The Mother of All Solyndras

When solar panel maker Solyndra declared bankruptcy in September 2011, the Obama administration defended its $535 million loan guarantee to the company by touting the need to compete with China. At a congressional hearing, Jonathan Silver, then executive director of the Energy Department’s Loan Programs Office, said, “[In 2010, China] alone provided more than $30 billion in credit to the country’s largest solar manufacturers through the government-controlled China Development Bank. That’s roughly 20 times larger than America’s investment in the same time period.”

Since then, China has shown the world that massive government subsidies are no guarantee of business success. Today, the solar industry worldwide is suffering from oversupply, weak demand, and depressed prices, and many of China’s solar manufacturers are fighting huge financial losses, debt, and bankruptcy. Not surprisingly, the Obama administration, which was eager to follow China down the path of spending big on clean energy, has had little to say about the lessons to be learned from the current disarray of China’s heavily subsidized solar industry.

In the past five years or so, China’s solar producers have risen from relative insignificance to world dominance. Their success has been driven by the hard work of Chinese businessmen who chased after capital, entrepreneurs who implemented business plans, and workers who toiled in production plants in polluted cities. Yet the hand of the Chinese government has also been continuously visible.

Bent on promoting China’s leadership in green technology, Beijing has directed a flood of government subsidies, tax breaks, and massive credit lines from state banks into the solar industry, and local governments have offered benefits like cheap land. In the process, China became the largest solar exporter in the world. Its top manufacturers, such as Suntech Power, Trina Solar, Yingli Solar, JA Solar, and LDK Solar, were publicly listed on U.S. stock exchanges. For the year 2012, Solarbuzz, a market research website, estimated that China would account for 76 percent of all solar wafer production in the world.

Yet China has also saturated the solar industry with overcapacity. A recent solar market research report released by GTM Research and the Solar Energy Association reveals that global solar manufacturing capacity stands at 70 gigawatts, even though only an estimated 31 gigawatts are needed. China is responsible for much of the glut, and as another GTM report cited by the New York Times indicates, Chinese companies alone had the ability to manufacture 50 gigawatts of solar panels last year.

Inconveniently for the Obama administration, those market forces that it likes to dismiss affect even companies favored by the state. China’s rush to boost capacity in a hot new industry seemed like a great idea until the market sank. First the 2008 global financial crisis caused a worldwide economic downturn. Then the financial turmoil plaguing Europe since 2010 caused countries like Germany, Italy, and France to reduce government subsidies for solar power significantly. According to the Chinese press, some 70 percent of China’s photovoltaic solar modules are exported to Europe. Thus, Europe’s budget cutbacks have significantly weakened demand for solar imports from China.

In addition, polysilicon, the essential raw material for photovoltaic cell and module products, went from severe shortage to growth in worldwide manufacturing capacity beginning in 2010. As polysilicon became more abundant, the prices of solar products dropped, causing the profit margins of solar companies, including Chinese ones, to plummet.

Meanwhile, it has not helped that the U.S. Commerce Department imposed tariffs on Chinese solar products in 2012, while the same year the European Union proceeded to conduct investigations into anti-dumping practices and unfair government subsidies in the Chinese solar industry.

As a result, Chinese solar companies face a gloomy outlook. The industry may have reaped enormous government financial support that drew open envy from President Obama; but according to the state newspaper China Daily, numerous small and medium-sized solar cell manufacturers have gone bankrupt, and more than 80 percent of China’s 43 polysilicon companies have stopped production, as prices and orders have declined. China’s largest solar manufacturers are battling severe financial problems.

LDK Solar, the largest maker of solar wafers in the world, faces a mountain of debt totaling about $3.6 billion. Xinyu, the company’s hometown in Jiangxi Province, has come to the rescue. Last July, the city government approved a measure to fund approximately $80 million of LDK’s loans. Then in October, LDK raised some $23 million by selling a 19.9 percent stake to Heng Rui Xin Energy, a renewable energy company partly owned by Xinyu.

Suntech, the world’s largest solar panel maker, also needed a bailout from its local government. Burdened with over $2 billion of debt, it received nearly $32 million in emergency funds in September. The loan was or-ganized by the city of Wuxi in Jiangsu Province, where Suntech is headquartered, and was extended by the local branches of state banks, including the Bank of China and the China Development Bank.

Local bailouts provide much-needed cash to large employers, but they do not necessarily please central planners. Beijing, well aware of the overcapacity, has instructed China’s solar industry to consolidate. In late December, Premier Wen Jiabao chaired a meeting of the State Council, China’s cabinet, to reemphasize what everyone knew to be Beijing’s wish: Let the solar industry reduce production and undergo mergers and reorganizations. Local governments, frightened by the prospect of massive layoffs if large solar employers go bankrupt, have ignored Beijing’s call. Whatever the Obama administration may believe about state omnipotence or the Chinese government’s power to push clean energy projects with a snap of the fingers, state planning is hardly so simple or efficient in practice.

For a state-driven economy like China’s to outcompete market liberalism, it would have to routinely pick the right winners and losers, according to Peter Thiel, president of Clarium Capital Management. But Thiel, founder of PayPal, an early investor in Facebook and LinkedIn, and a man who knows something about picking winners and losers, noted in a phone interview nearly three years ago that he is skeptical that central planning can get the job done, especially when it attempts to shape industries not yet proven and innovation not yet seen.

The Obama administration lacked the same foresight, and its hubris and hostility toward free markets have led it to waste taxpayer money on Solyndra and other clean energy projects. Some of the companies that have filed for bankruptcy since Solyndra’s -failure include electric car battery maker A123 Systems, which received $249 million of stimulus money; energy storage systems maker Beacon Power Corp., which received a $43 million loan guarantee from the Energy Department; and solar conversion technology developer Satcon Technology Corporation, recipient of a $3 million grant.

The investment losses incurred by the Obama administration in its green energy portfolio no doubt pale in comparison to the billions spent by the Chinese government to nurture and prop up its renewable energy companies. Nevertheless, the turmoil in the Chinese solar industry teaches that massive state spending cannot forestall changes in market conditions, though it can -distort market incentives and lead to overcapacity, inefficiencies, and other unintended consequences. The logic of the free market applies across national borders and without regard to the wishes of big-government dreamers.