On March 15, Suntech Power Holdings Co., one of China’s largest solar photovoltaic (PV) manufacturers, failed to pay its US$541 million convertible debt, causing its stock price to bottom out. (See Figure 1.) Three days later, eight Chinese banks filed a petition asking for the company’s main operating subsidiary, Wuxi Suntech, to be declared insolvent and proceed to restructuring. With Wuxi Suntech owing the banks 7.1 billion RMB (US$1.14 billion), the company was forced to declare bankruptcy on March 20.
Figure 1: Stock price of Suntech Power Holdings Co. (Unit: USD) (Source: Google Finance)
There was discussion about whether the Chinese central government would rescue the former star of China’s solar sector, but the National Development and Reform Commission (NDRC), abiding with itsnew policies for renewable energy, said the government “wouldn’t and shouldn’t intervene.”
This put the municipal government of Wuxi, in China’s Jiangsu Province, in a dilemma. On the one hand, Suntech had become a model enterprise showcasing Wuxi’s sustainable development success; it would be extremely difficult for the local government to let it go. In 2012, a proposal from Suntech Power to shut down Wuxi Suntech had distressed the local government so much that the municipality made an effort to save the company, securing an additional 200 million RMB ($32.2 million) loan from the Bank of China.
But this time around, having lost the creditworthiness to receive strong support from state banks, government bailout options were limited. Wuxi Guolian Development Group, a financial company controlled by the municipal government, was expected to take over Wuxi Suntech. On March 20, a former senior executive of Guolian was assigned to be the new president of Suntech Power. This marked the official entry of local government into the restructuring process for the suffering Chinese solar company.
Suntech’s distress was not a surprise to many observers. The president of Canadian Solar, a leading PV manufacturer in China, said that Suntech’s earlier business scandals had prepared the industry for the company’s bankruptcy. And the president of Yingli Green Energy, another top PV manufacturer in China, observed that the entire industry had been struggling.
Founded in 2001 by Dr. Zhengrong Shi, Wuxi Suntech grew rapidly during the golden period of solar PV development in China. Suntech Power was formed in 2005 and was the first Chinese solar company to go public on the New York Stock Exchange (NYSE). In the ensuing two years, the company’s profit rocketed from $30 million to $170 million, making Suntech the largest solar company in China and the fourth largest in the world.
So what led to Suntech’s rapid fall? Key factors include the global economic backdrop, the company’s own management problems, and an over-heated solar industry.
Figure 2: Suntech’s total net revenue gained from different regions (2005–11)
In late 2011, the United States and the European Union—the two largest markets for China’s PV products––successively applied anti-dumping measures against China to protect their own domestic PV manufacturers. Suntech, like other Chinese PV manufacturers, was heavily dependent on exports (see Figure 2), and faced significant challenges as a result of these adjustments to international trade rules.
Suntech’s own operational strategy was not healthy, either. China uses a tax rebate policy to incentivize exports, providing a 17 percent tax rebate for PV modules being sent out of the country. Taking advantage of the policy, Suntech had received an estimated $1.9 billion in refunds over the past seven years, according to data from the company’s 2007 and 2011 Annual Reports. Suntech had been increasingly relying on these tax refunds: in 2011, the estimated rebate it received was 22 percent higher than the company’s gross profit. (See Figure 3.)
Figure 3: Comparison between Suntech’s gross profit and tax rebate values (2005–11)
Weak management of accounts also threatened the company’s capital chain. In 2011, the accounts receivable from investees of the Global Solar Fund (GSF, a problematic subsidiary of Suntech that was once subjected to a fraud investigation) reached $19.5 million, 58 percent of the total annual sales to GSF investees.
These factors rendered Suntech’s operation unsustainable. If the tax benefit dropped due to either policy change or reduced exports, the company would not be able to support itself, nor continue to operate under the huge debt it was bearing.
Moreover, Suntech’s misjudgment of the market had more than once resulted in huge losses. Examples of reckless market behavior included buying silicon polycrystal at unreasonably high prices and choosing to pursue expansion even after the market limit had been reached. Business scandalssuch as related-party transactions with Shi’s private companies, tax evasion, and possible tax fraud, as well as a public letter of complaint against the senior staff, further exposed the mismanagement inside the company.
Beyond these internal problems, Suntech found little support from regulatory policies. The rampant pursuit of GDP growth among local governments in China was a primary contributor to the overproduction of solar PV products in the country. In the midst of the large-scale curtailment in domestic PV production in 2011, the Wuxi government still encouraged Suntech to keep expanding, providing land and requesting that the company build another factory requiring 50,000 employees. Such practices, fueled by cheap credit from state banks, made Suntech’s failure almost inevitable.
Suntech is only one example of struggling PV manufacturing in China. LDK Solar, a company of similar scale, was caught in the same curtailment. However, through support from local government and foreign investors, the selling of subsidiaries, and better debt management, LDK is recovering.
The story of Suntech’s failure is complicated, but it reflects the urgent need for China’s solar industry to reorganize. As the demand for PV products shifts from a handful of European countries to other emerging markets, fluctuations in the market have taught PV manufacturers to manage risk more carefully. Right now, an industry-wide consolidation is in process, not only in China, but also elsewhere in the world, including in the United States. As the market cuts out the least efficient firms, as with Suntech, a healthier and more mature solar industry will emerge.