Storms are raging over the European PV landscape as anti-dumping/anti-subsidy measures and the undertaking agreement concerning imports of c-Si PV modules originating in China are set to expire by 7 December. Cohorts of lobbyists are marching under different banners to Brussels in order to influence potential negotiated settlements and/or provide supporting evidence in ongoing formal investigations conducted by the European Commission (EC).

Asian PV manufacturers need to develop proactive strategies to minimise the impact of future trade actions. Image: JA Solar.

Making predictions of outcomes in legal proceedings is a non-lucrative art, even more so in cases where interventions of political powers cannot be ruled out. In this special instance, however, there are some indications that trade “defence measures” or “barriers”, are likely to remain in force in one form or another. These are:

  • The launch of the formal review of benchmark composition for the determination of minimum import prices (MIP) by EC;
  • The filing of a complaint against alleged lower-duty rate country-circumvention through Taiwan & Malaysia with the EC;
  • EU ProSun’s announcement that members will file a request with the EC to review duties that otherwise would expire by the end of this year;
  • The magnitude and sheer size of determined dumping margins in the initial investigation by the EC, up to 112.6%;
  • Last but not least, the increasing perception that PV is a key technology and main building block of a country’s, or in this case union’s, energy independence, especially in times of rising geopolitical conflicts.

The unpredictability of ongoing proceedings is not only a European phenomenon, as continuing investigations and rulings in the USA and China have demonstrated. The risks associated with shifting trade barriers lead to increased challenges for corporate planning departments that need to shield expansion strategies against resurgent or second-round anti-circumvention proceedings, as the example of the US DoC case against Taiwanese downstream manufacturers shows.

Strikingly, Chinese and Taiwanese players have lagged being proactive in the establishment of off-shoring locations for the production of c-Si PV modules for quite a long time. This conservativeness is a consequence of the ineffectiveness of US and European trade barriers that led manufacturers to adopt a reactive “wait and see” approach. US markets were still accessible through a symbiotic relationship in which cells of Taiwanese origin were utilised to assemble tariff-free modules in China, while the volume and price undertaking in Europe did not have a material impact on import volumes for tier-one manufacturers.

However, with anti-circumvention proceedings succeeding in the US and the European Commission starting to withdraw individual companies from the import price undertaking agreement, pressure is once more on the rise, leading to a whole new off-shoring dynamic since the beginning of this year. So far, the off-shoring moves in response to trade tariffs by Chinese and Taiwanese downstream manufacturers have been ASEAN-centric, with Malaysia and Thailand being at the forefront (see Figure 1).

Figure 1: Southeast Asia is in favour as an outsourcing destination for PV manfuacturers. Source: Viridis.iQ GmbH

These locations are being developed as export hubs to deliver AD/AS duty-free modules into the USA and potentially into the EU at a later stage. As the depth of integration and therefore value creation in the third country is relatively high, these operations are likely to be shielded against anti-circumvention investigation concerning “third-country assembly”. However, as some of the selected sites in Southeast Asia are receiving government subsidies and also accumulating production capacities from various downstream players, a newly initiated dumping investigation against manufacturers in these jurisdictions cannot be ruled out.

The risk for trade litigation increases as manufacturing capacities are simply being relocated and clustered in third countries without addressing the route of the problem, which is a trade imbalance between regions in a strategic product that is perceived to alleviate geopolitical concerns regarding energy security. It is therefore necessary that top-tier manufacturers in China and Taiwan should take a more diversified off-shoring approach, by either locating facilities directly in the trade-restricted markets and/or in third countries that do not have any inherent risk from accumulating an increased share of global manufacturing capacity.

An envisioned target distribution for manufacturing capacities from Chinese and Taiwanese downstream producers in comparison to the expected regional distribution in 2015 is depicted in Figures 2 and 3. The status quo shows that off-shoring activities are Asian-centric and therefore do not resolve the trade imbalance issue. The target allocation accounts for the likely outcome that over 30% of global PV installations are expected to be installed in Europe and the USA in the foreseeable future. The gradual build-up of a more diversified and balanced manufacturing and distribution approach is expected to reduce the risks for re-opened or new trade investigations.

Figure 2: Expected capacity distribution. Source: Viridis.iQ GmbH.

Figure 3: Envisioned capacity distribution. Source: Viridis.iQ GmbH.

While both groups of companies, integrated Chinese and specialised Taiwanese manufacturers, are likely to benefit from a broader based production off-shoring initiative, Taiwanese players could potentially benefit more by combining their internationalisation efforts with an aggressive downstream integration approach, in order to gain higher-margin end-customer access in large-volume off-take markets, such as the EU.

Figure 4 shows a comparative assessment of the equity ratio and gross margin profiles for the respective peer groups on a quarterly basis starting in 2007. As shown, the balance sheet health of Taiwanese players is better, while Chinese players are catching up on a sustainable higher profitability level (see gross margin profile on secondary y-axis). This seems to be the famous short window of opportunity, where Taiwanese players could kill two birds with one stone by increasing the regional scope and their depth of integration.

Figure 4: Comparative assessment: Taiwan vs. China. Source: Viridis.iQ GmbH estimates, company data.

The PV trade conflict increases investment uncertainty for manufacturers that are looking to broaden their global production footprint through the development of off-shoring locations. These newly developed sites could become subject to trade- or anti-circumvention investigations, which – in the worst case – could lead to extraordinary depreciation of otherwise irreversible sunk costs.

Faced with the difficult task of managing a phased transition to a more diversified production base while having existing facilities fully utilised, manufacturers in China and Taiwan are gradually venturing into locations in Southeast Asia. This circumvention approach could easily be baffled by new trade litigation as the example of the final US ruling against Taiwanese PV producers demonstrate.

A broader diversification approach would take locations in export markets into account, such as Europe and/or focus on third countries that have frictionless access to trade constraint markets, are located close to international shipping routes and have local sourcing advantages, while not having any significant risk from accumulating a significant portion of global manufacturing capacity.