Is China a Villain or Hero in Solar?

The solar market has exploded over the past decade in large part because Chinese manufacturers have brought a level of scale to the industry that never existed before. Scale brought lower cost, lower cost brought increased demand, which led to technological advancements that lowered costs further and the cycle continued.

At the center of this downward cost/price cycle was a massive flow of funding to solar manufacturers from government controlled banks in China. LDK Solar (NYS: LDK) , Suntech Power, Yingli Green Energy (NYS: YGE) , Renesola (NYS: SOL) , and a plethora of other solar suppliers were given billions of dollars by the government to expand their operations. They built and built, not caring about overcapacity even after prices began to plunge and margins went into negative territory. After all, China is about full employment, not making a profit.

Meanwhile, around the world solar companies were going bankrupt week after week because of the competition brought on by Chinese manufacturers. Some might say that this is capitalism at its best, the low cost producers will win. But let's not forget that most of the solar manufacturers in China wouldn't exist, certainly not at the scale they have now, without government support. Had the Obama administration made dozens of investments in solar that were multiples larger than Solyndra we would be up in arms.

All of this leads us to today when the U.S. government and European Union are employing measures to "protect" the solar industry. The U.S. imposed tariffs on Chinese solar cells, which will either kill solar imports from China or just force companies to be creative in how the product gets here, depending on an individual company's strategy. In Europe, similar measures are currently being debated.

Chinese companies cry foul, as Yingli, Trina Solar (NYS: TSL) , and Suntech have done in the last 24-hours, but they never mention the subsidies they've received in their complaints.

The good
The valid point that Chinese manufacturers have is that they've played a large roll in making solar viable, which is the underlying goal of the industry. In Suntech's response, its executive chairman said, "Our industry's mission is to make solar affordable for everyone and we are concerned that trade barriers will only delay the industry from fulfilling this."

This is a fair point by Chinese manufacturers. The solar industry would advance more quickly if their products were sold around the world, subsidized or not.

The bad
The problem is that countries view solar as the next big opportunity in energy. If they're able to build large sustainable solar industries, then thousands, if not millions, of people will be employed by the growth.

There's also existing local manufacturers and potential new companies to think about. If China is given a leg up because of subsidies, then Chinese solar companies will just expand their footprint around the world, squeezing out local competition. This is already beginning to take place, with manufacturing moving even to the U.S.

The bottom line
Is protectionism against Chinese subsidies the right move for the U.S., Europe, and other countries hoping to grab a piece of the solar pie? It depends on your perspective. Some companies will benefit, others will suffer, but the bottom line is that it puts a cloud over the stocks in the solar industry. Chinese stocks have already been battered because of low margins (think dumping) and huge debt loads, so these stocks are off limits. But protectionism may help manufacturers like First Solar (NAS: FSLR) survive until its thin-film efficiency can take a big step forward.

I'm not suggesting in any way that the predicament governments are in today isn't China's fault. It's Chinese subsidies that have caused governments to react -- there's no question about that. But the question we should ask ourselves is: Where would we be today if China hadn't subsidized the companies that led to the low-cost solar we see today? Maybe the solar industry should be thanking China instead of vilifying it?

It's a question worth thinking about as we see more countries "protect" their solar industries from threats in the Far East. To learn more about the industry and First Solar check out our premium report on First Solar. It comes with a year of updates and is chock-full of great information about the company. Click here to find out more.

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