The US government is preparing to investigate whether China's solar panel companies received a subsidy for exports or dumped solar panels in the American market at below cost price, after seven US solar product manufacturers filed a petition with the US Commerce Department demanding action.
This comes against the background of several US solar panel companies going out of business because of significant price drops and competition from China - and, more significantly, the continuing trend of solar manufacturing facilities and jobs relocating from the United States to China.
However, the solar industry in China hasn't fared much better this year than its US counterparts. The average price of solar products has been declining relentlessly, while the continued global economic slowdown, particularly the debt crisis in Europe, has greatly quelled demand. In fact, bankruptcies in the solar industry are even worse in China than in the United States.
The price decline is also partly driven by the tremendous excess capacity in China, which has mostly resulted from local governments' overzealous policies to attract investment. The provision of cheap or even free land, inexpensive infrastructure, subsidised public utilities and favourable tax regimes were common during the boom in the solar industry a few years ago. Excess capacity and overinvestment are prevalent in Chinese industries. Unfortunately, that also tends to have a spillover effect on the rest of the world.
An industry characterised by large upfront sunk costs coupled with low market concentration will usually experience a phenomenon called Bertrand competition, where each company charges a price just above its incremental variable costs, usually just enough to cover raw material and labour costs, leaving little money to recover the investment in capacity-related sunk costs. That means some companies barely make money, while others go out of business over time. This is what is happening in the solar industry in China.
