Suntech’s crash raises red flag for fledgling Chinese solar industry
BEIJING: Business was going gangbusters for solar module maker Suntech and its chief executive, Shi Zhengrong, just a few years ago. In 2007, Time magazine called him one of the “heroes of the environment.”
In 2008, CNN named Shi “China’s Sunshine Boy.” In 2009, Fortune anointed him “China’s new king of solar.” That year, New York Times columnist Thomas Friedman also cited Shi and Suntech as models of China’s green leap forward — which he called “the Sputnik of our day” and a spur for US clean energy policy.
Now, however, the Chinese Sputnik has crashed to Earth, and the Sun King has been toppled. Buffeted by fierce global competition, faced with a worldwide manufacturing glut and hobbled by heavy debt, Suntech’s directors ousted Shi on Mar 4 and defaulted on USUS$ 541 million worth of convertible bonds 10 days later. The following week, a Chinese court declared the company bankrupt after a petition from eight Chinese banks. On Wednesday, the company announced that its 2012 revenue had plunged 48 per cent from the previous year.
Suntech — which in 2011 was the world’s biggest seller of silicon-based photovoltaic modules — was once valued at USUS$13 billion on the New York Stock Exchange; it is worth less than one per cent of that today. A news report that Warren Buffett might be eyeing all or part of Suntech lifted the battered share price more than 80 per cent in one week, but acquiring Suntech could be a risky bet.
In February, Pavel Molchanov,
Suntech a proverbial ‘zombie’ company that perfectly exemplifies the Chinese solar industry’s massive overcapacity and consequently distressed balance sheets.
Raymond James, analyst
an analyst with the investment firm Raymond James, called Suntech “a proverbial ‘zombie’ company that perfectly exemplifies the Chinese solar industry’s massive overcapacity and consequently distressed balance sheets.”
The collapse of Suntech has broader significance than the damage inflicted on the company’s shareholders and creditors; it has punctured myths about the strength of China’s solar business — and its ability to depend on government support in a pinch.
Until now, policymakers in China have used subsidies to create a world-leading “green tech” industry that would push the country up the economic value chain. But green tech doesn’t guarantee thriving businesses. In the race for global solar supremacy, world manufacturing capacity has grown to 60 gigawatts, most of it in China. That outpaced solar demand, which is expected to reach about 35 gigawatts this year, enough to power about 26 million home s . So prices o f photovoltaic panels have plummeted, and it will take three to five years for overcapacity to shrink, says Bill Wiseman, managing partner of consulting firm McKinsey’s Taipei office.
But China’s government has not rushed to the rescue. Last month, another Chinese solar panel maker, LDK, defaulted on a loan payment, citing cash problems. And Chen Yuan, the outgoing head of the China Development Bank, declared in March that the bank should curtail its solar lending.
In the meantime, the manufacturing of silicon-based solar modules has become a commodity business, producing large volumes and, at best, tiny profit margins for products that are virtually indistinguishable to consumers. Innovation took a back seat to expansion, particularly in China. “People are fighting tooth and nail for the last penny of margin,” Molchanov said in a recent interview. Factories making clothes or toys are doing better. The rise of Suntech was a rags-to-riches story for its founder. Given up for adoption by destitute parents in a farming area, Shi excelled at school and obtained a master’s degree before moving to Australia in 1989 on an exchange programme. He accepted a scholarship to do solar cell research at the University of New South Wales, quickly earned a PhD and became deputy research director of a university spinoff developing next-generation solar technology, according to an article written for Time magazine by his patron and professor Martin Green.
In 2001, Shi moved back to China, using US$ 6 million in seed money from the Wuxi local government to start Suntech. At the time, Wuxi, with the blessing of the central government, was turning itself into a technology centre, part of a broader nationwide effort to climb the manufacturing ladder. In addition to cash, it provided Suntech with land and tax benefits as well as cheap electricity. Like other solar module manufacturers, Suntech took advantage of generous government subsidies in Germany and later in other countries to boost sales. In December 2005, Suntech went public, becoming the first private Chinese company listed on the New York Stock Exchange. Within four years, Shi was a billionaire. In 2011, Suntech, with sales of US$ 3 billion, was the world’s biggest maker of solar panels. One business adviser recalls the charismatic Shi showing up for a meeting in a Bentley. Shi said he didn’t want to be ostentatious, so he left the Rolls-Royce at home, according to the account.
But Shi wasn’t the only one jumping into the solar business; it became a classic bubble. In China alone, there are hundreds of manufacturers. Most are lowcost and low- quality, but there are a handful of giants with prodigious capabilities, such as Yingli and Trina. China has about two-thirds of the world’s solar panel manufacturing capacity. China alone, theoretically, could supply all of the world’s solar demand and there would be no room for US, German, Japanese or Taiwanese companies. Suntech tried to distinguish itself with its Pluto technology, a manufacturing process that allowed the cells to convert sunlight into energy more efficiently. But other companies also are setting new records for efficiency.
“Ten years ago, it was Suntech that was really a first mover in building China’s solar industry, and Dr Shi at the time was a visionary of sorts,” Molchanov says. “He helped create this lowcost manufacturing industry in China.” And, for a time, Suntech was successful, emerging from the 2009 slowdown.
Then, just as Suntech became the world’s largest solar panel manufacturer, the European debt crisis hit. Profit margins collapsed, and customers’ unpaid bills piled up. In June 2012, a puzzled Citigroup analyst noted in a report that as major countries such as Germany and Italy sharply reduced subsidies, Chinese manufacturers led by Suntech boosted capacity 30 per cent, “only exacerbating the excess supply conditions.” Shi relinquished his chief executive position but remained executive chairman. Still, he was upbeat. He blogged, “Do not despair. This is a necessary rite of passage for our maturing industry.” He brushed aside criticism that Suntech had expanded too quickly, saying, “The world couldn’t afford to wait a hundred years to solve our planet’s energy and environmental crisis.” Nine months later, he was ousted. — WP-Bloomberg