Streetwise Professor

August 15, 2012


Filed under: Economics,Politics,Regulation — The Professor @ 7:16 pm

Obama has repeatedly said that the US cannot afford to lose to China in the solar panel industry.  Well, I am (not) pleased to report that the US is being very competitive in this race.  Very.

Surely you are saying to yourself: SWP has finally lost it.  Has he forgotten Solyndra? Abound Solar?  First Solar?

Of course I haven’t forgotten these testaments to industrial planning and the miraculous insights that Nobel Prize winners in physics bring to it.  It’s just that the vaunted Chinese have done just as badly.  The competition to lose the most is very fierce indeed:

As solar panel prices continue to march lower, Chinese solar companies are struggling with heavy debt loads, triggering expectations many will be forced to seek a new infusion of funds through takeovers or mergers.

Suntech Power Holdings (STP.N) could be liable for hundreds of millions in new payments after it disclosed a potential fraud by a partner, while peers such as LDK Solar (LDK.N), JA Solar Holdings Co (JASO.O), Trina Solar (TSL.N) and Yingli Green Energy Holding Co (YGE.N) are also feeling pressure.

With prices for solar panels barely covering the cost to build them, dozens of small Chinese solar companies are believed to have shut their doors, and equity investors have fled the sector, sending share prices of the U.S.-listed Chinese companies down more than 85 percent since early 2011.

Most of the Chinese solar companies will be able to stay open only if government lenders continue to keep lines of credit open despite forecasts of several more quarters of red ink.


Since Jiangxi LDK Solar Hi-Tech Co. Ltd. settled in Xinyu, in southeastern China’s Jiangxi Province, the local government has gone out of its way to give it preferential treatment, making the company a focus of the local economy.

However, the manufacturer of solar modules, along with other similar Chinese firms, has encountered difficult times of late. In the past few years, these companies have built up large inventories even as demand has fallen off and profits all but disappeared. Naturally, LDK Solar ran up large debts.

All of this left the government with a choice: let the company fend for itself, or intervene, doubling down on its support. In fact, this wasn’t much of a choice, as the government has reflexively lent even more support to the troubled company, bringing into full view the relationship between government and business in China.

Governments at the city and provincial levels have taken steps to protect LDK Solar’s creditors and prevent the firm from filing bankruptcy. At the same time, the government has tried to find a white knight to buy the company, which employs thousands in Xinyu.

The situation in China’s solar industry and especially at LDK Solar shows the degree to which government becomes involved, for better or worse, in the market in China and how some companies become too big to fail.

Isn’t Chu a Chinese name?  Just wondering.

The Chinese and Americans join the Germans and Spanish in the solar bloodbath.  Billions have been thrown down this rathole.

Remind me again why we have to-HAVE TO-win this competition?  If the Chinese want to subsidize the production of solar panels, far be it from me to stop them.  Consumers around the world can benefit from China’s beneficence-and stupidity.  There is no reason for us to imitate it.

In the comments on an earlier post, pahoben and I exchanged views about the analogy between China circa 2012 and Japan circa 1990s.  I remember that in the 1990s, Smart People like Lester Thurow told us that America’s economic fate hinged on who “won” the flat panel display industry.  Really?  How’s that looking now?  And what is so wonderful about “winning” the competition to produce products that will inevitably become commoditized-as flat panels did?

Now we are being told by Smart People like Tooltime Tom Friedman and our very own POTUS that solar is the future, my boy.

How is that supposed to work, since everybody who tries to force feed this “business” loses money?

I’ve seen that movie repeatedly.  I know how it comes out.  Badly.

Profits are a signal that guide resources to their highest value use.  If subsidized companies can’t earn a profit, what does that tell you?

It tells me that this is a competition that we should gladly let some other sucker win.  But the Smart Set in the US seems hell bent on winning the Biggest Sucker competition.  Can’t we just be slacker losers instead?  It’s much cheaper.

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  1. Gin up the losses per Keynesian make-work job created, and give them to your political friends.

    Comment by vbounded — August 15, 2012 @ 7:56 pm

  2. One thing I can’t figure out is why Obama is trying to hinder additional use of natural gas by demonizing hydrofracking and, at the same time is hell bent on throwing money at electric cars and solar panels.

    Why are we not creating as many domestic jobs as possible and reducing foreign oil oil imports by using federal highway funds to improve roads and bridges in the Marcellus and Utica plays thereby allowing heavy trucks to access areas where current roads aren’t sufficient? Why are the feds not making it a priority to help sort out the pipeline infrastructure upgrades we need to handle new domestic production? Where are the feds in getting nat gas exports up and running? Why are we subsidizing ethanol production and not pushing use of nat gas as a motor fuel (and lack of consumer point of sale infrastructure is no excuse)?

    Why are we wasting money subsidizing electric cars using battery technology that still needs much more research and development? Why not use those subsidies to back additional R&D in fuel cells and electric car batteries? If we are subsidizing any car production, why not subsidize hybrid technologies?

    We have the most screwed up energy policies. Government is the solution to our energy problems, they are the cause of many of them.

    Comment by Charles — August 15, 2012 @ 8:06 pm

  3. My favorite solar energy story is from Spain. The government was handsomely subsidizing solar energy production into the grid. It was noticed that some of the solar facilities were producing large amounts of electricity through the night. This was so puzzling that curiosity got the better of some bureaucrat who decided to investigate how this was possible. It turned out the subsidies were so good that companies were renting large diesel generators and running them through the night and producing into the grid at a profit as electricity from a solar facility.

    Comment by pahoben — August 16, 2012 @ 9:57 am

  4. The problem isn’t that solar won’t ever become important, it’s that the technology is still so immature that it can’t produce produce power economically. If residential and commercial users need subsidies to simply buy panels, and the producers themselves need subsidies to be able to produce them for sale at the subsidized price, it’s pretty good evidence that solar is not yet ready for prime time.

    The technology simply isn’t ready for commercialization. It’s like someone trying to build a personal computer with vacuum tubes in the 1940s. Instead, of putting money into industry subsidies, it’s basic research that should be funded and X-Prizes offered for achieving important benchmarks. It would be far cheaper and wouldn’t lead to malinvestment.

    Solar technology has come a long way in the past decade, but it’s still about 10-20 years before it’ll be beneficial to residents without subsidies, and even then probably only in areas where there is near constant sunlight all year – like the Southwest. But at least that will provide the basis for a competitive solar industry that can begin achieving efficiencies of scale and possibly develop solar technology that would be cost effective in less ideal regions.

    Comment by Chris Durnell — August 16, 2012 @ 11:11 am

  5. Hey Professor looks like Julian soon will be AssAngie ward of the US government.

    Comment by pahoben — August 16, 2012 @ 7:10 pm

  6. Beware the 10 years to economic validity argument. I have been hearing about this for the last 30 years because no one realizes that the current technolgy also improves.

    The particular problem with solar power, or indeed any system that is created by an uncontrolled energy source is that it cannot be used in an environemt where demand shifts occur in time, and that time vector HAS nothing to do with the supply vector of the energy: for example in NYC peak demand occurs around 6-7pm, slightly later than 1pm DST! To make it “work” requires either large storage capacity, or generating capacity to fill out the demand curve. Neither is cheap.

    Re the stupidity of subsidized exports, paticularly when one is running a surplus is that not only are you giving stuff away, but you are helping to send even more stuff out than you are getting back: with the difference being a promise to pay in a currency controlled by the principal debtor. This is insane.

    Comment by sotos — August 17, 2012 @ 12:26 pm

  7. Good point Sotos.

    I wish the Sinos would subsidize photovoltaic panels to the point that I could economically justify installation. They still must fall substantially for installation in Houston.

    Comment by pahoben — August 17, 2012 @ 5:31 pm

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