IN DEPTH: China's PV giants abroad

The nation's solar heavyweights spread their wings.

Set in the middle of a dusty, roaring industrial park, and swarming with busy workers, CSun’s newest plant could be mistaken for any modern PV factory in China.

Only this is not China. Rather, the factory is 50km outside the minaret-punctured skyline of Istanbul — making it ground zero for one of the most unexpected and important shifts occurring within the PV sector today.

Over the past five years, Chinese companies came to dominate the PV manufacturing game, driving module prices to dizzying new lows and many Western rivals into bankruptcy.

Yet, seemingly overnight, the explosive growth of new solar manufacturing capacity in China has stalled. Instead, the industry is now awash with stories — some confirmed, some rumour — of Chinese manufacturers planning or setting up production abroad, even as they delay or bin expansion plans at home.

Of course, shifting production overseas is nothing new in the PV industry — most surviving Western module makers do the lion’s share of their manufacturing in Asia. But China was supposed to be different. After all, China was the reason that Western manufacturers outsourced production in the first place.

Yet in a stupefying turn of events, most, if not all, PV manufacturing capacity being added globally today is taking place outside China — and Chinese companies are the ones doing the building.

So what on earth is happening? And what does it say about the future of the PV sector?

First of all, it is important to understand the motivations of the Chinese manufacturers — and here they fall into two camps. The first consists of those seeking to circumvent anti-dumping tariffs — either by signing foreign contract manufacturing deals or by building module assembly plants of their own.

A few companies, such as ReneSola, have been frank about making such arrangements, while many others are operating in stealth mode.

ReneSola, a vertically integrated PV manufacturer based in Zheijiang province, recently began producing modules in Poland and India to avoid EU duties, after looking at sites in the Balkans, Cyprus and elsewhere.

Its module assembly work in Poland is performed by Jabil Circuit, a US-based contract manufacturer that operates more than 60 factories around the world, servicing industries from healthcare to aerospace. The first ReneSola modules recently rolled off Jabil’s lines.

“ReneSola has prepared itself for whatever happens in the EU [with anti-dumping tariffs],” explains Florian Dieckmann, the company’s marketing manager for Europe.

Others are taking matters into their own hands by readying foreign module plants of their own, including Yingli, which is contemplating setting up a US factory, and Jinko Solar, which Recharge recently revealed to be planning a facility in Portugal. Others may set up shop in Taiwan, South Africa or South America.

Some of these plans may vanish overnight in the event of a settlement between Beijing and Brussels. But many may press ahead regardless, perhaps as a “marketing pitch”, or, as one source puts it, “simply to make friends with the European Commission”.

For Chinese manufacturers in the other camp, anti-dumping tariffs are only of secondary importance. CSun, based in Jiangsu province, is in the vanguard of this category, but it is not alone. Hareon Solar, based near Shanghai, is planning a cell and module factory in southern Mexico. Chinese-Canadian company Canadian Solar recently announced plans for a second module plant in Ontario and is understood to be looking at sites in Turkey.

CSun decided to build its cell and module factory in 2011, before any hint of the EU’s anti-dumping investigation — a decision driven principally by geographic considerations.

Being in Istanbul puts CSun close to customers in Europe and future customers in the Middle East and North Africa. It also gives the company a tremendous leg-up in Turkey itself — a key emerging market with a new feed-in tariff offering a premium to projects using locally made kit.

While the two categories of companies may be driven by different motivations, the same set of factors has made this shift out of China possible. For example, advances in automation within the module assembly process have eroded the advantage of cheap Chinese labour — which, it should be noted, becomes less cheap every year.

Another factor is transport, which eats up an ever-larger share of the overall cost of modules. “Let’s say the cost leader is producing at $0.60 per watt [W], and shipping costs are $0.05/W,” says IHS Solar analyst Ash Sharma. “That’s pretty significant as the industry becomes more competitive.”

Still, the idea of outsourcing from China strikes many industry observers as bizarre.

Not only does it cut against the strategy that has underpinned major Chinese manufacturers in recent years — of amassing ever-greater economies of scale at enormous domestic factories — but it also comes at a time when the hope of a return to profitability has only just appeared on the horizon.

“If you’re struggling to produce profitably in China, what does that look like when you go outside China?” asks Finlay Colville, vice-president at analysts NPD Solarbuzz.

It is also worth noting that at the exact moment when Chinese manufacturers are seizing on the idea of producing overseas, their Japanese rivals seem to be drawing the opposite conclusion. Many Japanese players, such as Panasonic, are in the process of shutting down foreign factories and retrenching to home soil.

In many ways, CSun offers a perfect illustration of the challenges and opportunities facing Chinese PV manufacturers as they shift production overseas.

Inaugurated in May, and with its first shipment sent out in June, CSun’s Istanbul factory will grow to employ 1,200 workers producing 300MW of cells and modules a year — a sizeable addition to its 1.2GW of existing capacity in Nanjing.

On the factory floor, headscarf-clad female line workers return from tea breaks to their posts alongside huge production machines, some of which still bear signs in Chinese. (Roughly half the equipment in Istanbul has been transferred from China, while the other half is new.)

Upstairs, Chinese and Turkish office workers mingle playfully, trying out a few words in each other’s languages before reverting to English, the lingua franca.

All things considered, getting the Istanbul factory off the ground has been more difficult than expected, acknowledges Steve Shen, chief executive of CSun Eurasia. “Moving the production equipment here, okay, you can say that’s easy. But training people is different.”

Part of the appeal of Turkey is its deep pool of veteran manufacturing workers. But almost none have PV experience. “At the beginning, some people don’t understand how expensive cells are — they don’t wear gloves when they touch them, or they’re not gentle enough,” Shen says. “You have to educate them about how fragile they are.”

Labour costs in Turkey are “pretty high” compared to China, and even Eastern Europe.

Yet CSun anticipates a 5-8% annual inflation rate for its Turkish labour force — far lower than the 15% or so seen in China in recent years.

Improving technology also helps to eat into Turkey’s labour-cost disadvantage. CSun has invested in a number of Komax auto-welding machines, which string cells together into modules. At more than $1m apiece, each machine does the work of two dozen workers in China.

But transferring machines from China means that everything — from instruction manuals to display monitors — must be translated into English and then perhaps into Turkish.

And compared to China’s immense solar manufacturing clusters, it may not always be possible to find ideal sites abroad. CSun would have preferred a vast one-storey building, but the best it could do in this free-trade zone near Istanbul was a relatively compact, multi-storey building. The space restrictions mean that the production process is more broken up than the company would have liked.

Spreading manufacturing around the globe also has consequences for the research and quality-control processes, says Dieckmann. ReneSola evolved from a wafer maker to a vertically integrated PV manufacturer, with the technology team working at the same site as the manufacturing.

“You’ve got an R&D team which is used to riding their bikes to work every day. And suddenly they have to go to India or Europe or South Africa, and essentially reproduce what’s happening at home, only a lot of things are different,” says Dieckmann. “It is a challenge.”

In spite of the inherent pitfalls of manufacturing abroad, the push towards decentralisation seems likely to continue gaining steam.

On the contract manufacturing side, the jolt provided by the scramble to avoid EU duties has encouraged third-party players such as Jabil to invest in new capacity and technology — and they will rapidly improve their offerings.

This model is well developed in many other tech sectors, with contract manufacturers such as Foxconn making everything from Apple iPads to Sony PlayStations, allowing those companies to focus on R&D and marketing.

At the moment, module assembly is the only segment of the PV value chain that appears viable for contract manufacturing. But there is “no reason whatsoever” that the model could not be expanded to wafers and cells in future, says Colville.

“Remember that 20GW of capacity was added in China in recent years, all the way from ingots to modules, and a lot of those companies had no previous experience making anything,” he says. “The barriers to entry for crystalline silicon are simply not that high.”

Even if contract manufacturing never comes to dominate the PV game, it will almost certainly play a far more important role than it has in the past. That will give big PV companies more flexibility to respond to market conditions — with the result being slimmed inventories, less need to dump product, less political friction, and ultimately more profitable companies.

It also seems likely that Chinese companies will continue building in-house factories abroad. CSun, for one, is planning additional module plants in Brazil and South Africa.

In the short term, this decentralisation process may mean module prices stagnate or even rise in some markets. Perversely, it may also encourage more governments to implement domestic-content rules.

Over time, however, the price discrepancy between modules produced in China and elsewhere will soften — and the advantages of having a local manufacturing presence may become clearer, even in the absence of local-content rules.

“Maybe if you’re a Yingli, it’s worth having a factory in a place like Brazil just to get a seat at the table with the government and big utilities,” muses Colville.

From CSun’s perspective, the positive reaction in Turkey — from customers and bankers to politicians and media — has reinforced its belief that the headaches of opening shop on the outskirts of Istanbul have been worth it.

“Initially there might have been a feeling of, ‘Oh, CSun is just going to rent some office space and switch some labels on boxes and pretend its modules are made in Turkey’,” says Shen.

“But once we get customers and bankers to come here, to see what we’re doing, they understand that we’re not bluffing. We’re really here.”