Last year was a good one for Yingli Green Energy Holding (YGE). The Chinese company makes photovoltaic solar-power modules, which convert sunlight into electricity. With global demand up, Yingli doubled production capacity and ran its factories "365 days a year, 24/7," says Bryan Li, the company's chief financial officer. "We sold everything." Almost all the modules went to Europe, where governments provide generous subsidies for solar-energy producers.
Yingli plans to expand production another 70 percent this year, and it isn't alone: Other Chinese solar companies, including Suntech Power Holdings (STP) and LDK Solar (LDK), plan double-digit production boosts in 2011. "All of the major Chinese producers are engaged in massive, very aggressive capacity-expansion programs," says Paul Leming, an analyst with Soleil Securities in New York.
Their timing might be off. As the Chinese ramp up, austerity-minded governments in Europe are scaling down their solar subsidies. Germany plans to reduce its feed-in tariffs, which guarantee above-market rates to solar power producers, as much as 15 percent by July. France, Spain, the Czech Republic, and other European countries are reducing their support as well. "The amount of capacity being added is way ahead of what the market can take," says Finlay Colville, senior analyst with market research firm Solarbuzz.
Europeans are cutting subsidies because of record-high budget deficits as well as political pushback against policies that some say primarily benefit foreign manufacturers such as Yingli. In France, which cut its feed-in tariffs twice last year, most new solar panels "were made in China with a highly questionable carbon footprint," Environment Minister Nathalie Kosciusko-Morizet told Parliament in December. The country's environmental policies must "create jobs in France, not subsidize Chinese industry." That month the French government imposed a three-month freeze on solar projects while it crafts new investment rules.
The new priority for Chinese manufacturers is diversifying their customer base. Today, they're extremely reliant on European demand—more than 60 percent of Yingli's revenues last year, for instance, came from Germany. Suntech aims to reduce its reliance on European sales, which made up 74 percent of total revenue in 2009, by expanding in the U.S. and other markets, says Chief Commercial Officer Andrew Beebe. The company opened a 117,000-square-foot panel plant in Arizona last year and is doubling its U.S. head count to 150 people.
Others are looking at the home market. China's power companies are investing billions in infrastructure so they can transmit electricity across long distances, a prerequisite for moving power from far-off solar and wind farms to energy-hungry cities. Local governments have started providing more support, too. On Jan. 6, China Sunergy signed a deal to install 7 megawatts' worth of solar modules on the roof of the Nanjing South Railway Station. On Jan. 10, CNPV Solar Power in northeastern China completed a $25 million project that will generate 7 megawatts of solar power. Yingli's Li says the company's domestic sales were "minimal" in 2010 but could grow this year to 10 percent of revenue.
Total Chinese solar demand was only about 400 to 480 megawatts last year. That's more than double the previous year but still well below the size of markets such as Germany's, which bought between 8 and 9 gigawatts' worth of solar modules in 2010. (A gigawatt is a billion watts or 1,000 megawatts.) "It will be a very difficult time," says Jun Ying, an analyst in Beijing with Bloomberg New Energy Finance. Even under the most optimistic scenario, Chinese demand won't top 860 megawatts this year. "If you look at the production capacity" Chinese companies are adding, he says, "that's tiny."
The pressure for consolidation of the overcrowded industry will build, and that may force the government to bail out some companies and prevent a bloodbath, says Soleil Securities' Leming. "Whether we see consolidation or companies hunkering down and borrowing from Chinese state-owned banks is one of the big questions of the year," he says.
The bottom line: Chinese solar-panel manufacturers may be caught with excess capacity as European governments cut subsidies.