Agreement accelerates macro trends in PV industry

Now that the dust has settled, it is time to have a closer look at the outcome of the recent trade dispute between the EU and China over alleged PV module price dumping. While the proposed anti-dumping measures threatened to have dramatic implications for the European PV market with potential trade war escalation, the implications of the settlement are much subtler, and reinforce many of the underlying macro trends in the PV industry. Apricum Partner Dr. Moritz Borgmann provides a timely analysis on this hotly-discussed topic.

In early June, the European Commission imposed a provisional anti-dumping duty of 11.8% on imported Chinese PV modules, alleging that Chinese manufacturers were using dumping practices to unfairly hinder European competitors. The duty would have increased to 47.6% on August 6 in the absence of a solution. On August 7, the EU Commission announced that an agreement had been reached. While details were not publicized at the time, industry sources confirm that the deal provides for a minimum module price of around 0.56 EUR/Wp (about 10–15% higher than previous prices) and a volume limit of around 7 GW on Chinese module imports. The minimum price will be determined according to certain industry price indices in the future. The Commission will not impose any import duties for the time being, claiming that these measures “remove the injury suffered by the Union industry”.

An unsurprising yet reasonable settlement

In our view, the settlement is a logical step without much of an alternative for both sides. While it can be argued that in the past, China’s PV manufacturing industry benefited from a massive misallocation of cheap capital, which led to a devastating industry-wide overcapacity, the EU’s calculation of the dumping margins (up to 112.6%) was tenuous. We believe that the methodology was unsuitable for a rapidly-moving industry such as PV manufacturing. A benchmark analysis of the most recent production cost of leading non-Chinese manufacturers (including Singaporean/U.S. integrated manufacturer REC and the Taiwanese cell makers Motech and Gintech) demonstrates that gross margins are approaching robust levels even at today’s market prices, which are only slightly higher than the absolute lows of Q1/2013. From this comparison, it is difficult to argue that the market pricing before the settlement still implied dumping.

Whilst the settlement is seen as contentious by many, it avoided the escalation of a serious trade conflict, providing a politically acceptable solution. In fact, the dispute actually reinforced Beijing’s existing concerns over the unsustainable business practices of its lower-tier manufacturers, which were fueled by a menacing credit bubble driven by mostly municipal and provincial
lenders.

The compromise may also be indicative of the West’s realization that their traditionally strong trading position with China is gradually eroding. China’s rapidly growing affluence is reshaping the former low-cost manufacturing and export giant into a powerful, consumption-oriented economy that not only imports luxury western goods, but becomes less reliant on foreign markets to sell its own products.

A different playing field

Although the settlement appears hardly disruptive to the industry, it has tangible implications that accelerate some key trends. One fact remains unchanged by the settlement: standard modules have become and will continue to be commodity items, as module prices are no longer the key competitive differentiator in the PV market. The fundamental rule change leads to a paradox: module makers now have to maximize customer value delivered by a commodity product at a fixed price.

This task requires some creativity, which we anticipate Chinese module manufacturers will swiftly develop. The main tactical direction will be to cross-subsidize other services or products through the high profits made in the module business, even though the settlement has already anticipated several such tactics and explicitly forbids the most blatant circumvention attempts.

One obvious and legal approach will be to sell higher-efficiency modules in the European market: Modules with above-average efficiency increase customer value as they reduce the cost of area-dependent balance-of-system (BOS), including mounting system costs. Increasing efficiency at constant module price, on a per-Watt-peak basis, still reduces the overall system cost for the customer. We expect that the technology trend toward a significant increase in the market share of novel high-performance cell architectures will only be expedited by this trade settlement.

Furthermore the settlement presents new opportunities for reasonably low-cost non-Chinese manufacturers to be successful in the market, by differentiating themselves through the highest efficiency, providing the best service, the best sales support, the most intelligent package, the most efficient logistics and the smoothest process. However, expect that the Chinese are also striving for these advantages, and generally with a lower cost base.

Whilst the playing field has changed, the competitive pressure remains.

The winners and losers

Probably the most unfortunate outcome of the anti-dumping lobby is that it has entirely defeated its purpose to save the European PV manufacturing industry. Even if the outcome would have had a positive effect on the European industry, it would have come too late. A large part of European wafer and cell manufacturing has already closed down. What remains is Wacker, the world’s fourth-largest polysilicon manufacturer, and a few ailing cell/module manufacturers with varying prospects, most of whom remain uncompetitive even under the new pricing regime. In general, European wafer and cell manufacturers no longer have the scale to compete not only with China, but also with an increasing number of large Taiwanese manufacturers.

For the European downstream sector, the slight upward trend in module pricing is rendering an already difficult market situation, characterized by declining feed-in-tariffs (FITs) and compressed margins, even more unfavorable. The utility-scale segment, which was already operating at the edge of commercial viability in European key markets including Germany, will be most affected. The EU–China settlement will choke off a certain segment of demand given the high price elasticity in European markets. Again, the settlement highlights the need for downstream players to find new markets beyond Europe, and to address self-consumption instead of relying on FITs.

Among the Chinese manufacturers, the agreement will impact tier-2 and tier-3 players severely, who previously differentiated only through price and indeed operated in a dumping regime. Now, there is little reason for European customers not to buy from well-reputed, high-quality tier-1 suppliers such as Trina, Yingli and Renesola. In effect, the deal will facilitate recovery and consolidation among Chinese manufacturers.

Not all hope is lost for European module manufacturing however. We anticipate that the settlement will provide a stable pricing environment and some respite for at least limited module manufacturing activities in low-cost European locations such as Eastern Europe or Turkey. Closer proximity to the demand has the additional advantages of saving transportation costs, and importantly, decreasing transportation time, which increases supply-chain flexibility and reduces working-capital requirements. We expect a large share of such module factories to be operated by Chinese manufacturers, as evidenced by China Sunergy’s recently opened facility in Istanbul.

Calmer seas ahead

Overall, the effect of the settlement on the European and world markets should not be overestimated, as it only reinforces existing macro trends. It does effectively mark the end of Europe’s wildest market excesses, caused by a breathless race between politicians cutting FITs, module manufacturers cutting prices, and customers racing to buy before the next FIT cut. Through the settlement’s price index provisions, we anticipate PV module prices will continue to decline gradually, but certainly not at the rates observed in 2010–12.

The European and also the U.S. anti-dumping measures have sent a signal to the Chinese that will likely curb future over-investment excesses in the capital-intensive module value chain. Interestingly, the inverter market is now beginning to experience a similar situation with intensive price competition from Chinese manufacturers, but without prospect of western regulators intervening in this electronics-manufacturing domain.

In summary, European market participants must continue to maximize their efforts to deliver value to the customer and will have to accelerate their exit strategy from FIT-driven sales. They need to explore new business models and sales approaches to address customers’ self-consumption needs. From a global perspective, Europe’s PV module market share will continue to decline, thereby reinforcing the need for market participants to explore new overseas markets.

For questions or comments, please contact Dr. Moritz Borgmann, Apricum Partner on + 49 30 30 877 6222 or borgmann@apricum-group.com

Dr. Moritz Borgmann

Author:

Dr. Moritz Borgmann

Partner

Moritz Borgmann focuses on strategy, technology and corporate and project finance projects along the entire value chain of the solar industry. Prior to joining Apricum, Moritz was the cofounder and member of the management board of semiconductor company Celestrius AG.

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