China’s Competitive Advantage in the Solar Industry: How Advantageous is it Really?

In the wake of the Solyndra bankruptcy and amidst reports of an impending trade dispute against China’s solar subsidies, many are asking how US solar manufacturers can possibly compete with Chinese manufacturers. Sure, Chinese solar companies now dominate global solar photovoltaic (PV) markets (see figure below), but that does not mean the US is not still playing an important role in the solar industry. If we just look at how many solar panels are being manufactured here, we miss the more important metric—the total value created by the solar industry in the United States. A significant portion of the revenue from solar projects comes not from manufacturing the panels themselves, but site preparation and system installation, which must be done locally with local jobs.

Many of the most successful US solar companies import the panels they sell from China but can still compete because of the locally-based service they provide. In 2010 the US solar industry exported almost 2 billion in solar energy products. Despite our importing of solar modules from China, we were a net exporter overall of solar technology. Our largest export is polysilicon (the feedstock for making crystalline silicon PV panels) and second largest was the capital equipment used to manufacturer solar PV products. And in fact, while we have a $278.3 billion trade deficit with China overall, we have a positive trade balance with China in the solar industry.

What this means is that one of the lowest value segments of the solar PV supply chain is made in China, not to mention one of the most energy-intensive. China is paying a significant environmental cost for its competitive advantage in the solar industry. At present, the boom in PV manufacturing in China directly conflicts with China’s national policies to decrease the energy and carbon intensity of its economy. Amidst reports of increasing numbers of environmental protests in China, last week protesters camped outside an east China-based solar panel manufacturer in response to toxic waste from the factory being dumped into a nearby river and killing fish.

Since most solar panels made in China are exported, China is getting little benefit from the emission free electricity the technology provides. New Chinese policies are trying to change this – just a few weeks ago a new feed-in tariff policy for solar photovoltaics was announced. The feed-in tariff program provides a subsidy to encourage the deployment of solar energy within China, which will likely be necessary to meet the recently augmented solar power capacity targets of 10 gigawatts installed by 2015, and 50 gigawatts installed by 2020. Note that just a few years ago the national target for solar PV installations by 2020 was just 1.6 gigawatts. The recent price drop in global PV module costs is likely one reason for the change of heart among Chinese policy makers, in addition to their wanting to see China reap the environmental benefits of the solar technology, and not just the costs.

Crystalline solar PV technology dominates the global solar market. Module cost has fallen sharply in recent years– down from $3.50/watt in 2008 to $1.75/watt in 2010 and between 1.15 and 1.20/watt in August 2011. This makes it harder for other solar technologies to compete—particularly ones that have less demonstration experience, and less manufacturing scale. The special circumstances of the Solyndra experience should not scare us away from investing in R&D for innovative solar technologies. US companies can still compete in advanced solar technologies. These technologies are high risk but potentially high reward. It is comparatively easy for counties like China to import the polysilicon feedstock and the capital equipment (production line machinery) for solar module manufacturing, but harder to import the technological know-how to enable innovation in this sector. The United States should focus more on the strategic expansion of our own solar industry through innovation in advanced technologies and by creating a domestic environment that supports the use of solar energy, instead of fighting trade wars with China.

2009 Global PV Market Shares: Cell, Module and Wafer Production

Notes: In 2009, total cell production was 10,660 MW, module production was 8,950 MW, and wafer production was 11,212 MW. Companies are color coded by country of primary ownership: Red=China, Green=Japan, Turquoise=Germany, Pink=Taiwan, Blue=USA, Purple=Canada, Yellow=South Korea.

Source: Author’s calculations, based on Greentech Media, “PV News: The Solar Industry’s Monthly Market Monitor,” October 2010; “Solar Photovoltaic (PV) Supply Chain - Global Market Size and Company Analysis of Polysilicon, Wafers, PV Cells and Solar PV Modules to 2015,” Renewable Energy World, February 1, 2011.

For more information, see this list of resources on the solar trade case compiled by ChinaFAQs.

Image copyright Wayne National Forest and licensed for reuse under this Creative Commons License.