A bond default by one of China's biggest solar panel makers is a sign the Chinese solar industry is heading for the same kind of consolidation that has hit the rest of the world, where overcapacity and low prices have driven many players out of business.
Suntech Power Holdings Co. Ltd. revealed that on March 15 it defaulted on $541-million (U.S.) worth of bonds. The company, based in Wuxi, China, said it was going to try to "maintain business relationships with its existing customers and suppliers," and would look for additional sources of capital as it restructures. But there is no sign so far that the Chinese government or its agencies will step in to help.
Last fall, the Chinese government said it was no longer willing to pump money into unprofitable solar panel companies, but would encourage consolidation of the business.
The country is home to many of the biggest solar players, including Suntech, Yingli Green Energy Holding Co., LDK Solar Co. and Trina Solar Ltd. It is also the manufacturing hub for Canadian Solar Inc., a company whose headquarters is in Guelph, Ont. but which makes most of its panels in China.
The massive production of solar panels in China has contributed to a glut around the world, which has resulted in a steep drop in prices. Many companies – including German giant Q-Cells, U.S.-base Solyndra LLC and Canada's own Arise Technologies Corp. – have gone out of business or put themselves up for sale.
"The solar industry has been experiencing quite a bit of pressure due to overcapacity," said Michael Barker, a senior analyst at NPD Solarbuzz, a U.S. research firm that follows the solar business. "We've seen insolvencies across the world, and now this goes to show that Chinese firms are not immune from the supply-demand imbalance."
It is not clear if Suntech will be reorganized or merged, Mr. Barker said, but it will likely keep producing panels. Until a substantial amount of production is cut back around the globe, the problems facing the industry will continue and there will be more failures, he added.
Fortunately for the solar industry, the demand for solar cells is still increasing at a dramatic pace. Mr. Barker has calculated that the demand for solar cells has been doubling every two year since 2004. Even with a recent deceleration, the demand is expected to double again in less than three years.
Like other fast-growing technologies – such as computer memory chips – solar has experienced a boom and bust cycle where "there is a tremendous amount of demand, then a rush to supply that demand, then an overcapacity cycle where you flush out the uncompetitive capacity," Mr. Barker said.
The industry is not yet at the end of its consolidation phase, said Doug Urban, managing director of Hanwha Soar Canada Inc., the London, Ont.-based Canadian arm of a large South Korean solar firm.
"The whole solar industry went through a phase of oversupply, and in an oversupply situation anyone with a weaker balance sheet is going to suffer," he said. "It will happen to others before the shakeout is complete. It is a painful, but healthy trend."
Hanwha itself has benefited from the consolidation. Last year it absorbed Q-Cells, the German solar cell maker that was once the world's largest, before it teetered on the edge of bankruptcy.
Inevitably, there will be "smaller number of stronger players," Mr. Urban said. But that will bring stability, he added, and that is a crucial factor for an industry that sells products with 25 year warranties.
As for Suntech, the company has signed an agreement from bondholders representing more than 60 per cent of its defaulted notes to hold off on taking any action until May 15, giving some time for restructuring. Other noteholders, however, have said they intend to sue. The company's shares, which trade on the New York Stock Exchange, traded below 60 cents Tuesday, down from levels above $3 a year ago.