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A worker builds panels at the Wuxi, China, plant in 2011. Suntech was felled by oversupply and debt.

Solar’s future dark in China

Suntech and its bright visionary illustrate pitfalls

Bloomberg News photos
A worker inspects a solar panel last year at the Arizona plant of now-bankrupt Chinese company Suntech.

– Business was going gangbusters for solar module-maker Suntech and its chief executive, Shi Zhengrong, just a few years ago. In 2007, Time magazine called him one of the “heroes of the environment.”

In 2009, New York Times columnist Thomas Friedman also cited Shi and Suntech as models of China’s green leap forward – which he called “the Sputnik of our day” and a spur for U.S. clean energy policy.

Now, however, the Chinese Sputnik has crashed to Earth, and the Sun King has been toppled. Buffeted by fierce global competition, faced with a worldwide manufacturing glut and hobbled by heavy debt, Suntech’s directors ousted Shi in March and defaulted on $541 million worth of convertible bonds 10 days later.

The following week, a Chinese court declared the company bankrupt after a petition from eight Chinese banks. Earlier this month, the company announced that its 2012 revenue had plunged 48 percent from the previous year.

Suntech – which in 2011 was the world’s biggest seller of silicon-based photovoltaic modules – was once valued at $13 billion on the New York Stock Exchange; it is worth less than 1 percent of that today.

In February, Pavel Molchanov, an analyst with the investment firm Raymond James, called Suntech “a proverbial ‘zombie’ company that perfectly exemplifies the Chinese solar industry’s massive overcapacity and consequently distressed balance sheets.”

The collapse of Suntech has broader significance than the damage inflicted on the company’s shareholders and creditors; it has punctured myths about the strength of China’s solar business – and its ability to depend on government support in a pinch.

Until now, policymakers in China have used subsidies to create a world-leading “green tech” industry that would push the country up the economic value chain.

But in the race for global solar supremacy, world manufacturing capacity has grown to 60 gigawatts, most of it in China. That outpaced solar demand, which is expected to reach about 35 gigawatts this year, enough to power about 26 million homes.

So prices of photovoltaic panels have plummeted, and it will take three to five years for overcapacity to shrink, says Bill Wiseman, managing partner of consulting firm McKinsey’s Taipei office.

But China’s government has not rushed to the rescue. Last month, another Chinese solar panel-maker, LDK, defaulted on a loan payment, citing cash problems. And Chen Yuan, the outgoing head of the China Development Bank, declared in March that the bank should curtail its solar lending.

In the meantime, the manufacturing of silicon-based solar modules has become a commodity business, producing large volumes and, at best, tiny profit margins for products that are virtually indistinguishable to consumers. Innovation took a back seat to expansion, particularly in China.

Promising start

Shi, who did solar cell research and earned a Ph.D. in Australia, used $6 million in seed money from the Wuxi local government to start Suntech in 2001. At the time, Wuxi was turning itself into a technology center. In addition to cash, it provided Suntech with land and tax benefits as well as cheap electricity.

In December 2005, Suntech went public, becoming the first private Chinese company listed on the New York Stock Exchange. Within four years, Shi was a billionaire. In 2011, Suntech, with sales of $3 billion, was the world’s biggest maker of solar panels. And it set up an assembly facility in Arizona.

But Shi wasn’t the only one jumping into the solar business; it became a classic bubble. In China alone, there are hundreds of manufacturers. China has about two-thirds of the world’s solar panel making capacity.

Suntech tried to distinguish itself with its Pluto technology, a manufacturing process that allowed the cells to convert sunlight into energy more efficiently. But other companies also are setting new records for efficiency.

“Ten years ago, it was Suntech that was really a first mover in building China’s solar industry, and Dr. Shi at the time was a visionary of sorts,” Molchanov says. “He helped create this low-cost manufacturing industry in China.”

Clouds roll in

Then, just as Suntech became the world’s largest solar panel manufacturer, the European debt crisis hit. Profit margins collapsed, and customers’ unpaid bills piled up.

In June 2012, a puzzled Citigroup analyst noted in a report that as major countries such as Germany and Italy sharply reduced subsidies, Chinese manufacturers led by Suntech boosted capacity 30 percent, “only exacerbating the excess supply conditions.”

Shi relinquished his chief executive position but remained executive chairman. Still, he was upbeat. He blogged, “Do not despair. This is a necessary rite of passage for our maturing industry.”

Nine months later, he was ousted. In a statement at the time, he said the board members “are not focused on the issues most important at hand and are not acting in accordance with the best interest of the company.”

Suntech is not unique. Most Chinese solar panel manufacturers have been losing money. But Suntech had a lot of debt, incurred during its rapid expansion.

“Everyone in the industry faces the same challenges,” Molchanov said. “But what killed Suntech had nothing to do with the technology or the problems with solar in Europe. It was the balance sheet.”

Ben Santarris, a spokesman for rival SolarWorld USA, a subsidiary of Germany-based SolarWorld, said, “Chinese companies can sell below their costs for only so long before they either go out of business or the Chinese government props them up, extending the anti-competitive problem.”