German Solar Firms Eclipsed by Chinese Rivals

Photo Gallery: Solar Eclipse in Germany

Green energy used to be Germany’s great hope for its economic future. But now the German solar industry is in trouble amid huge losses, job cuts and the threat of bankruptcies. Chinese firms are gaining an ever greater share of the German market — and are benefiting from German subsidies for renewable energy.

The mayor of the eastern German town of Bitterfeld-Wolfen, Petra Wust, is all too familiar with booms and busts. The region was a center for the chemical industry in communist East Germany. Wust experienced at first hand how the industry was wound down after the fall of the Berlin Wall, putting about 50,000 people out of work.

Wust was also there when the region experienced rapid growth, earning it the nickname “Solar Valley.” In 1999, as the town’s then-treasurer, she helped persuade Q-Cells, a manufacturer of photovoltaic cells, to locate its headquarters in Bitterfeld-Wolfen.

The town bent over backwards to smooth the way for the company, says Wust, and the effort paid off. The solar panel business flourished, and the company, which began its operations with 19 employees, soon had more than 1,000 people on its payroll. When Q-Cells went public, one member of its works council even became a millionaire.

A dream seemed to have come true for many people and for the region, which had once been notorious for the pollution caused by lignite-fuelled power plants and the chemical industry. One photovoltaic manufacturer after another located in the area. The clean, future-oriented industry generated jobs and income, employing as many as 10,000 people in its heyday.

But now Q-Cells is struggling to survive. The company made a heavy loss in the second quarter of 2011. It doesn’t take a business degree to recognize the desperate situation in which the company, once the world’s largest solar cell manufacturer, now finds itself.

Solar Valley threatens to turn into a vale of tears. Mayor Wust fears that her town is heading toward another historic watershed. This time the fates of 3,000 workers are at stake.

Assorted Woes

The outlook has turned bleak for the entire solar industry. Companies that were the darlings of the stock market and the political world until recently are now experiencing a sharp downturn. Their share prices have plunged, as they downsize and write off millions in losses.

At Phoenix Solar, a systems supplier based in the Bavarian town of Sulzemoos, sales in the period from March to July were down more than 60 percent over the same period last year. The management of Berlin-based Solon is worried about the company’s ability to survive. Its future hinges on the banks extending a loan that expires at the end of the year.

In the United States, a few well-known solar companies have already run out of money. Last week Solyndra, a Silicon Valley maker of solar power arrays, filed for bankruptcy and laid off 1,100 workers.

A number of German companies are also facing legal problems. The former supervisory board chairman of Conergy, Dieter Ammer, faces charges of accounting fraud and insider trading in a Hamburg court, although he disputes the allegations. The public prosecutor’s office in the Bavarian twin cities of Nuremberg-Fürth is looking into allegations of wrongdoing by Utz Claassen, a former top executive at Solar Millennium.

Faced with their own problems, it comes as little consolation to the erstwhile sun kings that their counterparts in wind energy are dealing with their own woes. Nordex, a pioneer in the industry, plunged into the red in the first half of the year, forcing it to eliminate more than 100 jobs and reduce costs by €50 million ($70 million). In 2010, German wind turbine manufacturers as a whole saw revenues and jobs decline for the first time.

Dashed Hopes

The gloomy news from the solar and wind power industries comes as something of a surprise. After the catastrophe in Fukushima and the German government’s decision to phase out nuclear energy, it seemed obvious that makers of renewable energy systems would be among the winners of the so-called energy revolution.

“Germany is the global market leader in the renewable energy sector,” German Environment Minister Norbert Röttgen recently crowed. “If we expand this position, it will enhance the competitiveness of our industry and our country.” Meanwhile, Chancellor Angela Merkel said she anticipated “opportunities for exports, development, technology and jobs.”

Now, of all times, the green industries of the future are faltering. The goal of developing a new leading industry with global aspirations has become a distant hope. German players play only a secondary role in global markets and are steadily losing market share — despite being heavily subsidized. Or maybe the industry is ailing precisely because of the billions in government aid.

Hardly any other industrial sector has received such generous political support as the producers of green electricity, especially the solar industry. Germany’s Renewable Energy Sources Act (EEG), introduced 11 years ago, gave the industry a phenomenal boost. Nevertheless, the boom comes at a high price.

The EEG guarantees each provider a fixed price for the electricity it feeds into the grid (the so-called feed-in tariff) — paid for by consumers. The Rhenish-Westphalian Institute for Economic Research (RWI) calculates that, up until the end of 2010, electricity consumers paid roughly €81.5 billion for the expansion of photovoltaic technology alone. This “tsunami of costs” will only continue to grow, says the RWI.

Resting on Their Laurels

The bonanza helped small green energy producers transform themselves into sizable corporations within the space of just a few years. Hundreds of thousands of homeowners had solar panels installed on their roofs. As recently as last year, about half of the 16 gigawatts of solar modules installed worldwide were mounted in Germany.

The module producers could depend on a constant flow of orders. The problem is that they became lethargic as a result. Today German manufacturers are not nearly as innovative as their dynamic image would suggest. The industry invests only 2 to 3 percent of its revenues in research and development, a much lower percentage than in Germany’s famous machine-building sector, for example.

Not surprisingly, German companies are no longer as successful in selling their products, and their warehouses are full of inventory. “Eight gigawatts of solar cells are sitting in stockpiles worldwide,” estimates Frank Asbeck, CEO of Solarworld. Meanwhile, prices have hit rock bottom.

Only about six months ago, it cost about €28,000 to cover a 100-square meter (1,076-square-foot) roof with brand-name solar modules, says Asbeck. Today the price is down to about €22,000.

Many German manufacturers can hardly keep up, now that Chinese suppliers are flooding the world market with solar panels. The Chinese have set their sights on Germany, in particular, which has become the most important market for companies like Suntech and Yingli.

Suntech sponsors the team TSV 1899 Hoffenheim in the German national soccer league, while Yingli is an official sponsor of Bayern Munich. The marketing offensive has already had an impact, as the number of Chinese-made solar panels on German rooftops continues to grow. Even the competition admits that the Chinese products are just as good as German-made cells — and cost about a third less, on average.

Part 2: Chinese Companies Forge Ahead

At Suntech’s headquarters in Wuxi near Shanghai, workers in white uniforms produce solar cells in dust-free rooms. Visitors to the company are greeted by the smiling face of founder Shi Zhengrong on giant monitors in the lobby. Shi is one of the so-called “sea turtles,” the term used for up-and-coming entrepreneurs who have returned to China from abroad.

The 48-year-old is already one of the richest businessmen in the People’s Republic. Companies like Suntech and Yingli now dominate the world market for photovoltaics. The Chinese already generate close to half of global sales and almost 60 percent of profits in the industry, according to a study by the management consulting firm PRTM. This places the Chinese among the “biggest winners” of the last year, the study concludes. Eight companies from China and Taiwan are on the top-10 list of the fastest-growing players in the industry. There are no longer any German companies on the list, however.

This means that the Chinese competition is now more likely to benefit from the billions in feed-in tariffs in Germany than domestic producers. To a substantial degree, German electricity consumers are helping to fund the rise of Chinese solar producers. According to the Rhenish-Westphalian Institute for Economic Research, the average German household pays about €123 a year to subsidize green electricity.

Misguided Subsidies

The generous subsidies are a prime example of how the German policy of promoting green energy is pushing things in the wrong direction. Photovoltaics is by far the most expensive and most inefficient method of energy production. It consumes billions, and yet it produces just 2 percent of Germany’s energy requirements. A program to promote electricity conservation would be at least as productive, and much cheaper to boot — but it makes less of an impact than the production of shiny solar collectors. The operators of wind turbines also benefit from this controversial EEG subsidization policy, albeit with a smaller gap between costs and revenues.

The balance of power is also shifting in the wind market. Five years ago, there were four German names among the world’s 10 largest wind turbine producers. Today there are only two, Siemens and Enercon, while four Chinese turbine makers are now among the top 10.

The Chinese also benefit from government support in their advance on markets in Europe and North America. But China doesn’t promote the industry via consumers — it helps the companies directly. The country subsidizes the development of large production capacities, which allow manufacturers to reduce their costs even further. State-owned banks then help the wind turbine producers advance into export markets.

Chinese banks offer the operators of wind farms financing for new facilities. The cost of an offshore wind farm can easily reach €1 billion. Of course, Chinese manufacturers are also awarded the contracts to supply the turbines.

In Ireland, for example, the China Development Bank financed the construction of several wind farms, with the turbines being supplied by the Chinese manufacturer Sinovel.

Global Players

By comparison, medium-sized companies from Germany’s famous Mittelstand sector are the rule in the German wind power industry, so that coming up with the necessary funds for investments and expansion abroad can present a challenge. Some also lack experience in doing business in other countries. As long ago as 1998, Hamburg-based Nordex opened a plant in China, in the expectation of receiving contracts to build turbines there. But the Germans soon discovered that Chinese suppliers were often given preference.

A global corporation like Siemens, on the other hand, has both the capital and the connections to establish itself as one of the biggest producers of wind turbines. Siemens’ Munich-based wind turbine division, which, together with other companies in the Siemens group, already has a lot of experience in the Chinese market, is taking a different approach. It plans to establish a joint venture with Shanghai Electric, hoping that this will improve its chances of securing Chinese contracts.

Significant changes are taking place in Germany’s two most important green energy sectors. Some companies in the wind energy and solar-cell industries will likely disappear from the scene. Others hope to survive by aligning themselves with investors with deep pockets. Corporations like General Electric, Samsung, Sharp and Total are on the lookout for attractive solar candidates, hoping to capitalize on their economies of scale and develop mass production.

These young industries are now undergoing a maturing process that resembles the track record of carmakers in the early 20th century and later the consumer electronics industry. A handful of viable companies are emerging from a field of dozens of pioneers.

Green energy technology will remain a growth industry. But only well-funded companies with strong research capabilities and a global orientation can prevail in the long term. These companies do not restrict themselves to the domestic market, despite the temptations of relying on national subsidies.

Looking Abroad

Siemens, in particular, is taking this approach in wind power. As for photovoltaics, experts believe that the German technology company Bosch stands a good chance of being a player in the global league.

The company, which is based near Stuttgart, has already invested €2 billion in the solar sector. In the coming years, Bosch CEO Franz Fehrenbach plans to beef up the company’s Stuttgart workforce to about 7,000 employees. In this “extremely competitive market,” says Fehrenbach, only those manufacturers that move into mass production — and those that seek their fortunes abroad — will prevail in the long term.

Bosch plans to build a solar module plant on the Malaysian island of Penang and is investing €500 million in the project. Perhaps Penang will be home to the next Solar Valley.

Der Spiegel

http://www.spiegel.de/international/business/0,1518,784653,00.html

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