China’s Domination of the PV Industry: Veni, Vidi, Vici

June 11, 2018

By Paula Mintssxexsaqecreybwafcvdf [Founder/Chief Market Research Analyst]

I

n 47 BC, after his rapid defeat of Pharnace, King of the Bosphorous at the battle of Zela, Julius Caesar announced to the senate: Veni, Vidi, Vici — I came, I saw, I conquered.

In just a few short years, China’s solar PV manufacturers entered global cell and module manufacturing and rapidly dominated it. Since 2002, with annual shipments of 2-MWp, shipments from its manufacturers and domestic PV deployment have grown faster than the global market as a whole to over half of total shipped in 2017.

There is no doubt that in terms of solar, China came, it saw, it conquered. Now, a hiccup in either China’s production of PV cells and modules or in its deployment of PV systems would ricochet around the global PV industry.

Figure 1 depicts global shipments of PV cells and modules and shipments from China. During this 15-year period shipments of cells/modules from China grew at a compound annual growth rate of 97 percent, while global shipments (including China) grew at a CAGR of 41 percent. China has become the engine driving the global solar industry.

Figure 1: China and Global Shipments, 2002 through 2017

Figure 2 presents China’s domestic deployment of PV systems and those of the Rest of the World from 2012 through 2017. Installations can differ from shipments on an annual basis depending on inventory and the application focus. That is, multi-megawatt installations can lag that of other categories for a number of factors including the development process itself. For simplicity, shipments have been used as the standard in this one case, understanding that it presents a simpler, big-picture view.

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In 2012, China’s PV deployment was 16 percent of the global total. Its share of global PV deployment doubled in 2013 to 32 percent and then held at ~30 percent until 2016 when deployment of PV in China surged to 49 percent of the global total. 

In 2017, China deployed 53 GWp of PV systems giving it a 58 percent share of global installations.

Figure 2: China and Rest of World installations, 2012 through 2017

Figure 3 offers China’s annual share of global shipments from 2012 through 2017. During the period depicted in Figure 3, China’s share of global shipments increased from 45 percent in 2012 to 57 percent in 2017. China’s complete domination of PV manufacturing means that it dominates price at which cells and modules can be sold — globally. It also means that other manufacturers are captive (to an extent) to the low margins that are acceptable to manufacturers in China. The solar industry has suffered through decades of low to negative margins and now finds itself with an average gross margin of ~8 percent. Examples from other industries include:

• Coal 40 percent to 50 percent
• Iron and Steel 20 percent
• Construction ~30 percent
• Appliances 30 percent
• Aluminum 20 percent
• Industrial Machinery and Components 40 percent
• Aerospace 40 percent
• Agriculture 8 percent

Figure 3: China and Rest of World Cell/Module Shipments, 2012 through 2017

China Came, It Saw, It Conquered, It Backed Off

The global PV industry has been gliding along on the strength of China’s manufacturing and deployment strength for several years. During these years the market for PV deployment boomed mostly driven by Chinese manufacturer acceptance of low margins and by almost relentless deployment of PV systems even when China’s Central Government indicated it wished to slow its market.

China’s central government may get its wish this time, though, not as rapidly as it might want to. Though China’s system of government is essentially one party with one man at the top, there are layers of provincial and local governments making decisions, lending money and otherwise supporting their local industries. In other words, as the theme of the changes to China’s PV deployment are to, essentially, shuffle unwanted projects back to the provinces, it may take a while for the expense of supporting domestic deployment to slow things down. As an analogy, a large tractor trailer truck weighing 80,000 pounds and going 65 miles per hour needs 315 feet to stop.

China’s market, which had been accelerating, will need some time to slow.

Measures that China’s central government are taking are (in a nutshell):

• DG capped at 10-GWp for 2018
• Systems connected as of May 31 receive the FiT, after which developers must turn to the local government (a move that favors local companies)
• A pause in utility-scale deployment (meaning approvals) until further announcements
• A reduction in grid curtailment, meaning that more electricity will be fed into the grid and FiT payouts will increase

As with many countries, faced with the high cost of supporting PV deployment, China’s central government is (and has been) moving towards a bidding scheme. Bidding schemes always undervalue solar and further constrain margins.

Though governments plan incentive programs for solar with the best of intentions, they also consistently under estimate their success, and it is this very expensive success that leads to the collapse of many programs.

Figure 4 depicts the rise and fall of select country solar markets during the EU FiT period.

Figure 4: Rise and Fall of EU FiT Programs, 2005-2015

And Where Will It All Go If China Slows?

At one point during the FiT era, referring to Figure 4, the market in Europe annually consumed over 80 percent of PV modules shipped. As markets collapsed the refrain was — where will it all go? Then came the market in China to rapidly pick up the gigawatt slack. In 2018 there are several country markets where demand is ~10-GWp annually. It will take more than one country market to make up for a slowing in China. Should China slow by 10-GWp in 2018, that 10-GWp will float out to other markets at, likely, negative margins. Good for developers but not good for PV manufacturing. A slowing China means that the market as a whole will be flat or potentially shrink in 2018.

Figure 5: Six Scenarios for 2018 – all dependent on China

Figure 5 offers the original outlook for 2018 — which included a still accelerating China market, and a lower forecast with a slowing market in China. The most likely scenarios are, in both cases, the accelerated case.

The lesson is that the solar industry is still young, still immature, still struggling to find balance and that planning ahead requires an acceptance of the ever present risk of market collapse.