News 2024-09-28

Vicious Competition in the Solar Industry

Tomorrow, an internal corporate meeting aimed at preventing vicious competition within the photovoltaic (PV) industry will take place in Shanghai. What does this signify?

Some issues have recurred countless times, yet certain matters remain unaddressed. We find ourselves in a pivotal moment fraught with existential implications. How can we revive the photovoltaic sector?

The future of capital markets could potentially be promising, and it needs to improve. The unprecedented endeavor to salvage the declining balance sheets of companies must succeed; failure is not an option.

However, what about the fate of photovoltaics? Currently, its future remains obscure.

We have observed the government's dual approach: one prong targets asset management while the other addresses debt reduction. This dual strategy strikes at the core of the issues, with robust measures being taken. The most visible impact can be seen in real estate, where growth is tightly controlled, and existing stock is revitalized. The anchor of national wealth—real estate prices—must stabilize and recover. Concurrently, publicly-listed companies, which contribute more than half to GDP, must see their market value effectively repaired. In essence, the denominator of balance sheets must increase, and the numerator's structure must be optimized.

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The dangers of deflation are far more severe than those of inflation. Viewed through the lens of business, during deflationary periods, the prices at which companies sell their products continue to decline. If wages and other costs remain unchanged, and there is no technological advancement or increase in production efficiency, corporate profits inevitably diminish, pushing some into losses.

This assessment is supported by recent data. On October 13, the National Bureau of Statistics released new figures indicating that in September this year, the national Consumer Price Index (CPI) increased by a mere 0.4% year-on-year, remaining stable from the previous month. Meanwhile, the Industrial Producer Price Index experienced a year-on-year reduction of 2.8% and a month-on-month decrease of 0.6%. Dong Lijuan, chief statistician from the urban division of the bureau, noted that despite stable overall consumption market operations and stable prices in September, the Producer Price Index was influenced by fluctuations in international commodity prices and insufficient domestic demand, leading to wider year-on-year declines.

Given the current policy orientation, it cannot simply be interpreted as a Chinese version of quantitative easing (QE). In reality, the combined effects of these policies are far more complex than QE alone. Moreover, this will not be resolved overnight; instead, policy adjustments will likely respond to developments across the ocean. In conclusion, we retain a strong will, abundant resources, and diverse tools at our disposal; there are many cards we can play.

For corporate and household balance sheets, this moment represents a significant reshuffling. What mindset and actions should we cultivate in response?

As with the larger economy, the photovoltaic industry similarly requires consideration of the evolving landscape. Given that the PV sector is heavily influenced by policy changes, the industry’s response to macroeconomic policy shifts warrants serious contemplation from every entrepreneur.

How can photovoltaic enterprises harmonize with the current wave of economic stimulus policies? How can government regulators collaborate effectively to mitigate risks and enhance the quality and efficiency of national photovoltaic initiatives?

With that in mind, we present five rather simplistic hypotheses regarding photovoltaic prospects and invite insights from experts:

First, do the highest decision-makers and policymakers accurately grasp the current state of photovoltaic manufacturing enterprises? Are their views and attitudes aligned with this understanding?

Second, in terms of supporting the industry, the current phase of excessive competition in the photovoltaic sector raises questions. Regional achievements have pushed many areas to view photovoltaics as a new engine of growth instead of real estate. Countless favorable policies have been dispensed, whether within the limits or beyond them. Some state-owned enterprises have even joined the fray, competing on capacity, which ultimately leads to a nonsensical drain of public resources. As the primary entities for industrial investment, how much more policy advantage can be harnessed, and how can policies be optimized?

Third, regarding financial backing, has the perception of the capital markets regarding photovoltaic manufacturing shifted? Will investment attention pivot from high-tech industries to conventional industrial manufacturing, transitioning from one extreme to another? For the photovoltaic sector, these shifts could create drastically different conditions for financing and refinancing.

Similarly, with the backdrop of “quantitative easing,” will photovoltaic initiatives—considered as key players in transitioning to carbon neutrality and renewable energy—receive adequate financial support akin to that for existing real estate? This initiative will play a pivotal role in alleviating current corporate debts and inventory challenges, ideally preventing banks from halting or retracting loans to solar companies.

On the subject of phasing out obsolete capacity, while the industry has entered a restructuring phase, the current relaxation could hinder the completion of necessary alterations. From a long-term health perspective, do the advantages outweigh the drawbacks, or vice versa? If this restructuring is postponed, will we incur even greater costs later? How can we leverage time to gain space, allowing organic growth in market demand to ultimately achieve a common good?

On the agenda for tomorrow’s meeting of the China Photovoltaic Industry Association, the topic of “preventing international competition within the industry” takes center stage.

The association’s announcement indicated that “current mainstream product prices are significantly below production costs, leading to a situation of price competition below cost.” Therefore, it has become essential to “jointly discuss orderly ways to resolve supply-demand imbalances and eliminate excess capacity.”

Shanghai, a city known for its inclusiveness and adaptability, offers a fitting setting for this crucial dialogue. All parties involved are urged to set aside their differences and seek common ground to ensure that the outcomes of tomorrow's discussion resonate not only among market contenders but also reach higher authorities.

As fate would have it, the photovoltaic sector has faced numerous challenges throughout its existence.

In taking a glimpse ahead to 2024, the photovoltaic industry, despite being a representative sector of emerging industries, has shown signs of degradation compared to traditional fields like steel, electrolytic aluminum, cement, paper, and textiles, which all find themselves embroiled in fierce competition yet have managed to maintain steadier performance.

The steel industry's profits, while affected by global uncertainties, have benefited from effective capacity adjustment and supply-demand balance. For example, many steel companies have reduced unnecessary capacity and increased high-value-added products, leading to more stable profitability.

A stark comparison can also be made with the lithium battery sector.

In the first half of 2024, major distinctions in profitability emerged between photovoltaic manufacturing and lithium battery sectors. Despite both being pivotal components in the new energy domain and undergoing significant technological transformation spurred by global demand, their returns diverged sharply.

As opposed to the photovoltaic industry's struggle, the lithium battery sector continued to exhibit formidable profitability in 2024's first half. Continuous demand for electric vehicles and energy storage buoyed this sector's market standing.

During 2023, global nominal lithium battery capacity scaled up to 2568 GWh, with an output of 1210 GWh and a demand tallying 850 GWh. In 2024, the projected nominal capacity could leap to 30,000 GWh, accounting for an estimated output of 2344 GWh against a demand of about 1356 GWh.

If we analyze these figures, 2023's lithium battery operational rate lingered around 47%, while inventory ratios (the proportion of inventory to total output) stood at 30%. A further forecast for 2024 indicates operational rates at 78%, yet inventory ratios spiking to 42%.

These figures starkly contrast with the prevailing narratives surrounding photovoltaics. Yet, what’s the reality on the ground?

In 2024, lithium battery operational rates dipped to 47.42%, particularly declining from June through August to figures of 63.71%, 49.66%, and 47.42%, respectively. Yet, contrary to the photovoltaic sector’s trends, lithium battery businesses haven’t encountered widespread cash losses.

In 2023, photovoltaic primary materials figures included: 1.43 million tons of silicon materials, 622 GW of silicon wafers, 545 GW of batteries, and 499 GW of modules. Meanwhile, global added photovoltaic installations hit 477 GW.

The scenario for 2024 seems less bleak than the sector anticipates. Total Chinese silicon material capacity for the year is expected to range between 180-200 million tons against a market demand of about 160 million tons. Effective silicon wafer capacity may span 850-900 GW, with domestic demand estimated at 700-750 GW. Further, battery cell capability stands at approximately 800 GW against a market demand of 680-730 GW, while module capacity is around 1000 GW, with a demand of about 800 GW.

So, just how oversaturated is this industry?

The internecine competition within photovoltaics can often resemble a self-inflicted calamity.

Insights gained from discussions with various members of the photovoltaic community suggest that our struggles may stem from three core aspects:

First, the domestic customer framework of photovoltaics is significantly more singular than that of lithium batteries. Under the collective procurement mechanisms for major clients, the principle of lowest price winning holds. To secure contracts, some photovoltaic companies have resorted to bidding below their production costs, resulting in a damaging price drop that affects the overall market price.

Second, several prominent companies initiated a series of price wars late last year and into the beginning of this year, aiming to eliminate competition. However, rather than extinguishing rivals, this approach plunged the entire industry into a vicious cycle of price wars, spiraling out of control.

Third, leading companies inflicted intense competitive pressure by fully utilizing capacity in silicon materials and wafers, exerting downward pressure on the downstream battery and module sectors. This left those downstream players with few options for price increases, even when desired.

Fourth, the anticipated rapid reshaping of the silicon material and wafer industry was upended by the government’s industrial attraction policies and capital backing, resulting in a drawn-out process disconnected from market realities—where sustainability was dictated by energy costs, allowing only the cheapest to thrive. This deviation from the path expected by these leading companies led to an unforeseen minuet of consequences.

If these points hold validity, the detrimental rivalry in photovoltaics stem far more from human error than from natural disasters. As Li Junfeng articulates, no industry has displayed the folly shown by photovoltaics.

The demand elasticity in photovoltaics might be greater than previously considered. During the special recording of CCTV's segment "Where is PV Confidence in 2024", Liu Hanyuan, Chairman of Tongwei Group, passionately exclaimed:

Our confidence in photovoltaics ultimately relies on understanding just how large the future market should be.

First, we need to gauge the future potential of achieving carbon neutrality by roughly 2050 to 2060, with renewable energy taking a starring role, particularly photovoltaic energy as the primary player.

Second, to reach these ambitious goals, given that photovoltaic energy currently comprises only 5% of our energy matrix, China must install 500 million, 600 million, or even 700 million kilowatts of photovoltaic capacity each year over the next 20 to 30 years to make substantial progress toward carbon neutrality.

Third, our policy makers and governmental representatives must realistically interpret the tempo of photovoltaic enterprises' growth informed by such scientific data, ensuring responsible risk-bearing and innovation to optimize the sector and expedite deployment.

Firstly, on October 12, in a bid for procurement of photovoltaic modules for the 150 MW Agricultural-Photovoltaic Complementation Project in Yiyuan, prices shockingly plummeted to an average of 0.64 yuan/Watt, with some enterprises quoting as low as 0.53 yuan/Watt.

Secondly, on October 9, regulations emerged mandating that all distributed photovoltaic projects for large commercial and industrial setups must be exclusively for self-use, disallowing excess generated power to be supplied to the grid.

Amidst internal strife and external pressures, coupled with a disconnect in capacity supply and demand, coupled with extreme local competition for industrial investments and pricing strategies, the photovoltaic landscape faces significant turmoil.

If this downward trajectory continues, the instability will not only deplete the vitality of photovoltaic businesses, but also drain limited public financial resources across various locales, undermining the entire sector's resilience and threatening even the foundational goals for renewable energy advancement.

We cannot assume our foundations are unshakeable; otherwise, we risk drawing comparisons between the fifty paces of one group and the hundred paces of another. Amid escalating internal constraints, survival will not be a mere case of luck. The prosperity of photovoltaics impacts every single player in this field.

It’s vital that we amplify the genuine voices of photovoltaics and ensure the realities faced by these enterprises garner more visibility. Together, we must act decisively for the sustainability and future of photovoltaics.

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