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Flexible Vertical-Integration Models May Help to Avoid PV Trade War

On 17 May 2012, the US Department of Commerce (DoC) announced its preliminary ‘anti-dumping’ duty ruling in the case of c-Si PV modules sold in the US that incorporate c-Si cells manufactured in China.

The preliminarily DoC ruling assigned import duties of over 31% for specific Chinese producers/exporters that were selling c-Si modules (with cells made in China) into the US market. Suntech and Trina Solar received preliminary duties of 31.22% and 31.14%, respectively.

Other leading exporters – including many well-known Chinese brands – received a separate rate of 31.18%. The remaining Chinese producers/exporters received preliminary duties of almost 250%. This is in addition to the earlier (approximately 4%) countervailing duty on Chinese c-Si PV imports that the DoC implemented back in March 2012.

The DoC is expected to make its final determination in early October 2012. US Customs and Border Protection will require a cash deposit or bond that is applied retroactively for the previous 90 days.

Impact on Chinese PV manufacturers

When assessing the impact of the estimated ASP increase for PV modules that incorporate cells made in China (after adding the preliminary duties), it is reasonable to assume that the severity of the duties may eliminate any previous (perceived) price advantage of c-Si China-sourced modules into the US market.

However, leading Chinese PV manufacturers have had sufficient time to put contingency plans into place. A popular ‘work-around’ to potentially avoid the ‘anti-dumping’ penalties may be to use Taiwan (or possibly Korean) sourced PV cells within Chinese-supplied PV modules.

In fact, most Tier 1 Chinese module manufacturers had already been utilizing Taiwan-sourced cells to partially fulfill their global PV module requirements – well before the DoC ruling was even initiated. This supply-chain option may now be exploited more selectively and strategically by Tier 1 Chinese module suppliers. This may ensure that module shipments (allocated to US demand) could avoid qualifying for any input tariff supplements.

For other Tier 2 and 3 Chinese module suppliers, there could be significant ‘one-time’ costs involved before any possible ‘duty-avoidance’ strategy can be implemented. The scale of this one-time charge -and the precedent set by the 17 May 2012 DoC announcement – may provide enough barriers for many of these module suppliers. They may simply retreat from selling into the US market in the future.

The preliminary ruling may have the greatest impact on the smallest c-Si cell/module manufacturers in China. First, they may be hit with a severe duty charge. And – since they have limited industry experience and minimal purchasing ‘power’ – they are likely to struggle in quickly and cost-effectively implementing any third-party cell-supply solution.

Therefore, many of these smaller Chinese cell/module PV suppliers may effectively be ‘shut-out’ from the US market, or chose simply not to participate. And with a rapidly growing domestic Chinese PV market (and noting that the US accounts for less than 10% of global PV demand!), these manufacturers have many other geographies and options to pursue moving forward.

What’s next?

With trade relations between the US and China likely to remain tense, retaliation would not come as any great surprise. For example, on May 27, China’s Ministry of Commerce identified programs supporting renewable power (including solar) in California, New Jersey, Massachusetts, and Ohio that they suspect may violate World Trade Organization policies and trade treaties. Another possibility relates to imports of foreign-manufactured polysilicon, with their (most feared) competitors in the US and Korea being the subject of potential Chinese ‘allegations’ of ‘anti-dumping.’

An analogous trade complaint within Europe is another possibility. If anything similar was to be instigated here, the consequences for the global PV industry may run deeper – and be longer lasting – than the DoC case unfolding in the US.

Ultimately, if the market-share of the (c-Si) US PV demand that is satisfied by leading China Tier 1 c-Si module suppliers remains lower than the cell-MW level that flows from Taiwan to China, there may be no reason to even factor in US import tariff duties.

If this particular scenario comes to fruition, then changes in US module ASPs and PV demand levels would proceed almost independent of the DoC ruling. Given that the US market is less than 10% of the global PV industry demand (and leading c-Si module suppliers have been pursuing flexible vertically-integrated strategies for the past few years), this scenario would seem to be the ‘most-likely’ of all the permutations being considered today.

And if this does indeed happen, then this would send out a particularly powerful message to other countries that are considering imposing protectionist measures. This would also go a long way to avoid any ‘domino effect’ that the US DoC is otherwise at risk of being remembered for in years to come.