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Photovoltaic Bubble Shattered in China

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As the overseas market shrinks amid the global financial crisis, the photovoltaic industry in China is downsizing and most photovoltaic companies are experiencing huge losses, the Economic Reference Newspaper reported on Monday.

Investments as high as hundreds of billions of yuan have floated into the photovoltaic industry in the past three years, although its key technologies are still lagging behind. As the industry bubble has shattered, Chinese companies are paying heavy costs.

Huge amount investment squandered

In 2001, China only produced 3-megawatt (MW) photovoltaic batteries; in 2007, that number surpassed 2,000, ranking China as the world's largest producer of photovoltaic batteries. The production capability has grown more than 600 times in six years. Huge amounts of investments have swarmed into the industry, particularly in the past two years.

Statistics show that in China's photovoltaic industrial chain, more than 10 polycrystalline silicon firms, 60 silicon chip producers, 60 battery companies and 330 assembly plants have gone into operation. China accounts for one-third of the solar power batteries produced in the whole world.

Liu Hua, president of Beijing Runchenglishi Investment Consulting Co., Ltd, expressed his worries. He said that in the past few years, many Chinese companies have invested a lot, lured by the extravagant profits of the industry, despite the lack of technology and talents.

By the first half of 2009, there were about 50 companies constructing, expanding or preparing polycrystalline silicon production lines in provinces such as Sichuan, Yunnan, Henan and Jiangsu. The current total investment is more than 100 billion yuan (about US$14.64 billion). And the total production capability will exceed 170,000 tons a year, two times more than the polycrystalline silicon's annual demand in the world.

In Sichuan Province, the polycrystalline silicon output was only about 700 tons in 2007, although in the last year it has surpassed 2,000 tons. Moreover, it's estimated that the total production capacity will exceed 31,750 tons by 2010, with many new solar power lines going into operation.

However, impacted by the global financial crisis in 2008, European countries—especially Spain—have changed their encouraging policies to the solar power industry. The global photovoltaic market demand has decreased sharply. As a result, Chinese photovoltaic firms have received fewer orders than expected, and most companies were forced to stop production. Many companies which bought high-price raw materials also suffered huge losses.

At present, the price of polycrystalline silicon has fallen to US$70 per kg, close to the production cost. The small-scope companies' cost is more than US$100 in China. By contrast, their foreign counterparts have cut their costs to as low as US$25 to US$30, Liu Hua said.

Under this situation, domestic companies face fierce competitions. If they stop production, they will suffer huge losses from upfront investment; if they continue to manufacture, they will bear huge deficits. Analysts believe that more than half of the investment will be squandered.

The bubble ‘blown by Chinese companies themselves'

"The bubble was blown by Chinese companies themselves", said Shi Zhengrong, board chairman of Suntech Power Holdings Co. (ADS). (NYSE: STP).

The company, a powerhouse in the photovoltaic industry, was established in 2001. It became the first Chinese private-owned company listed on the NYSE in 2005. Shi once was the richest person in the Chinese mainland. According to the Hurun Report regarding China's wealthiest people in 2008, his wealth reached 21.5 billion yuan (about US$3.147 billion).

The huge, sudden profits in this industry and the extravagant wealth that companies like Suntech received from the overseas listing triggered the domestic firms to passionately invest in this field. The crazy investment on the downstream of the industrial chain has stimulated the price jumping of polycrystalline silicon; the surging price of polycrystalline silicon promoted a new wave of investment.

When the investment fever was just about to transform into production capability, the price bubble was shattered both at home and abroad. Shi Zhenrong figured that the overcapacity situation of the photovoltaic industry would appear in July or August this year; however, the financial crisis sped things up and made it happen by about 6 to 10 months earlier. As market demands deteriorate, it is normal for lots of companies to go out of business or even go bankrupt.

(China Development Gateway by Jiao Meng, August 28, 2009)