Cheap Solar (Part 2): How Solar Manufacturing Got Its Chinese Characteristics

This piece is part of a series. Click to read Part 1 and Part 3.

Over the past decade, China has become both the largest market and the biggest supplier of solar photovoltaic (PV) panels globally. The country dominates manufacturing: only three of the ten largest solar PV manufacturers globally are not Chinese (see Figure 1).

In Part 2 of this series, I examine 1) China’s impact on solar PV prices; 2) how China became a solar industry powerhouse that enabled it to affect costs; 3) the resulting political backlash in other countries and implications for the clean energy transition. (View Part 1 of the series here).

Figure 1. Top Solar Panel Manufacturers by Shipments in 2019 (GW)  Note: Hanwha is an American firm, First Solar is a South Korean firm, and Canadian Solar is a Canadian firm. All other firms are Chinese.
Source: GlobalData; Power Intelligence Center.

1. A Solar Cost Revolution

Thanks to the dramatic fall in PV panel costs, solar energy is now much more competitive with coal, facilitating the global clean energy transition (see Figure 2). Chinese manufacturers were key in making solar panels a commodity that is both widely available and affordable. As of 2019, China was home to almost 80% of the world’s solar panel production capacity.

Figure 2. Solar PV Panel Cost as of 2019 ($/Watt)Source: IRENA Renewable Cost Database.

Although estimating the precise “China impact” on global PV cost is difficult, particularly since costs were dropping well before Chinese manufacturers arrived en masse, there are some proxies. For instance, in 2012, the lowest price that a Chinese monocrystalline silicon solar panel producer could set while maintaining acceptable returns (Minimum Sustainable Price) was estimated to be 23% lower than that of a comparable American firm.

2. How China Did It

China’s solar industry, unlike its wind turbine industry, is dominated by private firms. Local governments, however, were key early players. This was especially so in the Yangtze River Delta region, which could be dubbed the “Polysilicon Valley” given the concentration of major solar firms that led the Chinese industry’s development. These companies were attracted by a variety of local incentives, including industrial parks, subsidized land, tax breaks, and, importantly, discounted electricity.

Initially, Chinese solar producers relied almost entirely on imported components and machinery and exported the vast majority of the end products. But as the industry expanded, so did upstream investment in polysilicon and wafer production, as well as manufacturing equipment. The result was an increasingly indigenized and vertically integrated supply chain, economies of scale, and cost advantages for local manufacturers.

Yet that scale—the average Chinese factory was four times the size of the average American one—led to exports flooding the global market, triggering punitive trade responses (see below). At the same time, demand faltered in European countries as they cut feed-in-tariffs (FiT) after the global financial crisis.

As the export market faced uncertainty, Beijing threw its weight behind the domestic renewables market by adopting its own FiT in 2011. The policy support was effective in bolstering domestic demand. By 2015 China had the most installed solar capacity and electricity generation of any country.

The solar industry continued to grow, attracting more investment. New market entrants proliferated, and an increasingly crowded playing field intensified competitive pressures to cut costs. Industry pioneers like Suntech were driven to bankruptcy, unable to adapt quickly enough.

Beijing actively fueled this competition in order to weed out weaker firms and raise the quality of products. In particular, it launched a top-runner program in 2015 which had the effect of increasing R&D spending to improve efficiency in the value chain and to shift toward higher performance monocrystalline panels. In addition, Beijing slashed the FiT in 2018 pushing the industry towards consolidation.

3. The Fallout and Controversy

Competition from Chinese manufacturing proved damaging and disruptive for former industry leaders, particularly German solar cell and panel manufacturers. To counter Chinese manufacturers’ alleged unfair advantage from state support and local content requirements, the European Union and the United States responded with anti-subsidy and anti-dumping tariffs on Chinese solar panels between 2011 and 2014.

Yet the tariffs have largely failed to produce serious competitors to Chinese firms. Perhaps recognizing this reality, Brussels decided to let duties on solar panels expire in 2018 (the Trump administration took a different approach by slapping more tariffs on most Chinese-made solar panels in 2018).

Herein lies the dilemma facing governments. On the one hand, Chinese companies have displaced local producers—even though the majority of solar industry employment resides in the downstream segment of installation and maintenance. On the other, affordable solar PVs—in which Chinese manufacturing plays a major role—has to be part of the solution to decarbonizing countries’ economies.

Though far from over, the debate over the impact of Chinese cleantech manufacturing appears to be shifting from jobs to supply chain integrity. As the clean energy transition picks up, governments are increasingly assessing the economic and political implications of China’s dominance of the solar panel value chain.

Part 3 will look at these and other challenges and opportunities that lie ahead for the solar PV industry.

Ilaria Mazzocco is a Senior Research Associate at MacroPolo. You can find her work on energy and climate here.