Unit VI Case Study
Read the referenced article below, and assess whether or not this effort by the European Union has merit and whether or not this effort will be effective.
If you deem that the effort will not be effective, explain what you would do differently and why. Also, through additional research, explain whether or not the solar energy industry is an infant industry. Are there any additional protections that you would create for the European Union?
Your case study should be at least three pages in length.
All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations.
Cite at least one resource from the CSU Online Library. Chaffin, J. (2013, May 10). Solar flares: Trade. Financial Times, 11. Retrieved from https://libraryresources.columbiasouthern.edu/login? url=http://search.proquest.com.libraryresources.columbiasouthern.edu/docview/1349784977?accountid=33337 Information about accessing the grading rubric for this assignment is provided below
Solar flares: Trade
Chaffin, Joshua. Financial Times; London (UK) [London (UK)]10 May 2013:
Brussels is preparing for a decisive clash with China over imports of solar equipment but some EU companies complain that a showdown would harm them more than help them. By Joshua Chaffin
Four years ago, in the midst of Europe’s solar energy boom, Wacker Chemie opened a new polysilicon factory in its sprawling chemicals facility in the small Bavarian town of Burghausen.
There, in a production hall as large as an aircraft hangar but as clean as a laboratory, ultra-pure ingots of polysilicon – the most basic ingredient in photovoltaic cells – take shape in custom-built reactors heated to more than 1,000C.
These days, the boom is over and Wacker’s factory, with its 2,400 workers, is looking vulnerable. The company has been caught in what is shaping up to be a decisive trade fight between Europe and China and Wacker executives are worried about collateral damage.
Last September the EU launched its biggest ever investigation, probing billions of euros of imports of Chinese solar equipment . This week Karel De Gucht, the EU trade commissioner, urged that provisional duties averaging 47 per cent be imposed on the country’s exports of solar panels for dumping, or selling products below cost, in Europe.
For Wacker, the fear is that such measures will backfire by pushing up solar equipment prices for consumers and further undermining an industry already under pressure in Europe.
Adding to their unease is the likelihood that Wacker will be first in line for Chinese retaliation. Late last year – just weeks after the EU opened its investigation – Beijing launched its own probe into Europe’s polysilicon manufacturers.
“This simply does not make sense,” says Rudolf Staudigl, Wacker’s chief executive, who is pleading with Brussels to hold fire. “If tariffs are implemented, Europe will be damaged more than China.”
Wacker’s plight reveals a big dilemma surrounding the investigation. For Mr De Gucht, the solar case is part of a larger campaign to sweep away a web of illegal government subsidies, including cheap land, financing and raw materials, which he says unfairly boost Chinese exporters.
Over the past three years, Mr De Gucht, a pugnacious Flemish liberal, has ratcheted up the pressure against Beijing by opening anti-tariff subsidy investigations into Chinese-made glossy paper, modems and steel products, while challenging its policies on raw materials. The commissioner is also threatening a separate investigation into China’s telecommunications network equipment makers, Huawei Technologies and ZTE Corp.
The solar case may give Brussels leverage to force Beijing to the bargaining table. But it may also have unintended consequences.
In addition to Wacker, many small European companies that install solar panels on buildings and rooftops are warning that duties will spark higher prices and destroy their business.
“This is the conundrum [the European Commission] finds itself in at the moment,” says Konstantinos Adamantopoulos, a trade lawyer at Holman Fenwick Willan in Brussels. “In the solar case, the Chinese are arguably keeping a lot of downstream European jobs in place. So how do you deal with that?”
The case has risen to the highest political levels, with Angela Merkel, the German chancellor, last year calling for a negotiated solution amid concerns that the confrontation could precipitate a full-blown trade war.
Further complicating the EU’s calculation is solar energy’s position at the messy intersection of environmental and industrial policy. Over the past decade, the EU has enacted some of the world’s most stringent environmental rules and underwritten generous subsidies for renewable energy.
Those policies were sold on the promise that they would not only help save the planet but also make Europe a leader in green technology and green jobs. The uncomfortable reality is that while solar has flourished, much of the wealth has been harvested by low-cost Chinese producers.
To some, this is an acceptable bargain to reduce emissions. “We’re concerned about our national energy policy, which relies on access to cheap solar panels,” said one EU diplomat whose government opposes duties.
But it is galling to others, including Germany’s SolarWorld, Europe’s biggest manufacturer of photovoltaic cells and panels. The company was founded by a German entrepreneur, Frank Asbeck, known as the Sun King for his lavish tastes.
SolarWorld has almost single-handedly led the campaign against China . It first filed a complaint in Washington through its US subsidiary, accusing Chinese competitors of dumping and benefiting from illegal subsidies, including billions of euros in cheap government loans.
After the US imposed import duties on the Chinese last year, SolarWorld capitalised on the momentum by filing a similar version in the EU, the world’s biggest solar market, where installed capacity is about 10 times larger.
“Most Chinese solar companies would have gone bankrupt a long time ago if not for endless government subsidies. Meanwhile, over 20 major European solar manufacturers have become insolvent in 2012 alone,” says Milan Nitzschke, a SolarWorld executive who is president of EU ProSun, the coalition of companies that submitted the case.
China’s success in Europe has been stunning. In less than a decade, its manufacturers have gone from bit players to capturing more than 80 per cent of the market. They have done so amid a broader credit-fuelled expansion that has created overcapacity throughout the industry as companies pursued government subsidies.
For SolarWorld and the Sun King, the case may be a matter of business survival. The company lost EUR500m last year and is currently trying to restructure its debts. “If there are no measures, we will lose the whole industry,” Mr Nitzschke says.
But in Burghausen, Chinese companies are viewed more as partners than predators. Mr Staudigl credits low-price Chinese products with aiding solar’s growth. By his own estimate, European companies capture as much as 70 per cent of the value of Chinese solar panels sold in Europe when one accounts for Wacker’s polysilicon and the work of the installers. “I get the feeling Brussels is trying to put itself in a good negotiating position with China by threatening high tariffs . . . not knowing obviously what it really means for companies who are in these types of businesses,” he says.
Mr De Gucht’s aides argue that they are merely following the rules in prosecuting the trade case. Yet EU law does provide some room for manoeuvre. A provision known as the “community interest” allows the commission to conclude that dumping or illegal subsidies caused harm to European producers yet still refrain from imposing duties if doing so would go against the EU’s broader interest. That interest, vaguely defined, could include higher prices for consumers, a loss of jobs or environmental impact.
A coalition of mostly European solar companies, known as the Alliance for Affordable Solar Energy, has been pushing to derail the case in line with that broader interest. The coalition has repeatedly brandished one of the Brussels lobbying industry’s most reliable weapons: an expert study. Commissioned from Germany’s Prognos economic consultancy, it found that a 60 per cent tariff on Chinese solar panels could cost 242,000 European jobs over three years.
Prognos also said European solar consumers were so price-sensitive that any increase in tariffs would hurt demand. “The potential positive impact of duties for the EU solar producers is dwarfed by the negative impact on employment in the EU,” said Thorsten Preugschas, chief executive of Soventix, a German solar developer and AFASE member.
EU ProSun has fired back with a study of the Prognos study conducted by PwC. It concluded that Prognos’s estimates were “highly questionable”. In the US, for example, PwC says that solar jobs and installations increased even after Washington imposed duties last year – in spite of dire warnings to the contrary. “These guys are just scaremongering,” says Laurent Ruessmann, EU ProSun’s lawyer.
Burghausen, where Wacker was founded, is best known for Europe’s longest castle, which looms above the banks of the Salzach river. The town’s sites are an unintended reminder of the vagaries of shifting international trade. It grew wealthy in the Middle Ages by charging tolls on the salt barges before the central government withdrew the privilege in 1596 and prosperity vanished. It did not return until Alexander Wacker arrived to set up his chemicals company in 1914.
For decades, Wacker’s polysilicon business was geared to the semiconductor industry. Not unlike solar, much of the client base shifted from Europe and the US to Asia, beginning in the late 1980s.
“We are used to serving customers in all parts of the world, so for us it really didn’t make – and still doesn’t make – any difference whether we deliver material to a European or an American or an Asian company,” Mr Staudigl says. “It didn’t bother us at all. Why should it?”
The solar sector took off after Germany, Italy and other EU countries implemented feed-in tariffs in the late 1990s, forcing power utilities to purchase solar energy from consumers.
The effects of that policy are visible on Bavarian hillsides, where the barn roofs bear the bluish sheen of photovoltaic cells and collections of tilted panels sprout in open pastures.
As those tariffs ignited a boom in solar installations, Wacker’s annual solar revenues more than tripled between 2007 and 2011 to EUR1.4bn, accounting for 28 per cent of total sales. With European governments now reducing those subsidies, new solar installations last year declined for the first time in more than a decade – falling from 22GW in 2011 to 17GW. Polysilicon, once scarce, has also suffered, with prices plunging by about 50 per cent in 2012.
Some in Brussels suspect Wacker is campaigning against the case to appease Beijing. Still, much of Wacker’s thesis about the solar industry’s future – and the current trade case – was shaped by experience. In 2007 the company tried manufacturing photovoltaic wafers through a joint venture with Germany’s Schott Solar. “It was very apparent already in 2009 that because of some advantages like much lower labour costs in China . . . their cost position has been much better,” Mr Staudigl says.
Wacker pulled out of what its executives concluded was a commodity business – one whose products could be produced anywhere in the world with readily available German and American equipment. Instead, they refocused their attention on polysilicon, which requires much larger investments and greater expertise to produce at high levels of purity.
“The Chinese are trying to do it, of course, but it’s not that easy,” says Wolfgang Storm, a Wacker senior marketing manager.
For Mr Nitzschke, that is wishful thinking. “If you had asked solar manufacturers in Europe two or three years ago, they would have given the same answer,” he says, shaking his head.
That may be so. In the meantime, though, Wacker and its allies see Brussels – not Beijing – as their most immediate threat. “In this trade war,” Mr Staudigl says, “nobody wins.”
China
A gloomy outlook for panel producers
China’s solar-panel makers once seemed unstoppable. Over the past decade, they have grown into the biggest solar companies in the world, thanks to low labour costs and cheap loans from state-owned banks.
Such rapid expansion, however, brought destruction upon themselves. China’s capacity for producing panels grew tenfold from 2008 to 2012, flooding the world with cheap solar panels. During the same period, global panel prices fell from $4 per watt to less than $1, putting many western companies out of business.
Now it is the turn of the Chinese to feel the pain. One of the country’s biggest solar companies, Suntech, declared bankruptcy in March after defaulting on a $541m bond in the Cayman Islands. A second Chinese solar giant, LDK , which was once the world’s biggest manufacturer of solar wafers, has been staving off bankruptcy by selling equity to new investors. Even so, LDK has still had difficulties making payments on its debt and defaulted on a $23.8m payment last month.
The rising debt levels at Chinese solar companies have sparked an intense debate within policy circles about how these businesses should be dealt with. Some Chinese officials say it is time for Beijing to cut the lifeline of cheap credit that has sustained these companies for so long and let the forces of creative destruction take over. That is easier said than done, however. China’s solar manufacturers are highly geared and their main creditors are state-owned banks, which are loath to write the loans off as losses.
In recent months Beijing’s assistance to the ailing sector has been restrained. The government announced a rash of new solar installation projects in China to help mop up the excess supply of panels, but at prices so low that panel makers can barely break even. The country’s solar installations will double this year as a result, but this demand remains tiny compared with vast excess capacity.
Even solar executives admit that, eventually, many of China’s solar companies will have to shut down. If the EU proceeds with its proposed tariffs, that will only hasten the day.
Credit: By Joshua Chaffin in Burghuasen
Word count: 2154
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