China's PV needs an imminent supply-side reform

Source: Dacade

Yellen's recent visit has repeatedly raised the issue of China's overcapacity and the export of cheap goods. Some people also said that the visit was "not about drinking", and it was intended to use the topic of overcapacity to pressure China to seek some positive support in the process of dealing with inflation in the United States.

The international financial situation is confusing, but we can and should analyze a series of issues related to industrial competitiveness:

Does China's strong advanced manufacturing industry, including but not limited to photovoltaics, need supply-side reform?

If there is no supply-side reform, is it in the interest of the country to be cheap and involuted in the long term?

Is it the same as the statement to a certain party, that the advanced production capacity is not excessive, and it cannot even meet the demand?

01. The photovoltaic industry is facing a severe problem of overcapacity

At present, the price of photovoltaic modules has fallen to less than 0.8-0.9 yuan, corresponding to the price of polysilicon in the range of 50-60 yuan. In the last round of overcapacity, polysilicon prices remained around RMB 60, while module prices were around RMB 1.4.

At the same polysilicon price, modules are 40% cheaper.

Although factors such as larger wafer sizes and improved cell efficiency have led to cost savings, they are still far from falling prices. In the context of the rapid increase in the installed capacity of the photovoltaic industry in the past two years, the embarrassing situation that the main material link of the whole industry is facing losses across the board has to trigger our reflection.

Of course, it's a problem of overcapacity.

The industry-wide supply of main materials is as high as 1,000GW+, and we estimate that the global module demand in 2024 will be about 636-715GW (530GW of global installed capacity this year, with a capacity ratio of 1.2-1.35), which means that China's production capacity has exceeded the optimistic demand compared to market expectations by more than 50%, and considering the rest of the world, the capacity exceeded may be even greater.

Of course, if we are bound to discuss the topic of the so-called shortage of advanced production capacity, it is undoubtedly a bit self-defeating.

With supply exceeding demand by more than 50%, price wars seem inevitable. Both new entrants and old leaders have the need to expand their market share to maintain their financing and industry position, which accelerates price clearance.

We know that the main photovoltaic material links, except for modules, are heavy assets, and it is not easy to clear them. According to economic theory, it is only when the price falls below the "variable cost" or its cash flow breaks down prematurely that it leads to an exit. This has lengthened and expanded the time and power of the price war in the photovoltaic industry.

02. The root cause and new characteristics of this round of photovoltaic overcapacity

This round of overcapacity has its full historical background and is the result of the resonance of changes in the industry pattern. It is obviously the heaviest in the history of the industry, but it may also be a phoenix nirvana.

From the perspective of external reasons: in recent years, the stock market IPO financing has been greatly released, resulting in popular industries can easily refinance and list from the capital market, greatly expanding the scale of production capacity;

From the perspective of internal reasons: the photovoltaic industry has accelerated technology iteration since 2021, from large silicon wafers in the silicon wafer sector, N-type silicon wafers to N-type TOPCON cell iterations, and then to the iteration of large-size modules. New entrants have no capacity burden and can quickly gain market share and financing by cutting into the so-called advanced production capacity, in addition, the original leading enterprises are also forced to increase new production capacity to maintain market share, which exacerbates the risk of overcapacity;

Since 2020, vertical integration of the PV industry has gradually become the mainstream, and traditional specialized giants such as LONGi, Trina, Tongwei, Canadian Solar, and Risen Energy have been fully integrated, which is equivalent to the close replication of their previously lacked production capacity, which is the deep-seated cause of overcapacity.

In line with history, the financing environment has improved and demand growth is expected, and the new features are: a large number of iterations in all links, full vertical integration and unprecedented IPO scale, and full integration is the most significant new feature, which has also caused a huge expansion of production capacity.

The improvement in the financing environment, the unprecedented IPO and the return of a large number of overseas PV giants to A-share financing have all contributed to the short-term impulse to expand capacity.

However, I must also clearly realize that in the industry without the premise of supply-side reform, the involution caused by excessive capital easing has undoubtedly exacerbated the waste of social capital, and even extravagance. Of course, this is not only happening in the photovoltaic industry, but now it has swept through most industries without a supply-side framework.

Full integration is a trend in the photovoltaic industry in recent years, and it is also an intrinsic demand. However, after full integration, it means that the production capacity of the original specialized subdivision chain will continue to be more than doubled, and it is fully refreshed, which causes the rapid accumulation of production capacity in the short term - is one of the main reasons for overcapacity at this stage.

However, after full integration, the survival of the fittest enterprises may have stronger support, and the scale effect and demand lock-in have led to a significant increase in the industry threshold in the later stage.

03. If there is no supply side, where will it go?

Recently, it has been reported that some parts of Europe are using China's cheap PV modules as fences, and some application markets have significantly increased the capacity ratio due to the fact that the modules are too cheap.

What we see today is that most of the PV links are close to or even below the cash cost, and the whole industry is no longer profitable. Even auxiliary materials and other links are competing to be depressed, or losses or small profits.

As China's industry with absolute global leadership, it is still so, which is embarrassing.

Thinking about 2016 before the steel industry has been a wide range of losses for many years, if the supply side reform is not carried out, then a large number of state-owned iron and steel enterprises will withdraw from the market, a large number of workers can not be solved. At the same time, the overcapacity of China's steel industry has led to high prices of imported iron ore, high profits for foreign resource suppliers, and large losses for the entire Chinese steel industry.

Similar cases have occurred in glass, chemical, non-ferrous metals and other industries.

If the decision-makers do not take the opportunity to carry out the supply-side reform of the photovoltaic industry at the moment, then we may see the following scenes:

1. It will take time for the fierce competition in the main material link of photovoltaic enterprises, and the overall loss of the whole industry is inevitable. In an industry that almost monopolizes the global industrial chain, it is equivalent to China subsidizing overseas carbon neutrality with "national funds".

Half of China's modules are exported, and as the share of overseas modules recovers, the share of exports will continue to expand to 70%.

Without supply-side reforms, it is really embarrassing that China's powerful manufacturing industry is subsidizing overseas carbon neutrality, and this result is not caused by overseas but by the Chinese industry itself.

2. China spends a lot of cheap energy to supplement overseas.

Although photovoltaic power generation can amplify electricity by about 100 times (the amount of electricity consumed to produce related equipment and auxiliary materials and the amount obtained in the next 30 years), it is only three times that per year, and China exports half or more of the modules in the future. This will lead to the problem that China's annual PV manufacturing consumption can only compensate for the amount of electricity generated by new PV in the country.

The industry-wide uncontrolled overcapacity is equivalent to China subsidizing overseas with cheap energy, while energy consumption and manufacturing costs remain at home.

3. Countries have increased trade protection, and overcapacity is not conducive to industry iteration and innovation.

Cheap PV modules have led many countries to take trade protection measures against Chinese products, especially in the United States, India, Turkey and other countries. By imposing tariffs and blocking imports, countries have intercepted large amounts of taxes from Chinese PV companies and subsidized domestic industries. As a result, enterprises in these countries, which are not competitive, can rely on their own markets to obtain a large amount of excess profits and then carry out R&D iterations.

On the other hand, in China, a large amount of funds are used for involution and capacity competition, many new entrants have lost a lot of money, and leading enterprises have also made small profits or even losses, which is not conducive to the future domestic industrial research and development and iterative upgrading, and is an act of killing chickens and eggs.

If this phenomenon is not faced up to and changed, the advantage of China's advanced manufacturing industry may gradually turn into a disadvantage, and the so-called absolute lead will be eroded by overseas companies.

4. China's photovoltaic industry is also very strong, and it should enjoy its due profits, and if it does not reform the supply side, it will lead to a waste of a large amount of social capital for a longer time. These funds are supposed to contribute to stabilizing economic fundamentals. These capitals can even enter the accelerated construction of China's new power system, and can also enter the global construction of new power systems, giving full play to the historical opportunities of energy transition.

If the supply-side reform is not carried out at this time, we can imagine that the whole industry will continue to compete fully in the next 1-2 years or even longer, and even some companies will accelerate their gambling, resulting in a waste of social resources, especially industrial capital and government capital. These funds should have injected vitality into the continued weakening economic fundamentals, rather than being wasted on the already leading manufacturing sector.

In the face of today's judgment that "advanced production capacity" is not excessive, it is still in our ears, but what we actually see is that the so-called advanced production capacity is no longer advanced after the full release, and has been excessive. And these N-type capacity prices have also "run wildly".

These advanced production capacity may not even be advanced in the context of accelerated iteration of technology in the future, and these huge capacity plans are bound to become another victim of accelerated iteration of technology in the future.

In the face of such a dilemma, why should we bind ourselves?

We should take the opportunity to carry out the necessary macro management, otherwise when it is really difficult to return, a large number of photovoltaic companies will go bankrupt, only to find that they have caused greater costs, and these costs are not necessary.

We found that the profits of the photovoltaic glass industry can still maintain a good level, or even stand alone, which is due to the previous supply-side results of this industry

04. How to promote the photovoltaic supply side?

Through supply-side reform, the above problems can be changed or improved, the global competitiveness of the photovoltaic industry can be improved, and stable profits can be invested in technology iteration and research and development, so that China's advantageous industries can go more widely global. Only the photovoltaic industry with leading technological advantages can penetrate trade barriers, rather than through cheap and cheap.

So how to carry out supply-side reform? Refer to the glass and steel industry the same.

1. Carry out the top-level design of the overall capacity planning and limit the blind expansion of production capacity. If technology iteration is required, replace the old capacity with new capacity. For the annual new demand, a certain amount of growth is given.

2. The new capacity plan is uniformly placed in the National Development and Reform Commission for approval.

3. New entrants can only carry out capacity construction after they have fully demonstrated advanced technology and iteration.

4. Restrict the refinancing and listing of the photovoltaic industry from the perspective of increasing capacity construction. Restrict the participation of local enterprises and state-owned capital in the construction of new production capacity.

5. Encourage acquisitions in the photovoltaic industry. For new entrants, the production line may be withdrawn more quickly, and mergers and acquisitions are encouraged to complete the past capacity expansion goals.

05. Is the marketization that the market pays attention to real marketization?

At present, the official statement is obviously more in favor of market-oriented liquidation, that is, it is regulated by the market.

However, we emphasize that what has happened in the photovoltaic industry in the past few years is of course not only the overcapacity of the photovoltaic industry, but also largely not market-oriented.

The unprecedented practice of IPOs and refinancing has distorted marketization, which has been further distorted by the competition between local governments and state-owned capital.

The super-market-oriented expansion of the capital supply level has brought about the involution of the manufacturing industry, which is not the result of real marketization, but the result of policy fueling. Stopping at the right time is not to completely restrict marketization, but to cater to the overkill behavior of marketization.

We need an industry that is constantly fully competitive to gain a leading position in the global market, but we also don't need an advanced manufacturing industry that occupies a lot of social resources to fully involute the counterproduct. We should have invested these resources in more market-oriented aspects to maintain economic activity and stability, right?

Although we know that cheap photovoltaic modules are beneficial to the domestic energy transition, it is extremely beneficial for a large number of state-owned power companies to deploy photovoltaic energy. However, we are well aware that China's photovoltaic industry is a product that can lead and spread all over the world, which deserves our key care.

In the future, a larger proportion of the photovoltaic industry will be exported or production capacity will go overseas, and the competitive advantage of China's photovoltaic industry will be maintained, not only by relying on the crushing of production capacity and price, but also by maintaining reasonable profits for a long time to accelerate industrial iteration and technological research, so that other countries will continue to be out of reach, so as to break through trade barriers, which is in line with our long-term interests.

Just like the pharmaceutical and technology industries in the United States, they have grabbed high profits and continued to lead the world, even if they are American photovoltaic companies. In the U.S., its own advanced industries can be said to be well cared for, and in China, of course, the same should be applied, and it is more worthy of protection to maintain a long-term competitive advantage.

06. Final statement

Although the PV industry is currently facing various problems, especially overcapacity caused by deep integration and a large amount of social capital, we should still maintain a positive view on the future development prospects of this industry and the global leading edge of China's industry.

In the context of no supply side, leading enterprises have accelerated the "going to sea" to promote the marketization of production capacity. After the "comprehensive integration", "IPO climax and local capital fueling", "technology iteration" and other factors jointly promoted by Nirvana, it should be regarded as the pace of wider barriers in the photovoltaic industry, and the next cycle should be better.

However, as China's leading industry, we still expect China's decision-makers to carry out upper-level planning faster and more accurately, and also avoid internal friction and waste of funds, so as to achieve high-quality development.