Can the U.S. Learn From China's Solar Manufacturing Subsidies?

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China is eating our lunch when it comes to manufacturing growth and job creation. Despite America's superior innovation and technology development, the Asian country has won the manufacturing battle for PCs, solar modules, and almost everything our beloved Apple makes.

There are a lot of factors that go into this manufacturing shift, including a more flexible and cheaper workforce as I discussed last week. Since the topic is too big to tackle in one article, today I'd like to focus on government subsidies for solar manufacturers, how they differ in China, and how China will continue to pull ahead of American companies if the dynamic doesn't change.

Subsidies in the East and West
China provides a multitude of subsidies, including a devalued currency for manufacturers, but the most blatant is a virtually unlimited source of funding. A recent New York Times article highlighted this when Apple executives marveled at an addition supplier Foxconn built in case it got a contract. This type of spending would never take place at a U.S. factory because banks don't give "just in case" loans and managers can't justify the spending for such an endeavor.

But the Chinese government had underwritten the addition, providing financing that would eventually lead to tens of thousands of jobs.

The same has been done in the solar industry, where China has taken a dominant market position, despite the fact that most of the technology was developed in the U.S. The Chinese government decided the industry was something it wanted to dominate and provided the financing necessary for fledgling manufacturers to build capacity, despite little experience.

LDK Solar (NYS: LDK) could get up to $8.97 billion in financing from the China Development Bank over five years to build out its facilities to compete in the solar business. JA Solar (NAS: JASO) has credit of up to $4.42 billion, Suntech (NYS: STP) $7.29 billion, and Trina Solar (NYS: TSL) another $4.3 billion, just to name a few. This type of financing would be impossible to obtain in the open market since they have little to differentiate themselves from the competition.

Until late last year, when China implemented a feed-in tariff for solar projects, this load funding was the major subsidy given to the solar industry there and built an industry from nothing in a handful of years.

In the U.S., on the other hand, the solar industry had to rely on a tax credit to fund its expansion until federal stimulus money gave a jolt to the industry. This funding was given to solar and wind project installers, not manufacturers. Since it was a tax credit, it oftentimes required a tax equity investor, often a foreign company, to fund the project. The subsidy was there, but instead of being direct, it was convoluted and too complex to be as effective as China's subsidies in building an industry.

The stimulus money helped in some ways. The 1603 Treasure Program turned the tax credit into a cash grant for 30% of a renewable energy installation's cost, helping attract more investors. But more direct funding blew up in the government's face. The Solyndra debacle showed that loan guarantees don't guarantee success and that the government probably isn't the best at picking industry winners. The outrage after the company's collapse could be heard around the country. "Why is the government meddling in business?" some would ask.

The ways that China and the U.S. have gone about subsidizing the solar industry illustrate how our countries feel about subsidies and supporting industries we feel have potential for growth. The U.S., as a capitalistic economy, has said it doesn't want the government meddling in business, for understandable reasons. China, on the other hand, will hand out money to businesses willing to build plants that will create jobs.

The merits for the U.S. plan are understandable, but can you really argue that China hasn't already won the battle for solar manufacturing jobs?

Who is right?
It's these stark differences that we need to remember when debating China versus U.S. manufacturing and economic positions. Whether you agree with the way China has handled subsidies in solar manufacturing and a variety of other industries, the country has been successful in attracting U.S. technology to be built on their shores. Once there, it's only a matter of time before China dominates the entire industry (see PCs).

In the case of solar manufacturing, SunPower and First Solar (NAS: FSLR) remain the two dominant U.S. players competing in the market. But they've only been able to stay there because they've been able to out-innovate China. SunPower leads the industry in efficiency and First Solar still has the lowest cost per watt. Can those advantages last much longer with China's new dominance in the industry?

The debate continues
I have to admit that I see merit in both government positions, but I think there is a place for the U.S. government to take a stand and invest in particularly important industries, just like China does. Whether that is through cheap, government-backed loans, state-owned businesses, or other subsidy methods, I don't know what would be best. What I do know is that China is eating our lunch when it comes to manufacturing, particularly in industries like solar, and there's a place for government somewhere in the picture.

The playing field isn't equal right now, and that just doesn't seem right.

How do you feel about Chinese subsidies? Do you think we should do more to help manufacturers compete in the U.S.? Leave your thoughts in our comments section below.

At the time this article was published Fool contributor Travis Hoium owns shares of SunPower and First Solar. He also manages an account that owns shares of SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.The Motley Fool owns shares of First Solar and Apple. Motley Fool newsletter services have recommended buying shares of First Solar and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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