more of its manufacturing assets to recover from heavy debt.

This rapid expansion in module production capacity will however see dependence grow on China-based cell producers such as Aiko Solar and Tongwei, as companies plan to update their module production capacity faster than their in-house cell or wafer capacity.

The industry may have to be wary of new entries like SunPower spin-off Maxeon, who had previously placed more focus on the residential market. With large amounts of IP and innovation on its side as it moves to an Asian HQ, Maxeon has already stated its intentions to “outgrow” its market and become “one of the leaders in the industry as we see it, as it starts to consolidate,” with the help of primary shareholder Tianjin Zhoghuan Semiconductor (TZS). While module market leaders Jinko Solar currently accounts for around 12% of global mono-wafer capacity, TZS account for 33%, which may see Maxeon quickly develop into a competitive large-scale manufacturer. With such innovation in wafer and cell development, we would expect to see the number of acquisitions from large manufacturers like Jinko and JA Solar increase as an attempt to hold their competitive edge.