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China Bends to US Complaint on Solar Panels but Plans Retaliation

Keith Bradsher|The New York Times
Tuesday, 22 Nov 2011 | 9:57 AM ET

Chinese solar panel makers plan to shift some of their production to South Korea, Taiwan and the United States in hopes of defusing a trade case pending against them in Washington, according to industry executives.

A Chinese worker walks near the solar modules of a newly installed 100MW photovoltaic on-grid power project in Dunhuang of China's northwest Gansu Province.
Getty Images
A Chinese worker walks near the solar modules of a newly installed 100MW photovoltaic on-grid power project in Dunhuang of China's northwest Gansu Province.

But at the same time, the Chinese industry is considering retaliating by filing a trade case of its own with China’s Commerce Ministry.

The most likely target would be American exports to China of polysilicon — a prime ingredient in solar panels — Chinese industry executives and officials said on Monday. American manufacturers exported about $873 million of polysilicon to China last year, nearly as much in dollar terms as the value of the solar panels that China shipped to the United States.

The Chinese moves come after the United States Commerce Department opened a trade case against China’s solar panel makers earlier this month, at the request of SolarWorld Industries America and six other American solar companies.

The Commerce Department said it was considering punitive tariffs of 50 to 250 percent on Chinese solar panels, based on preliminary evidence that China was “dumping” solar panels in the United States below the cost of making and marketing them. The department is also investigating whether the Chinese government is breaking international trade rules by subsidizing the export of solar panels — if such a finding was made, it could result in additional tariffs.

Having hired trade lawyers to advise them on the Commerce Department case, Chinese solar panel manufacturers are increasingly gloomy about their chances of winning it, said Ocean Yuan, the president of Grape Solar, a big importer of Chinese solar panels that is based in Eugene, Ore.

Mr. Yuan said that Grape Solar was already negotiating with several Chinese manufacturers, whom he declined to identify, to perform final assembly of solar modules in Oregon. That would be the last step in new supply chains the Chinese industry intends to set up that would start in China then run through South Korea and Taiwan in hopes of avoid any new tariffs.

But because final assembly of solar panels is relatively low-tech manual labor, any Chinese expansion into Oregon would be unlikely to add many valuable American jobs.

Currently, the only Chinese solar panel assembly site in the United States is near Phoenix and owned by Suntech Power. That plant has a capacity equal to about 3 percent of the American market for solar panels.

Even before the filing of the trade case, Suntech had begun preparations to increase output at that operation, planning to add a work shift and double the size of the factory. But that will expand the current work force to 260, from 110 now. And even then, its capacity would serve only a small fraction of the American market. By contrast, companies based in China supplied more than 40 percent of the American market for installed panels in the third quarter of this year, according to GTM Research, a renewable energy consulting firm based in Boston.

Meanwhile, the Chinese solar panel industry is seeking legal advice on filing its own antidumping and antisubsidy trade case against the United States, industry executives in Beijing said Monday.

The most likely target would be American exports of polysilicon, the main material used in making conventional solar panels, said Wang Shijiang, a manager at the China Photovoltaic Industry Alliance based in Beijing.

The manufacture of polysilicon requires enormous amounts of energy — so much electricity that it typically takes the first year of operation of the panel to generate as much power as was required to make the polysilicon in it. The process requires superheating large volumes of material in electric-arc furnaces, including the melting of quartzite rock at more than 3,600 degrees Fahrenheit.

The United States is one of the world’s largest producers of polysilicon, in states like Tennessee and Washington, because it has access to a lot of inexpensive hydroelectric power. And most of that polysilicon is exported.

China’s own polysilicon industry is controversial because it relies heavily on electricity generated by coal-fired power plants, and because weak environmental controls at Chinese polysilicon factories have resulted in toxic spills that have fouled streams and rivers.

Solar energy now contributes only about one-tenth of 1 percent of American electricity, but the amount of new solar wattage installed in the United States has been growing more than 70 percent a year since 2008, according to GTM Research.

American solar panel makers, though, have had trouble competing with the Chinese, whose export industry has helped push wholesale solar panel prices down sharply — to $1 to $1.20 a watt of capacity today, from $1.80 in January and $3.30 in 2008.

Three American solar companies that together represented one-sixth of American manufacturing capacity in the sector went bankrupt in August — including Solyndra, whose failure despite receiving more than $500 million in federal loan guarantees has fueled Republican criticism of the Obama administration’s green-energy policy. Four other American solar companies have laid off workers and cut output since spring of last year.

Meanwhile, formerly brisk demand for solar panels in Europe has slowed, as financially pressed governments have reduced subsidies. And so far, the Chinese domestic market for solar power remains tiny. As a result many Chinese manufacturers have a capacity glut, to which they have responded by shipping more panels to the United States, driving prices down.

The United States energy secretary, Steven Chu, noted in Congressional testimony last week that solar panel prices had fallen 70 percent in the last two and a half years. Mr. Chu was testifying as part of a Republican inquiry into Solyndra.

At the simplest level, there are four main steps in making a solar panel, also known as a solar module. Using molten polysilicon to grow crystals or cast blocks of polycrystalline silicon is the first step. The second step is cutting and polishing the material into thin, smooth wafers.

The third step involves chemically treating the wafer and adding electrical contacts to turn it into a solar cell. The last step involves connecting 60 or 72 solar cells together, covering them with glass, enclosing them in an aluminum frame and adding an electrical junction box.

The United States trade case was filed against solar panels for which either of the final two steps — turning the wafer into a cell or assembling cells into a panel — was done in China.

Mr. Yuan said that Chinese manufacturers wanted to keep wafer production in China, but were making plans to ship wafers to Taiwan or South Korea for conversion into solar cells, as one way to potentially avoid any new tariffs the United States Commerce Department might decide to impose. That step is the costliest, most high-tech and most highly automated task in producing solar panels, representing about a third of the total cost.

Chinese manufacturers have studied moving solar cell factories directly to the United States but have largely rejected it in favor of other countries because it takes so long to comply with the many American regulations for opening new factories that use a lot of chemicals, according to a Chinese industry executive, who spoke on condition that neither he nor his employer be identified.

Mr. Yuan of Grape Solar said cells made in Taiwan or South Korea from Chinese wafers would be shipped to the United States for final assembly — a step that typically accounts for a little less than a fifth of the total cost of making a solar panel.

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