Taiwan solar cell makers to see boost on back of China tariffs, but will effects be long-term?

23. May 2012 | Top News, Global PV markets, Industry & Suppliers, Markets & Trends | By:  Tim Ferry

Taiwan looks likely to see a substantial boost to its solar cell industry following the latest U.S.-China trade case announcement, but will it be enough to offset declining margins and the industry’s core issue – overcapacity in supply?

Taiwan Yong An Solar Park

The Taiwanese government is often seen as dragging its feet on solar power installations.

While the solar world market explores the ramifications of the DOC’s recommended over 30 percent tariffs on Chinese-made solar cells, at least one thing seems clear – Taiwan is likely to see a boost to its solar industry.

The island nation, located just off the coastline of China’s Fujian province, shares not only proximity, but deep ties with its larger neighbor – cultural, linguistic and economic – that point to its role as obvious alternative for Chinese solar makers. And as the number two solar cell producer, with a 12 percent world market share, the country has both the capacity and capability to pick up any slack in the U.S. market.

Taipei-based, Fubon Securities analyst, Daniel Tzeng says he expects the ruling "to prompt Chinese cell manufacturers to shift orders to Taiwanese makers." Furthermore, he says local cell makers are already seeing "order influence" from China, and expect this to continue throughout the summer. 

Aaron Chew of Maxim Group, an investment banking, securities and investment management firm, concurs, saying he has been in communication with some of the biggest players in both China and Taiwan, and they all report that they have been in negotiations since the beginning of the year on how to deal with any potential tariff issues.

SolarWorld brought the case before the DOC last October and, since then, the global solar industry has been alight with rumors, with some predicting punitive tariffs as high as 250 percent. The newly announced tariff, combined with already approved countervailing tariffs of between 2.7 and 4.9 percent, is still substantial and will likely impact China’s market strategies. Chew says the low cost of shipping between China and Taiwan, compared to the cost of the tariff "obviously suggests this is a viable means of to circumvent the tariff."

The irony is not lost on critics of the ruling. Rather than supporting the U.S. solar manufacturing industry, the ruling might just hand a substantial amount of the U.S. solar market alternatives to markets like Korea, Japan and, in particular, Taiwan.

Boom or bust?

But while Taiwan makers are likely to see a short term boost, skeptics question for how long and how large this boost will be. They also note that ultimately, the ruling does little to address the core issue facing the industry: overcapacity in the market. In fact, some analysts feel it might even make the situation worse.

Taiwanese firms have cut manufacturing capacity over the past year as prices plummeted by 50 percent in 2011, and have thus far continued their slide by another 20 percent in 2012. Consequently, Taiwanese firms are currently working on about 70 percent capacity. Increased sourcing from Chinese firms is likely to prompt Taiwanese firms to bring back that 30 percent laid up capacity back online.

However, Daniel Tzeng, from Fubon Securities, a subsidiary of Fubon Financial, which is Taiwan’s second largest financial holding company, reminds people that the DOC is only preliminary, and "Chinese makers will not lower their output just because of this initial judgment."

As Taiwan is a major player in the market, any additional capacity brought online will only worsen the massive overcapacity that already exists in the global market. China’s 18 gigawatts (GW) of manufacturing capacity comprises roughly 60 percent of total global capacity, which exceeded total global demand in 2011 by 40 percent. Even without Taiwan’s additional capacity, the most rosy forecasts for 2012-13 solar demand – around 30 GW installed – would still leave the global market with 25 percent overcapacity.

While Taiwan makers might get a boost in the short term, "the grander implications of this is its going to further exacerbate the supply and demand imbalance in solar," says Aaron Chew.

This overcapacity has led to downward pressure on pricing throughout the value chain. Tzeng says that all of Taiwan’s major players announced losses in the first quarter (Q1) of 2012, and predicts continuing losses in Q2.

He believes the reasons include high costs of raw materials relative to their selling price. More orders only leads to higher expenses. "If they gain more orders and they produce more it means they will suffer more losses," although he concedes his forecasts for Q2 losses are "minor" compared to Q1.

This catch-22 is seen throughout the solar industry, but is acutely felt in Taiwan by dint of its occupying of the middle of the value stream. Relatively high costs for upstream polysilicon combined with low prices for cells mean cut deeply into margins.

How sustainable is solar?

Trapped in the middle, then, between higher upstream costs and low downstream selling prices, is Taiwan – and the world’s – solar cell industry even sustainable?

"I haven’t seen any turnaround point that will offer any opportunities for cell makers to turn a profit," says Tzeng, citing what many see as anemic demand for 2012 and after. Subsidies are being reduced across Europe and the question remains whether the other solar hotspots – the U.S., Japan and emerging markets – will be able to make up for Europe’s expected drop in solar demand.

Aaron Chew notes that falling prices have helped solar reach its grid parity goals, but that a 30 percent tariff is not going to help. And in a very price sensitive industry, where 20 years of energy need to be paid for upfront, "the pressure’s on" to reduce overall systems costs.

Still, Maxim’s Chew remains optimistic that demand will pick up and that the economics of solar will ultimately balance into sustainable prices at all levels of the value stream.

Country of origin

While the long term considerations remain in play, in the short term the ruling does allow Taiwan to distinguish itself from its neighbor. Motech, for one, announced it would begin labeling its product’s country of origin to ensure that cells made in its Taiwanese plants don’t get subject to the same tariffs as those made in its China plant. Del Solar’s company spokesperson Austin Chiu says that as the company also has production sites on both sides of the straits, "proper product allocation will be necessary." 

Another distinguishing feature between the two sides of the straits is domestic demand. While China is often cited as having huge demand potential, Taiwan’s demand has been notably weak. Out of a total installed world photovoltaic capacity of 38 GW, Taiwan plans for less than 70 megawatts in the coming year, and only 3.5 GW by 2020, when total grid capacity should exceed 65 GW. Does this reflect a lack of faith in their own product?

Perhaps, but it also reflects the peculiar politics of the island nation. Despite importing 99 percent of its energy, Taiwan’s government heavily subsidizes energy costs for consumers. Everyone from international environmental groups to power utilities say that Taiwan must raise the price of electricity to more accurately reflect the costs of production accrued by beleaguered Taipower, which has operated in the red for the past five years, and to stimulate energy conservation.

But when President Ma’s administration announced rate hikes to bring the prices more in line with costs, it was met with howls of protests from the opposition party, and the President was forced to rescind most of the increases. Taiwan actually offers an attractive feed-in tariff of about NT$8.00 (about US$.25) per watt, but the government is often seen as dragging its feet on solar power installation.

Why Taiwan?

Taiwan, officially known as the Republic of China, split from the mainland in 1949 with the retreat of the Chinese nationalists (KMT) to the island. Long supported both militarily and economically by the U.S., Taiwan was considered a bulwark against communist Chinese power. The two sides of the Taiwan Straits routinely bombarded each others territory until the 1970s, with thawing tensions allowing for cultural and family ties to bring the two sides closer. Economic ties have flourished since the 1980s, and Taiwan remains among the biggest sources of FDI to China.

Furthermore, some of China’s largest employers are based in Taiwan, including the world’s largest contract manufacturer, Hon Hai Precision Industries. Since the ascension of Ma Ying Jeou to Taiwan’s presidency in 2008, and his reelection in January this year, the two nations have become even closer. Economic ties continue to grow under the Economic Framework Treaty Agreement (ECFA) and China is Taiwan’s largest trade partner.

Several Taiwanese solar power makers have followed much of the country’s industrial production offshore to China, including Taiwan’s largest solar maker, Motech, and DelSolar, which were attracted by the lure of cheaper costs. Others, such as Taiwan’s number two maker, Gintech opted to stay home in Taiwan, not out of a sense of patriotism, but cost efficiency. 

Gintech spokesperson, Becky Yu says the reason Gintech invested in Taiwanese manufacturing is that the expertise and systems already exist there. Taiwan is the home to world’s number one contract semiconductor, Taiwan Semiconductor (TSMC) along with United Semiconductor (UMC) and several multinationals, including Texas Instruments, have substantial operations on the island.

As solar cells are essentially semiconductors, this means that Taiwan has a ready source of highly experienced technical personnel, and Yu notes that most of Gintech’s engineers have experience working for the big semiconductor makers. The company decided that replicating this depth of technical expertise in China would probably not be worth it, despite overall lower costs.

Taiwan also has a robust network of public/private research centers, such as the Industrial Technology Research Institute (ITRI). Several of Taiwan’s largest technology firms, including TSMC and AU Optronics were established on the back of developments made there.


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