China’s leading solar equipment manufacturers are adopting a collaborative approach to address the challenges of overcapacity and slowing demand. Over 30 companies have pledged to participate in a self-regulatory program, reminiscent of OPEC’s oil supply management, agreeing to production quotas for the upcoming year. These quotas will be determined based on current market share, existing production capacity, and anticipated demand.
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This unprecedented move signifies a significant shift from the intense competition that has characterized the industry for years. While this competition has driven innovation and reduced prices, it has also resulted in significant overcapacity and shrinking profit margins. The current landscape has solar companies prioritizing survival and anticipating a potential recovery in profits within the next year or two.
Overcapacity and Slowing Demand Drive Need for Change
The industry’s challenges stem from a rapid expansion of production facilities beginning in 2021. This expansion led to a global overcapacity, particularly in China, which accounts for over 80% of global solar manufacturing. Current production capacity exceeds 1,100 gigawatts of panels annually, surpassing projected global installations not only for 2024 but also for the next decade, according to BloombergNEF.
This overcapacity is not unique to the solar industry in China. Various sectors, from copper smelting to steel production, face similar challenges due to rapid growth outpacing economic expansion. The issue lies in the collective understanding of the need for production cuts, coupled with a reluctance to be the first to implement them.
While surging demand previously offset the effects of overcapacity in the solar sector, this growth is now waning. Global installations are projected to increase by 34% this year, following a 76% surge in 2023. However, BloombergNEF forecasts a significant slowdown to just 8% growth in 2025. Geopolitical tensions and trade disputes further complicate the situation, incentivizing Chinese companies to establish manufacturing facilities in countries like the US, India, and Indonesia to circumvent rising tariffs.
Price Wars and the Impact on Profitability
The excess capacity has triggered aggressive price reductions, often pushing prices below production costs. Longi Green Energy Technology Co., a leading solar manufacturer, is projected to incur a net loss of nearly $1 billion this year, a stark contrast to its $1.7 billion profit in 2023. Industry executives generally anticipate a potential market recovery in the latter half of 2025, although some hold more pessimistic views, predicting a three-year recovery period for the wafer and module sectors.
The strain on the industry was palpable at a recent China Photovoltaic Industry Association meeting in Yibin, Sichuan. The association urged media outlets to focus on positive narratives rather than highlighting the sector’s challenges. This plea reflects a departure from the positive coverage typically associated with the solar industry, often lauded for its contributions to clean energy and technological advancements that have drastically reduced costs. The industry’s remarkable growth, from under 200 gigawatts of global solar panel installations in 2014 to over 2,200 gigawatts projected by the end of this year, underscores the scale of its achievements.
Learning from the Past, Looking Towards the Future
The industry’s rapid expansion has not been without casualties. Former industry leaders like Suntech Power Holdings Co. and Yingli Green Energy Holding Co. succumbed to market pressures, highlighting the need for sustainable growth strategies.
The new production quotas aim to prevent similar failures by promoting restraint and discouraging cutthroat competition. The OPEC model of supply management serves as a framework for this initiative. However, skepticism remains regarding the enforceability of these agreements and the willingness of companies to adhere to them. Questions persist about ensuring compliance and implementing effective punitive measures.
Despite these uncertainties, the agreement represents a crucial step toward stabilizing the industry and potentially boosting prices. The success of this initiative hinges on the commitment of participating companies to uphold the agreed-upon quotas. The industry is entering a new era where traditional supply-demand analysis may be less relevant if the execution of these quotas proves effective. The coming months will be critical in determining the long-term impact of this collaborative effort on China’s solar industry.
