China’s State Run Industry and the Death of Solar Innovation

Big government doing big business: Democrats and Republicans would agree - "let’s not go there!"

If there’s anything that’s been consistent about the talking points of either major political party, it’s this: so-called liberals generally don’t trust big business and believe that a conspiracy of big money and big right-manipulated media is making the rich richer and the poor poorer. So-called conservatives generally believe that a conspiracy of big government, big unions and big, left-biased media is bringing about in America the equivalent of the fall of Rome. 

The common despised term is “big” – but what if we had big government running big business – sort of “big” squared? We’d have something pretty scary to everyone.

In fact, we’d have China!

The Economist (January 21-27 issue) had a great write-up on “The Rise of State Capitalism”. The writers point out that “the Chinese no longer see state-directed firms as a way-station on the road to liberal capitalism; rather, they see it as a sustainable model. They think they have redesigned capitalism to make it work better, and a growing number of emerging-world leaders agree with them.”

How’s it working out for them? In general, not bad, at least for now. The article goes on to say: “In 2009 China Mobile and another state giant, China National Petroleum Corporation, made profits of $33 billion—more than China's 500 most profitable private companies combined. State giants soak up capital and talent that might have been used better by private companies. Studies show that state companies use capital less efficiently than private ones, and grow more slowly. …the coddled state giants are pouring money into fancy towers at a time when entrepreneurs are struggling to raise capital.”

Of course, the Chinese government has fingers in more pies than just telecom. Government-backed companies make up 80 percent of the value of the Chinese stock market.

And that’s the rub with state owned enterprises (SOE). State capitalism destroys internal competition, monopolizes resources, encourages political cronyism and maybe worst of all, it euthanizes innovation. And if the state is big and powerful enough, its favored industries can stifle innovation and upset commerce around the globe.

For example, uh…let me think…oh yeah, solar PV! Chinese government-backed companies flooded the world market with cheap, not innovative, not particularly well made, but…cheap…solar panels. Panel laden Chinese freighters were going in and out of U.S. ports like a fiddler’s elbow.

The result? In the U.S., solar PV production is pretty much kaput. Sure, we have a somewhat thriving industry of solar installers putting in residential panels (of Chinese origin). When the cream skimming is over even that market will shrink. And as for good ol’ American innovative ingenuity coming up with better PV technology, you can forget it for the immediate future. Not even the U.S. government corp of bureaucrats is dumb enough to risk another Solyndra (another victim of the cheap PV glut and poor investment judgement).

Other examples of the impact of state sponsored capitalism on solar technology are Siemens and Panasonic. Siemens, no slouch when it comes to anything power, is trying to off-load its solar business because of poor sales. To be fair, some of the droop in sales is due to the European economy. But much is due to Chinese competition.

Panasonic just announced that it is freezing new investments in its Malaysian PV plant. It had moved manufacturing to Malaysia from less efficient plants in Europe and Mexico to get costs down but Panasonic is still losing money. Again, of course, part of the reason is the European economy, but the Chinese dumping of cheap panels on the world market played a large part on the decision.

So at least the Chinese solar industry is doing well, right? Nope. In an effort to supply the exploding U.S. and European government-subsidized PV markets, a glut of Chinese companies were created. As prices dropped the Chinese government kept these companies afloat even though Chinese panels were being exported at below cost. A major Chinese manufacturer reports a gross profit margin of  a negative 66 percent! 

So, the Chinese solar industry has made it possible for U.S. homeowners and a few businesses to get inexpensive solar (no one knows how well these panels will last), subsidized by other taxpayers. Ironically, the income stream (U.S. taxpayer subsidies and all) helps fund the construction of Chinese coal plants!

The incentives for further PV innovation are at least temporarily non-existent. Even the Chinese PV manufacturing industry is dying on the vine.