US-China trade dispute: 'Asian manufacturers won't give up this market'

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While some solar industry organizations have described this week’s decision by the U.S. Commerce Department to raise tariffs on Chinese solar imports as "unprecedented," Stefan De Haan, principal analyst, Photovoltaic, at HIS, says the move came as no surprise. Indeed, while echoing other analysts’ views that a negotiated settlement was unlikely, De Haan points out that Chinese and Taiwanese manufacturers have already acclimated themselves to a price range of between $0.75 and $0.80 per watt.

De Haan adds that Chinese and Taiwanese companies have been making efforts to reach a negotiated settlement since the beginning of the year, but adds, "from what we’ve been hearing, there has not been much progress. It’s still possible that there will be a negotiated settlement. What the Asian side wants is a minimum input price like in the EU, this would be an ideal outcome for them, but the signs we see are not too optimistic."

The Commerce Department’s decision, he adds, was not a big surprise. "Rather, if they had decided to stop these duties it would have been a much bigger surprise."

Nevertheless, despite looming price hikes and new strategies, like establishing manufacturing sites outside of China, De Haan stresses that at the end of the day, "Asian suppliers will all still enjoy good business because the U.S. market is at the moment the most attractive in terms of absolute growth in the world."

Chinese companies are quietly evaluating their options as they await the U.S. International Trade Commission’s final injury determinations, expected to be handed down next month, De Haan says. The IHS analyst adds that China’s targeted manufacturers "are prepared for the case that the final outcome will be negative from their perspective in that preliminary duties will finally be confirmed and then they we will see more capacity ramping up outside of China and Taiwan to serve the U.S. market."

Bienvenido a Mexico!

If the ITC upholds the Commerce Department’s ruling, as expected, De Haan says Chinese companies will likely set up shop closer to the U.S. border.

"We know that several players are evaluating Mexico, for example. We’ll hear a lot more public announcements once there is a final decision. Mexico is definitely the hottest region there, they already have a supply chain there and it’s close, it’s one of the countries where it makes sense to go to."

In addition, original equipment manufacturer (OEM) models like that of Chinese PV manufacturer ReneSola, which serves the European market largely through its non-Chinese OEM operations, are certain to become increasingly popular, De Haan adds. “This will also be a solution to serve the U.S. market – having capacity that is not owned by the suppliers themselves but by OEM partners."

One key aspect of the current U.S. anti-dumping and countervailing duty investigations against Chinese imports is the 2012 tariff applying to Chinese modules with Chinese cells, which remains in place and which De Haan says is significant in understanding the need for capacity outside of China.

"As of mid-2014, on the initiative of SolarWorld, these tariffs are being reviewed. That’s the real danger at the moment for the U.S. market and the manufacturers. With the current tariffs on the Taiwanese cells, this is already pretty clear. The market has had almost half a year to digest this. The loophole for Chinese companies using Taiwanese cells to sell in the U.S. market has been closed, but they still have the option — and many of them are already doing it – to switch back to their own cells and just take a little bit of a margin hit on their U.S. operations. It’s nevertheless better than losing a footprint in the world’s third biggest market. But if these tariffs from 2012 that apply to fully Chinese modules are now retroactively increased, then of course this could change the situation and then there would be a real need – depending on how much they are increased – for capacity outside of China."

If not, De Haan says the situation could remain as it has been for the past four to six months, with Chinese companies serving the U.S. market building up inventory with their own modules. “Of course prices have gone up since then and the margins of Chinese manufacturers have declined and U.S. and Western manufacturers have become more competitive in the market, but, nevertheless, everybody is still doing good business. This situation could continue but only if the 2012 tariffs are not substantially increased, and that’s still to be decided upon.

"When you look at the tariffs they imposed now on the Taiwan trade case, we could imagine that also the Chinese tariffs could be increased a little bit but I don’t think that it would change the situation completely. We will probably see a mixture depending on the individual companies – some might still be able to serve the U.S. market at final prices of $0.75 to $0.80, others will fully go for capacity outside of China, so that it could be a mix."

Taiwan expected to focus increasingly on downstream operations and the Japanese market

As for Taiwanese producers, De Haan predicts that they will expand their operations more downstream and build up their own module manufacturing in order to generate demand for their own product and make up for dwindling Chinese orders rather than setting up manufacturing overseas. Taiwanese firms will focus increasingly on markets like Japan, he adds, pointing out that they have to some extent given up on the U.S.

"But of course, the Japanese market is not expected to grow further in the next years and China, by definition, is extremely hard to enter for foreign suppliers,” De Haan notes, adding that the U.S. is "the one big growth market in the next three years in terms of absolute growth, not relative growth of course. It’s a market that a top supplier can hardly neglect, so I could imagine that the Taiwanese will seek solutions, either through OEM partners or through building up their own capacity. At the moment they are still avoiding these decisions but without that they won’t have a chance to get a foot in the U.S. market.”

According to Tuesday’s decision, Taiwanese PV manufacturer Gintech will be paying nearly the same rate at 27.55% while Motech had its rate reduced by more than two-thirds to 11.45% and all other Taiwanese PV makers have had their anti-dumping rates nearly halved to 19.5%.

De Haan says it’s hard to tell at the moment whether the lower rates will really offer a reprieve for Taiwanese firms.

“It could help, but it’s a bit speculative at the moment. You could assume that with these reduced tariffs, the fully Taiwanese module could still be sold in the U.S. at a reasonable price. They would be competitive with the Chinese tariffs and also with Western suppliers.

“Most of these scenarios really tend to point to a price level of $0.75 to $0.80 in the U.S. market but not much more.”

‘At the end of the day they will all still enjoy good business because the U.S. market is at the moment the most attractive in terms of absolute growth in the world.’

While De Haan notes that the Commerce Department ruling will help U.S. manufacturers become more competitive, he stresses that “Asian manufacturers won’t give up this market. What will happen is that prices will increase but they have already done that – we saw price increases from $0.60 to $0.65 to now $0.70 to $0.75 and maybe a little will still come on top but most of the increases have already happened. Local manufacturers, similar to the EU trade case, will increase their competitiveness towards Chinese suppliers, but I don’t think they will be able now to massively increase their market share at the expense of Asian suppliers. The Asian suppliers will react and at the end of the day they will all still enjoy good business because the U.S. market is just at the moment the most attractive in terms of absolute growth in the world.

“The effect is really on the margins of the Asian manufacturers and in particular on the Taiwanese cell makers and the effect is also on some small to mid-size EPCs in the U.S. that have projects in place calculated with much lower prices than we’re seeing now in the market. This could affect projects of a few hundred megawatts in total. There will be effects throughout the supply chain but no massive shifts.”