The bankruptcy of Chinese solar panel maker Suntech has cast a shadow of uncertainty over the global solar market, which is already struggling with intense competition, market saturation, and trade disputes. These factors will likely herald a period of market consolidation, and recovery will take place but slowly.
Last month, Suntech filed for bankruptcy after it had defaulted on a US$541 million bond payment.
Leo Wang, analyst at China Market Research Group (CMR), said two interlinked factors caused the demise of one of the world's biggest solar companies. First, many Chinese solar companies focused on developing low-cost solar products to gain market share and this meant they suffered from diminishing profit margins.
The other factor was that customer demand was not growing as fast as the manufacturing of the solar products, resulting in an over-supplied market, Wang explained.
Suntech's misfortunes are also a red flag to signal the troubles in the Chinese solar power industry, which is one of the major markets globally. Suchitra Sriram, Asia-Pacific program manager for energy and environment at Frost & Sullivan, said the Chinese solar industry peaked too early, and this had repercussions elsewhere since most of its solar products were exports.
Furthermore, the growth of Chinese solar companies was supported by extensive credit lines offered by local governments or state-backed agencies. These parties encouraged manufacturers to expand production capacity rapidly, Sriram said.
"The heavy subsidies from the government attracted haphazard investments in the sector, and created a mammoth amount of overcapacity that even some of the larger companies could not break even.
"China became the global nerve center for solar manufacturing, pushing Japan and German companies behind. And this created a massive oversupply situation and drove panel prices down nearly 23 percent in 2012," she noted.
These companies' reliance on overseas markets, especially the U.S. and Europe, added to their susceptibility of the impact of wider economic forces. The Eurozone crisis, which forced governments to cut back on solar subsidies, and the anti-dumping duties the U.S. government slapped on China-made solar panels led to the "downward spiral of the Chinese solar power industry", she added.
Survival of the fittest
Sriram went to say Suntech will unlikely to be the last Chinese company to wind up. Small and midsize solar businesses may eventually exit as they are unable to cope with the diminishing margins. The stronger companies will survive, but not before a period of consolidation that will happen worldwide, she predicted.
Wang concurred, saying the solar power industry is unlikely to recover any time soon, at least not until the European Union (EU) and U.S. see an upturn in their economies. Current competition is "extremely fierce" and proving to be harmful to many companies within the industry, he added.
"The failure of Suntech is going to make other players in solar market be more cautious which will also slow the recovery. Perhaps most importantly, this sector can truly take off [only] when the price for fossil fuels increase to a point where solar energy is the more attractive financial alternative, even in the absence of government subsidies," he emphasized.
He added that while the Chinese market is a key one, local solar companies will not be responsible for the make or break of the global solar power industry as there are other factors hampering its growth.
"The entire solar industry is structurally flawed and has been artificially sustained through heavy subsidies when [U.S. and E.U.] governments were flush with cash during the early 2000s. [After the 2008 economic crisis], these subsidies were called into question because governments find themselves in a position where they would rather concentrate their investments on short-term growth and unemployment, than solar energy which is a much longer-term investment with uncertain returns," Wang explained.
Sriram added that Suntech's exit will not drastically alter the global solar market as there remains "too much competition in the manufacturing space" with companies from India, Taiwan, Japan, and Europe competing for a slice of the action.
The important thing is to develop new markets across the globe and for companies to promote the adoption of solar tech in order for excess supply to be absorbed in the next few years, she advised.