Technology Push
Niche Markets
Demand Pull
1960
1970
1980
1990
2000
2010
2020
Scale Up
Chapter 7: China's Own Gift to the World
China contributed most directly to inexpensive PV through a combination of: high-risk entrepreneurial activity, aggressive municipal governments that mobilized resources for these firms, massive demand from Germany, and drawing on expertise from other sectors in China—first high and then later, and crucially, low-technology products.
Activities in China between 2000 and 2016 contributed most directly to cheap PV. During that period, Chinese solar companies scaled up production by a factor of 500. By 2007, China produced more PV than any other country and by 2013 it was installing more PV than any other country. It produced 70% of the world’s PV in 2017.
To understand the distinct path that China pursued in this period, I focus on one pioneering company, Suntech. It was the seed from which the Chinese PV industry grew, flourished, and eventually dominated. It established a successful model that others followed. It got cities interested in PV. It created a domestic Chinese supply chain. It trained a local skilled labor force. It partnered with foreign firms to export to foreign markets. It accessed finance from US capital markets. It established a profitable business model. Suntech demonstrates the role of entrepreneurship, which is so central to innovation in China today. Central government motivations for PV have covered a range of goals over time: national security in the
1970s, poverty alleviation in the 1980s and 1990s, economic growth post-2008, and environmental concerns in the 2010s. And the state certainly played a role in enabling a thriving PV industry. But its role was secondary to the role of entrepreneurship in the 2000s decade. The state was more important after 2009.
This dichotomy is most clear in the shifting sources of funding for PV companies. During the 2000-07 period the industry went from a few nascent start-ups to world leader. Financing in the early period was scrappy and dispersed—a few million dollars here and there coming from individual PV entrepreneurs themselves and angel investors. The central government created a small domestic market with the Brightness Program in the 1990s and had supported some state firms to produce PV to power satellites and communications before that. But the Chinese central government only supported PV materially after firms established the legitimacy of the industry with their Initial Public Offerings (IPOs) in New York in 2005-07. As in many aspects of PV in China, Suntech led the way. Chinese PV companies raised $7b from US capital markets from Suntech’s December 2005 IPO until the end of 2007. The central government became strongly supportive in 2009 and it extended tens of billions of dollars in credit to PV firms in 2010. Though late, its participation was still important. Capital requirements for scale up involved billion-dollar decisions. Global demand for PV accelerated then, with annual growth in shipments increasing from 30%/year to above 50%/year.
The explosion in demand for PV set off by the German Feed-in Tariff in mid-2004 transformed Chinese production. The satellite programs of the 1970s and 80s, and rural electrification initiatives in 1996 and 2002 had established a small Chinese market. But the German market was two orders of magnitude larger. Moreover, the declining rebate aspect of the German policy meant that there was a rush to install solar before the subsidy program ended. All participants in the solar industry suddenly realized that they needed to move quickly. The Chinese are better at that than anyone. The US, Japan, and Germany were simply not fast enough to recognize the market opportunity, much less meet it. One the distinct characteristics of firms in China is their
“organizational capability”—their competence in hiring quickly, producing quickly, and improving quickly. These qualities were exactly what the German PV market required.
China became serious about its own domestic market in 2005 with the passage of its Renewable Energy Law. As in other countries, wind power served as a helpful precursor technology for PV. While the law mainly targeted wind power, it bolstered the confidence of investors in Chinese PV companies by conveying an expectation that China would one day become a major market for PV. The Chinese Feed-in Tariff it created in 2011 allowed the industry to continue to grow even after the global financial crisis and reform of the German subsidies slowed demand for Chinese exports.
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Firms in the Chinese industry contributed to the development of PV technology in a variety of ways. The combination of PV R&D, early PV production, and the emergence of the semi-conductor industry during the 1970s-1990s provided a foundation of competence. Experience in other areas of high-volume manufacturing, such as textiles, also played a role. From 2000, substantial know-how was imported including extensive international collaborations and repatriated Chinese who had been trained in the West.
In addition, foreign machines—and the technicians who traveled to China to install and optimize them—provided steady inflows of knowledge to China. People moving from Australia, Germany, and US to China were crucial. Many firms upgraded gradually, starting out by producing modules from cells, the least technically challenging step.
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A crucial step was when Chinese firms obtained technology standards and certification, which provided reliability to skeptical early adopters in Germany. As Germany’s market grew beyond the capacity of German firms to supply it, German distributors turned to China for modules. The technology standards helped convince the German’s to take a chance on recently-established Chinese firms. The German firms’ rapid adoption of Chinese modules legitimized the Chinese technology.
Low labor costs gave China an international comparative advantage in the key scale up period of 2000-07. However, this advantage was short-lived due to the swift proliferation of automation. The labor share became too small to provide much advantage. China remained competitive by relying on other advantages such as speed, flexibility, and rapid exchange of information among supply chain partners.
At the same time that automation was increasing, costs were plummeting. As a result, experience outside of the semi-conductor industry became increasingly relevant. Producing textiles, shoes, and hand bags provided know how about producing at gigantic scale in a commodity market where margins were thin due to fierce competition. China had more experience with those activities than any other PV producer.
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As the Chinese industry grew, it became extremely competitive. The global market share of the largest company declined and never exceeded 10%. Contrast that to Sharp’s 28% of the world market in 2004. As competition intensified, profits were hard to come by, and costs continued to fall. China timed its scale up just about perfectly; in time to meet demand but not too early. There were times of over-capacity but that capacity was soon put to use in a global market growing at well above 30% per year.