Chapter 3 - China‟s Photovoltaic Industry
3.3. Cell and Module Industry
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3.3. Cell and Module Industry
These two sectors are the most mature in the PV production chain. Cell production is the
assembling of two different doped wafers together so that they form what is called the p-n junction which is responsible for the photovoltaic effect. After the cell is produced it is encapsulated in glass sheets to form a module which will be cooked in a laminating machine. The technology barriers to cell and module manufacturing are relatively low and in the case of module production also require smaller amounts of investment.
3.3.1. Sector Growth
China is the world‟s leading cell and module manufacturer showing impressive growth rates in the last 5 years. Unlike silicon processing, cell and especially module assembling is labor intensive which gives Chinese firms a competitive advantage. Labor is estimated at only 1-2% of the total cost of China‟s module production segment in contrast to 5-10% in developed countries. China capitalizes on its cheap labor into becoming the manufacturing hub of solar cells and modules.
Engineers just graduated from university can be found in China for a salary of only about 2,640 USD a year. (NYT, 2010) This therefore follows a similar pattern to the one which led it to become the manufacturing hub for other industries.
The first generation of Chinese PV manufacturers came from the solar cells sector. These companies, established in the 80‟s were state owned and depended entirely on imports of key equipment and whole production lines at times. As the country failed to present incentives for engagement in technology research and innovation, there were many bottlenecks in the lines and production was at around 20% of capacity. (Marigo, 2005)
The second generation of companies which started in the early 2000s was driven by market demand and was not dependent upon the central government priorities. Having followed the strong drive of the world PV market the sector showed rapid growth numbers. According to Energy Focus in 2011 there are more than 600 Chinese companies which are involved in the production of complete solar panels. It was estimated that in 2008 alone around 60 cell production companies existed and over 330 module encapsulating firms. (Ma, 2009) Despite raw material constraints, new companies are continuing to enter the industry, with overcapacity becoming a relevant issue in terms of 2012 production rates.
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Apart from the polysilicon production stage, each segment of the supply chain has a significant number of equipment suppliers. The downstream segments have a significantly higher number of suppliers as shown in table 3.4. Almost all solar cells manufacturing equipment can be found domestically. However due to quality issues some of the machinery is still imported at a high price.
For example, only half of the wafer cleaning machines is domestically produced.
The case is different for module encapsulating equipment which proposes the lowest technological barrier. Hundreds of machine manufacturers offer different levels of technological solutions which encourages fiercer competition and more options for companies involved in the segment.
Table 3.4 Manufacturing Equipment Providers in the PV Industry Ingot Wafer Cell Module
All firms 70 178 335 234
Turn-key production
lines 1 9 15 26
Source: Tour Arnaud de la, Glachant Matthieu, Meniere Yann, 2010. Innovation and International Technology Transfer: the Case of the China Photovoltaic Industry. Pg. 9.
http://econpapers.repec.org/paper/haljournl/hal-00498578.htm retrieved on April 2nd, 2011
Unlike the polysilicon, ingot and wafer segments, a significant number of turn-key companies exist in the cell and module segments that allow production to start with a minimal level of technological knowledge. (Tour et al, 2010) This is another catalyst which led to the fast growth of the industry.
Interaction with international suppliers should not be evaluated on the basis of production costs alone as it has unique benefits. This form of interaction gives manufacturers an opportunity to gain know how and give and receive feed backs regarding ways of improving the manufacturing process.
This accelerates the circulation of knowledge across the industry which helps Chinese manufacturers reach higher production standards. Imports of international equipment are a key component of the Diversification of the manufacturing industry and are crucial for Innovation and exchange of ideas.
3.3.2. Industry Leaders
Taking a look at the marketing strategies of Suntech and Yingli, two of China‟s leading cell and module producers helps us understand the dynamics of the downstream sectors.
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Suntech was founded in 2001 in Wuxi city, Jiangsu province under the support of the local government. Its founder, Dr. Shi Zhenrong has studied and worked for over ten years in Australia where he gained practical knowledge on the solar industry. In general Chinese PV companies have benefited greatly from the arrival of highly skilled executives that have received their education and expertise abroad and brought with them capital, professional network and technology. Many of the board members of China‟s leading PV companies are overseas Chinese that have studied and worked abroad. Chinese firms are developing specific programs to attract overseas educated mid-level management employees. (Tour et al, 2010)
In 2007, more than 98% of Suntech‟s product output was sold outside China with over 85% of its revenue coming from the European market. Germany was Suntech‟s largest sales destination accounting over half of its revenue followed by Spain. Being heavily dependent on foreign markets Suntech is suiting its production capabilities to match its market‟s needs. In 2006 it acquired Japanese PV module maker MSK in order to gain BIPV technology capacity. This acquisition is enabling the firm to further expand into Spain and penetrate new markets in Japan and the US which are considered to be major BIPV markets.
Suntech is also taking active steps in developing its markets as it started to build in 2009 a 30MW PV power plant in Texas in a joint venture with MMA renewable ventures. The company is expected to further develop the US market in coming years and is considered to be the best placed firm to enter the US market in the coming years. These international activities compensate for a very small domestic market. In 2010 China accounted for only 1-2% of Suntech‟s annual revenue.
With the rapid growth of the domestic market in the last three years, the company is expecting percentage to rise to 10% in the coming two years.
In general, Chinese producers are not major innovators. They devote much less revenue to R&D than other western firms, which usually accounts to less than 1% the yearly turnover. Surprisingly the number of patents introduced by Chinese companies in the downstream sectors is considered high (15-16%) which rates China third in number of patents. However, only 1% of Chinese patents are filed abroad, in contrast to 15% for Germany and 26% for Japan. The value of the downstream Chinese patented inventions is considered low.
Suntech is an exception in that aspect as it dedicates a greater portion of its revenue in research and development. In 2009 for example, about 5% of its revenues went to R&D projects. (Technology Review, 2010) It has also established research cooperation relations with several universities.
Suntech‟s Innovation is mostly directed at maintaining its high competitive level in the c-Si silicon
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solar cells in terms of energy conversion efficiency of mono-silicon cells, which as mentioned above is the most common wafer technology in China‟s domestic industry.
Yingli is China‟s third biggest solar cell producer with an estimated 1 GW production in 2010. It is one of the world‟s biggest vertically integrated firms although its wafer production capacity still lacks behind the domestic sector leaders. Unlike Suntech, Yingli was founded privately by Mr.
Miao Lianshen in 1987. In 1998 an investment company controlled by the local government of Gaoxin Districy in Baoding, Hebei province bought a 60% stake of Yingli which enabled the company to found Baoding Yingli new energy resources co.
Yingli mostly focuses on the European and US markets, however in recent years the company has shown interest in penetrating developing Asian markets. In 2008 Yingli signed contracts with a number of market developers in Korea with a total of 7 MW of PV modules for grid connection installations. (PVtech, 2008) In 2011 Yingli started entering the market in Japan with a 10 MW PV module distribution contract signed with YHS, a joint venture mostly involved with IBPV
development. (PVtech, 2011)
Perhaps due to its complete domestic vertical production line, Yingli has been selected as the major PV module supplier to the government‟s Golden Sun project. As mentioned in Chapter 2, this program is heavily subsidized by the ministry of finance which is expected to attribute 70% of subsidies to Yingli, thus turning it into China‟s leading PV modules supplier. (PVtech, 2010)
2010 was a very successful year for Chinese solar companies as Europe‟s market demand, driven by generous subsidies as a part of different FIT schemes, has raised capacity utilization to its limits.
Most leading Chinese firms such as Suntech, Yingli and LDK are already going through massive expansion programs. Yingli alone has been reported to increase its capacity by 70% in 2011.
These recent expansion plans come however in time where Governments in Europe are scaling down their solar subsidies. 2012 is expected to be much slower than previous years in terms of European market demand with Germany, Spain, Italy and the Czech Republic expected to reduce their FIT. European analysts are claiming that the amount of capacity being added is ahead of what the market can take. (Bloomberg Businessweek, 2011) Chinese manufacturers today have a new priority in diversifying their customer base.
3.3.3. Municipal Drivers Toward Industry Selection
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While most major companies have already made significant efforts in penetrating new markets in the US and Asia, the growing local market is retaining a growing strategic importance. The reason is that political pushback against solar subsidies is also driven by claims that foreign manufacturers are the ones benefiting the most from them. France‟s environment minister has claimed before that environmental policies should create jobs in France and not subsidize the Chinese industry.
China‟s domestic industry holds a significant advantage concerning the direct support it has been receiving from within. Chinese state-owned banks and municipal governments have been reported to offer unbeatable assistance to Chinese solar panel companies in what has been one of the industry‟s important competitive advantages. According to a report by the New York Times from January 2011, China‟s cheap labor is only one aspect of the advantage its domestic industry holds, whereas creating partnerships with local governments plays a greater supportive role. With the help of Municipal governments, firms can borrow up to two thirds of a factory construction cost with an interest rate lower than 5 percent. A similar venture in the United States would require a
significantly larger amount of equity as banks are reluctant to provide loans because of the financial crisis. Authorized loans are expected to have double digits interest rates.
As a result of favorable operating conditions companies have been shutting down factories and moving production lines to China. Such is the case with Evergreen, the Unites State‟s third largest solar panel maker, which has closed its main production factory in the states and has shifted its production to a joint venture with a Chinese company in central China‟s Wuhan. This has happened despite a total of USD 43 million was offered in assistance by the government of Massachusetts in recent years.
Evergreen is not alone. Other solar panels manufacturers are struggling in the United States such as Solyndra which has recently shut down one of its manufacturing plants and has delayed expansion of another. British BP has also shut down its solar panel manufacturing in Spain in order to expand on a joint venture in China. (Energyboom, 2010)
Apart from generous loans and low interest rates, municipal governments have been supportive in other aspects. For example, Hunan Sunzone Optoelectronics has received 22 acres of valuable urban land close to downtown Changsha at low prices which reduced the company‟s costs and increased its attractiveness to investors. Moreover, China‟s famous bureaucracy which is known for having a strict hand against foreign developers is extremely cooperative in the process of project authorization. Sunzone has reported receiving the permits necessary to build its factory in just three months. Another eight months are dedicated to building and equipping the factory after which the factory‟s capacity is intact and is ready to start production. The construction phase of building a
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similar factory in the United States will take over a year alone, with the preliminary permit procedure lasting an even longer time than that. (NYT, 2010)
These different measures are a result of the PV industry being categorized by the central government as a crucial expert industry. They are considered to be a standard procedure in all sectors of the industry. The United States government and other European governments have shown discontent over these measures referring to them as creating an illegal industry advantage.
According to the World Trade Organization regulations, countries should not provide subsidiaries to exporters as this lowers other countries‟ industry competitiveness and shakes the free market off balance. For the past decade China has failed to provide a list of its national subsidiaries as is expected from every WTO member, therefore frustrating mostly western governments. In October 2010 the Obama administration pledged to the WTO to investigate Beijing‟s subsidies to its clean energy industries. (NYT, October 15th, 2010) Governments around the world are looking for ways to reduce their reliance on China‟s solar industry in what is becoming a threat to its future growth.