This is the second of five posts exploring the impact of Chinese Industrial Capacity on various real asset industries.

• Part 1—Understanding China Trade Strategy: This post examined China's economic strategies and their impact on global trade and geopolitical dynamics, focusing on the shift from low-value-added goods to high-value-added industries like lithium-ion batteries, solar cells, and EVs.

• Part 2 – Solar Supply Chains and a Battle Lost

• Part 3 – Gas Turbines

• Part 4 – Wind Turbines

• Part 5 – Electrical System Equipment

The rise of China's solar manufacturing industry over the past two decades has been remarkable. From a negligible player in the early 2000s, China has become dominant in producing and manufacturing solar photovoltaics (PV), accounting for over 80% of global production across most segments of the solar supply chain.[1]

In the early days of the industry's evolution, Chinese companies benefited from low labor costs, less stringent environmental regulations, and government support, enabling them to produce solar panels at significantly lower costs than their Western competitors. This simplistic explanation for Chinese dominance was once the whole story; it is no longer the case. China has advanced the art of solar manufacturing, showing a unique skill set to manage the scale, tempo, and cost challenges of mass-producing innovative technologies requiring precision and high levels of quality control.[2] A critical skill set for advanced economies.

How We Got Here

Starting with the 11th Five-Year Plan (2006-2010), the CCP identified solar as a strategic industry, leading to increased government support.[3] This strategic vision, coupled with the support from local governments in the form of subsidized land, electricity, and tax incentives, bolstered confidence in China's solar industry. By 2008, with the global financial crisis roiling Western economies, China's state-owned banks provided massive lines of credit to solar manufacturers. In 2010 alone, the China Development Bank extended $43.2 billion in low-interest loans to twelve Chinese manufacturers.[4]

This period also saw the Chinese government take a more active role in supporting domestic demand for solar power. In 2009, the government launched the Golden Sun Demonstration Projects, which provided subsidies covering 50-70% of installation costs for specific solar power projects.[5] This was followed by introducing feed-in tariffs for solar power in 2011. The rapid expansion of manufacturing capacity and declining global demand due to subsidy cuts in vital European markets led to intense competition and consolidation in the global solar industry from 2011 to 2013. Many non-Chinese manufacturers went bankrupt or scaled back operations, while Chinese companies continued to expand, backed by government support.

The 12th Five-Year Plan (2011-2015) set targets for improving industry concentration and manufacturing efficiency. The policies encouraged vicious price competition, resulting in industry consolidation and technological upgrading across the solar industry. The government also took steps to stimulate domestic solar installations. Future targets helped create a large and stable home market for Chinese solar manufacturers bigger than any single market elsewhere.

The 13th Five-Year Plan (2016-2020) further emphasized the development of the solar industry, setting ambitious targets for solar installations and manufacturing capacity. The plan also focused on improving the quality and efficiency of solar products, encouraging companies to invest in research and development.[6] The most recent five-year plan, the 14th Five-Year Plan (2021-2025), continues to prioritize the development of the solar industry as part of the country's efforts to peak carbon emissions before 2030 and achieve carbon neutrality by 2060.[7]

With solar, the Chinese have established a development pattern for advanced manufacturing industries. The process starts with government support to build a base of manufacturing competence. This stage is mimicry, using traditional advantages in factors of production to gain skills and undercut the price of foreign competition via brute force. This is followed by a politically driven domestic competition phase during which "product alternatives are weighed, but cost curves drive production selection," necessitating continuous manufacturing and product innovation so companies can survive on ever-thinner margins.[8] This is where the solar industry currently stands; the key unanswered question is whether China can make the next leap and convert monopoly power achieved through downstream superiority into an environment where upstream basic science and invention can prosper.

Impact on Western Producers

"It was a masterful strategic move. China leveraged its market power to kneecap U.S. producers and secure its grip on the entire solar supply chain."
Xiaojing Sun, global solar research leader at Wood Mackenzie

Chinese rivalry has plagued U.S. and European solar production for a decade. Both regions historically had strong solar supply networks, but Chinese enterprises now dominate worldwide production, forcing many companies out.

Only a few Western businesses now contribute to worldwide polysilicon production. Major western producers such as Hemlock Semiconductor, REC Silicon, and Wacker Chemie have lost 73% of their market share relative to 2019. Today, Total-owned SunPower manufactures some high-efficiency cells but has moved all manufacturing to Asia. Meyer Burger, a Europe-based firm, survives but struggles to scale up cell production in Germany. Only one major non-Chinese modular manufacturer still exists the U.S.-based First Solar. All Western firms in the solar value chain depend on tariff protection and government incentives to survive.

Despite the political protection, Western solar OEMs are longshots to survive. In nine of the last ten years, REC Silicon, Meyer Burger, and First Solar had negative free cash flow, and SunPower in ten. They all have more debt than ten years ago. Over the last ten years, Western corporations have been unable to keep up with the pace of Chinese firm growth and manufacturing cost reductions, which depend on continued manufacturing process improvement. This led to numerous bankruptcies and exits from the market.

For example, former industry leaders like Q-Cells and Solarworld in Germany went bankrupt, while U.S. manufacturers like Solyndra famously collapsed despite government support. Even companies that survived, like SunPower, were forced to shift production to Asia to remain cost-competitive.

The US responded by imposing anti-dumping and countervailing duties on Chinese solar imports starting in 2012. It has since taken added measures, including:

• Section 201 tariffs on imported cells and modules imposed in 2018[9]

• The Solar Energy Manufacturing for America Act provides tax credits for domestic manufacturing[10]

• Restrictions on imports from Xinjiang due to forced labor concerns[11]

Europe initially imposed anti-dumping duties on Chinese solar products in 2013 but phased them out by 2018.[12] More recently, the EU has focused on positive incentives for domestic production, including:

• The European Solar Initiative aims to scale manufacturing across the supply chain.[13]

• Potential carbon border taxes that could advantage EU production

The U.S. approach of trade barriers and manufacturing incentives has been more successful in preserving and attracting domestic solar manufacturing, particularly for modules. However, both regions are afterthoughts compared to the scale of China's integrated solar supply chains. The U.S. and Europe are working to revive domestic solar industries, but competing with China's entrenched position will be challenging. From a cost-benefit perspective, money could be better spent elsewhere; the battle for traditional PV panels is likely lost, and focusing on other value chains will yield superior economic and societal returns.

Significant, sustained policy support and private investment would be needed for Western countries to rebuild competitive solar supply chains and reduce dependence on Chinese imports. But those investments are by no means a guarantee of success. As fast as barriers can be implemented, Chinese solar manufacturers have found strategies to circumvent trade barriers.[14],[15],[16] 

The result is that the overall impact of tariffs in support of the US solar industry has had mixed results. Hence, there are continued financial losses at the Western OEMs mentioned above. Furthermore, trade barriers are always two-edged; they have provided some protection for US manufacturers and increased costs for solar installers and developers, potentially slowing solar adoption. Some industry groups have argued that the tariffs have done more harm than good by increasing prices and reducing overall demand.[17] As the solar industry continues to evolve globally, policymakers, industry leaders, and energy experts debate the effectiveness and impact of these tariffs. [18]

The Most Important Thing – How the Problem Has Evolved Beyond Simple Factors of Production and Economies of Scale

While the Chinese advantage started with lower labor costs, cheap government financing, and cheap energy, Chinese producers have not wasted that advantage. The Chinese leadership in solar is no longer simply a reflection of favorable factors of production; it now reflects the accumulation of fundamental skills and abilities in the complex manufacture of solar panels. For example, Chinese firms now dominate the supply of tools and equipment needed to manufacture solar panels, advancing the technology behind everything from silicon crystal growth furnaces to silicon rod processing and often controlling 80% to 90% of the tool market.

Furthermore, improvements in the manufacturing processes that build on China's existing competitive advantage are now institutional knowledge of Chinese producers. At the same time, Western firms have no similar opportunity to develop that knowledge as there are so few factory floors on which to acquire it.

This will be a theme throughout the rest of this series. China is now a manufacturing powerhouse based on highly innovative and knowledge-intensive proprietary skills distinct from the capabilities involved in invention and innovation. As the manufacturing of solar panels has left Western shores for China, the innovative knowledge to commercialize recent advances is lost as the West's ability to simultaneously address three production-related challenges (scale, tempo, and cost) atrophies.

Many have argued, naively, that China's emergence as a global manufacturing hub is purely a function of the country's low factor cost, but evidence is mounting that this is not the case. The thesis rests on two underlying premises: first, that manufacturing migrates to the lowest-cost environment, and second, that the knowledge required to manufacture things is either trivial or easily acquired.

While the first premise is objectively true in many situations, the second is not, especially with more advanced technology. High-volume manufacturing of complex products such as solar panels is more than just an afterthought to product development. It is a critical engineering-intensive enabler of product development and essential to commercialization. 

China has become the best place to get answers to the following questions:

1. How can a new product idea, an invention, be translated into something that can be manufactured or used profitably?

2. How can this be done quickly enough to respond to changing end-market demands?

This skill set has far-reaching implications for global economies and the West. While most of the profit for some innovations may continue to accrue to Western companies in some instances regardless of where the product is manufactured (think Apple), this skill set has allowed Chinese firms to make inroads with their own products that are of equal and sometimes superior quality to Western products. Combined with the large domestic market, that ability acts as a flywheel that enables Chinese firms to level up, building sequentially from imitator to peer and finally to leading innovator.  

This should come as no surprise to the West, and especially Americans, as the ability to mass-produce products was critical to America's economic rise and allowed for continuous productivity improvement, which allowed for higher margins and, in turn, more investment in R&D. It could, be argued that while basic scientific innovation, something that the West continues to excel at, is essential to advancement and progress, it is the ability to address the three production-related challenges of scale, tempo, and cost, that are at the core of the commercialization of scientific advancement which allows for economic progress. Put another way, the barriers to entry in solar cell manufacture are not simply monetary; a genuine skill gap exists.

What Should the West Do

"The U.S. needs to skate to where the puck is going, not where it's been. We should be pushing the boundaries of solar technology, not trying to match China's scale in older designs."
Dr. Sarah Kurtz, professor at the University of California Merced and former researcher at the U.S. National Renewable Energy Laboratory (NREL)

While China's dominance in conventional silicon solar panels appears unassailable for now, the solar industry continues to evolve. While China has demonstrated a remarkable ability to manufacture better, faster, and cheaper, it has yet to prove its ability to innovate at a basic scientific level. Several promising avenues exist for the West to regain leadership in next-generation solar technologies, so long as we do not innovate and export the critical manufacturing step. Otherwise, the cycle will start all over again, which means that management teams must recognize that the short-term margin gain from outsourcing production to China will always be a pyrrhic victory.  

Focus on Advanced PV Technologies

Rather than trying to compete in commoditized silicon panels, the West should double down on R&D into cutting-edge PV technologies. The Department of Energy's National Renewable Energy Laboratory (NREL) is exploring several promising avenues:

• Perovskite solar cells: These emerging materials have achieved rapid efficiency gains in the lab, reaching 25.2% for single-junction cells. Their low-cost production potential could disrupt conventional silicon.

• Tandem cells: Combining perovskites with silicon in multi-junction cells has achieved record efficiencies of over 29%. This approach could significantly boost panel output.

• III-V semiconductors: While currently expensive, these ultra-high efficiency materials (up to 47% in multi-junction cells) could enable new applications.

The West can leapfrog China's entrenched position in older silicon PV by focusing resources on these next-generation technologies. The West also maintains leadership positions in several solar adjacent technologies, areas that could provide competitive advantages in next-generation solar:

• Power electronics and smart inverters

• Energy management software and grid integration

• Building integrated PV and other specialized applications

By combining these strengths with breakthroughs in cell technology, U.S. companies could develop highly differentiated solar products for premium market segments.

The Risks of China's Approach

While China's state-led approach to scaling up solar manufacturing has been undeniably effective in gaining market share, it also carries significant risks. China's push to rapidly expand PV production has led to severe overcapacity. By 2020, even the most prominent Chinese solar manufacturers were operating on razor-thin margins, both a feature and risk of the politically driven system. The need to continuously expand and upgrade capacity to stay competitive is straining balance sheets.

Eventually, this model may only prove sustainable if China can leverage its unique manufacturing skill set into an upstream innovation skill set. As one analyst notes, "China's industrial policy has been so effective in reducing costs for silicon cells that it has become a barrier to adopting new technologies." This technological conservatism could leave Chinese producers vulnerable to disruption from breakthrough technologies developed in U.S. and European labs.

By continuously focusing on next-generation technology and domesticating the supply chain for those next-generation technologies, Western manufacturers can worsen the problems Chinese producers face due to overexpansion. The challenge with this goal is that it requires Western producers to think long-term. The advantages and profits gained from offshoring to China are tempting, but the resulting short-term profits are a pyrrhic victory in the long run.

The story of China's rise to dominance in solar manufacturing offers a stark warning about the challenges of competing in strategic clean energy industries. However, it does not need to be the final chapter. By learning from past missteps, leveraging its strengths in upstream innovation, and rekindling the downstream manufacturing skill set, the West has an opportunity to reassert leadership in next-generation solar.

[1] China accounts for 93% of global polysilicon production, 92% of global cell production, 84% of global module production, and 89% of global inverter production, according to the June 11, 2024, BNEF Solar Manufacturer Production 2023 Report.
[2] For example, polysilicon purity for solar-grade monocrystalline cells requires 99.999999999%—one impurity per ten billion atoms of silicon.
[3] National Development and Reform Commission, "The 11th Five-Year Plan", 2006
[4] https://www.bloomberg.com/news/articles/2012-09-25/chinese-lender-supports-solar-companies-securities-journal-says
[5] https://dialogue.earth/en/energy/4232-burned-by-the-sun/
[6] https://en.ndrc.gov.cn/policies/202105/P020210527785800103339.pdf
[7] https://digichina.stanford.edu/work/translation-14th-five-year-plan-for-national-informatization-dec-2021/
[8] “The Role of Innovative Manufacturing in High-Tech Product Development: Evidence from China’s Renewable Energy Sector” in Production in the Innovation Economy.
[9] Office of the United States Trade Representative, "Section 201 Cases: Imported Large Residential Washing Machines and Imported Solar Cells and Modules", 2018
[10] U.S. Congress, "H.R.5523 - Solar Energy Manufacturing for America Act", 2021
[11] U.S. Customs and Border Protection, "Withhold Release Order on Silica-Based Products", 2022
[12] European Commission, "EU-China solar panel trade measures end", 2018
[13] SolarPower Europe, "European Solar Initiative", 2021
[14] Transshipment: Some Chinese companies have been accused of shipping solar products to disguise their origin from other countries. For example, in 2021 the US Commerce Department found that certain Chinese companies were routing products through Malaysia, Thailand, and Vietnam to avoid tariffs.
[15]Assembly in Southeast Asia: Many Chinese firms have built manufacturing facilities in nearby countries like Vietnam, Malaysia, and Thailand to assemble solar modules using Chinese-made cells. This allows them to label products as made in those countries.
[16] Tolling arrangements: Some Chinese producers have used "tolling" arrangements, sending materials to be assembled in other countries and reimporting the finished products.
[17] https://www.seia.org/news/solar-tariffs-cost-62000-us-jobs-billions-investments
[18] https://www.seia.org/news/commerce-department-decision-devastates-us-solar-industry