How Do You Say "Mexico" in Chinese?
The answer to this is
, and I bet you this word has been tossed around in many Chinese
solar companies' boardrooms over the past months. But why would
Chinese solar companies be interested in Mexico?
The U.S. Department of Commerce recently made a preliminary
decision: to impose tariffs on solar panels manufactured in China.
After this announcement, we saw two (expected) reactions by
Real Goods Solar
). Although the tariff decision was probably just a catalyst,
SolarCity announced its
of Silevo and its plans to set up a manufacturing facility in the
Chinese solar producers have a few options in terms of their
responses to the tariff decision. Let's review some of them.
The Mexican Option
The Mexican option is about building manufacturing facilities in
Mexico. The Chinese could start setting up manufacturing facilities
of their own in Mexico.
There are numerous benefits to producing in Mexico. The country
to see 30% lower labor costs than China by 2015. Moreover, Mexico
has 44 free-trade agreements in place, which are far more than
China's 18 agreements.
The Americas are growing to become a strong consumer of solar
modules; therefore, getting production closer to end-consumers will
lower shipment costs.
The Malaysian Option
Malaysia could turn out to be a quicker step to solving the
tariff problem. Setting up shops in Malaysia, the Chinese will join
First Solar and SunPower, both of which already base a great share
of their manufacturing in the country.
Manufacturing in Malaysia will keep production focused in Asia
while possibly solving the tariff problem. Another advantage of
moving production to Malaysia would be that old production lines
could be moved to the new facilities fairly easily to immediately
start producing panels for the U.S.
The African Option
Africa is often taunted as the future base of global production,
and since Africa's solar demand is rapidly growing, it would make
sense to start producing in Africa.
There are already several producers making panels in Africa, and
we might see more of that going forward. Africa has abundant land
available and very low labor costs. It is no secret that China is
heavily investing in Africa, and 15.3% of its 2011 investments went
The ReneSola Option
This is my least favorable option. Pursuing the OEM production
profile. ReneSola (
) has secured about 1.1GW of OEM worldwide. The company has a
network of 11 plants located throughout Europe, Africa, South Asia,
The OEM strategy has the worst cost implications. ReneSola
reported that OEM made panels cost them about 20% more, or
$0.60/watt instead of their in-house cost of $0.50/watt. I view
this option as a short-term solution, as in the longer term,
starting production bases in Mexico, Malaysia, or Africa would
offer a lot more value.
The tariff decision just underlines the importance of the solar
industry to diversify production into at least one other location.
The timing could not have been better, as the industry is getting
ready for its next expansion cycle.
According to IHS, by the end of 2017, the industry will reach a
70GW annual shipment rate, which is almost 90% greater than 2013's
level. Global capacity will need an additional 10GW-15GW of
modules, and 20GW of cell and wafer capacity to supply demand.
As the Chinese weigh their capacity expansion plans, I expect
that a part of it will include a build-out of tariff-free capacity
outside of China. There do not have to be several GW facilities; a
few hundred MW will do it for most companies for now.
GTM research had provided us with an informal summary of what
each strategy means in actual prices per watt in the U.S.
As we approach the second phase of capacity expansions in the
industry (which are expected to start in 2015), we could see a
smarter and more balanced capacity expansion.
A part of this will be divesting some of the capacity to
locations outside of China, such as Africa, Malaysia, and
Current supply and demand outlooks provide assurance that moving
some of the production outside of China could fit right in with the
general trend of expanding industry capacity. Given this
information, the Chinese solar industry has plenty of ammunition to
tackle its current trade war with the U.S.
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