Is Chindia the Answer to India’s Manufacturing Puzzle?

When it comes to manufacturing in Solar, it is not a rankings fight globally. China settled that some time ago. By 2012 to be accurate. It’s a fight for the other 30 percent market share, be it with breakthrough innovations, temporary tariff protections or sheer cussedness as the US is doing right now. But eventually, even this 30 percent share would require every ounce of ingenuity, innovation and domestic market size deliver.

India, which has been trying hard to create a fertile ground for solar manufacturing, has consistently failed to do it so far.At least at scale. To understand that, it is important to understand the story of China’s dominance and the present day situation in that country. For this story, Saur Energy spent a week meeting key players in China that have emerged in the solar supply chain.

The China Growth Story: On Western Wings

The solar manufacturing sector as it exists today was predicted by no one in 2005, and by barely a handful of people in 2007. For that, China deserves almost all the credit. For instance, in 2005, Chinese exports to the US were a piffling USD 22,000. By 2007, this figure had climbed to USD 2.5 billion. Last year, when the Trump administration embarked on its trade ‘war’ with China, the figure being cited was USD 50 billion. How did China dominate the industry so conclusively? By building at scale, for global markets, with solid backing bth from the central government and now, regional provinces, besides the most important part. Creating a huge domestic market.

Solar 101, or How Chinese Manufacturers Took Over the World

As pointed out earlier, till 2007 the Chinese only saw Solar manufacturing as an area with small potential, churning our products mainly for exports with very little domestic consumption. European powerhouses like Germany, which were in the middle of major solar deployment projects in their markets, had little hesitation with manufacturers outsourcing to China. With generous feed-in tariffs, (FiT), a norm that carried the industry till as recently as 2017 in most markets, the business was predictable, profitable (after subsidies) and growing slowly.

Adding to this government support and subsidies was a strong domestic market that truly took off post-2007, when the Chinese government made a strong commitment to adding solar power to its energy mix. Perhaps it was the pressure of the 2008 Beijing Olympics, or the realisation of unsustainable pollution levels, or solar simply qualified for the Chinese template for massive support. The short result was that by 2013, China effectively made up for a 20-year head start to overtake Germany by becoming the country with the highest installed capacity of solar power.

By 2017, China was the first country to pass 100 GW of cumulative installed PV capacity and by the end of 2018, it had 174 GW of cumulative installed solar capacity. Wood Mckenzie, a global solar tracking firm, reckons that by 2024 China will be at 370+ GW of installed capacity, more than twice the US level. These numbers tell the simplest tale of the incredible investments and expansion in capacities Chinese manufacturers made in the sector, starting 15 years ago.

Today, close to 65 percent of global manufacturing is either based in China or in countries where facilities are controlled by China-based firms. So strong is the China grip on the sector that prices are virtually decided in China today.Even global competitors cannot really fight them without having a manufacturing presence in China. That’s dominance.

Present Day China market-Myths that Need to be Buried

Three myths need to be removed when it comes to the Chinese manufacturers today. The Myth of quality, unlimited funding, and global awareness.

On quality, it’s a fact that a lot of Chinese manufacturing was built up using the best technology in Europe, mostly what Germany had to offer, besides other global best practices. Today, when we met Chinese manufacturers in China in their facilities, they stressed on the investments they have made in R&D and the patents which for them is a regal badge of honour. With market dominance, some of the recent innovations have come from China, with hopes for future breakthroughs reaching markets heavily dependent on Chinese adoption and backing.

Another clear sign of the focus on quality is the word ‘bankability’ that you get to hear consistently across presentations by Chinese firms. Bankability, which denotes the willingness of financial institutions across the world to fund projects that are using China-made or supplied equipment, is a critical aspect for manufacturers today and an area where most Chinese manufacturers have made giant strides.

And the critical input: Funding. Like many other sectors in China that came up after the economy opened up post 1981, the solar manufacturing industry too has received massive state backing in its initial phase. Post-2012, the biggest support was probably the feed-in tariff model, which assured clear profits, that enabled these firms to expand and invest globally and work at very low margins. But the situation today is much different. You will hear a lot more about shareholder returns, return on equity and profits, with the industry expected to fend for itself now.

In fact, after China stopped its FiT model in favour of a bidding system early this year, the competition there has been intense, driven by a drop in prices as well as a slowdown in projects. Every Chinese firm today is striving to be financially viable with the weaker ones falling behind. The withdrawal of Chinese subsidies almost completely removed any benefit the safeguard duty imposed by the Indian government in 2018 could have delivered as module prices slipped faster in China. One key reason why absolutely no Indian manufacturer has cited the duty as a success in encouraging manufacturing.

Further, while it is true that in their quest for volumes many Chinese firms offered generous terms to buyers, it is also true that the same Chinese firms are wary of who they sell to in India and elsewhere now. Stung by payment delays and defaults, these firms are investing a lot more time and research into their clients when it comes to due diligence on creditworthiness. Having their own offices in key markets is just indication on their view on the market now. Speaking to Saur Energy, Yiming Wang, President at Ginlong, a key player in the Solar inverters space, says “With multi-year warranties today, we see this as a key cost factor affecting profitability and market leadership, making it a key issue about having our own teams to provide the kind of support we promise”. Seraphim, a firm that was founded by professionals in the semiconductor industry and known for its focus on research and development, is a good example of the new focus on global markets on the back of innovation and quality.

At an interaction with Saur Energy, Polaris Li, president, Seraphim said “actually, 85 percent of our sales are from overseas clients. A key reason is that the payment terms in China can be complicated and take a long time. unlike LC’s (Letter of credit), that’s very easy and simple.

“He goes on to add how for Seraphim, it’s about a ‘plus solar’ attitude rather than ‘Solar plus”, when Solar was a very expensive proposition. Giving an example of this, he cites the situation where they created a solar powered tracker that could be fixed on cattle herds in Australia, that helped to find any straying cattle. “ The margins from such an innovation are way higher than normal solar solutions!”, he adds.

Every Chinese firm worth its salt today has a global footprint and is no longer working with the old model of appointing country representatives or middlemen. Every firm we met has its own offices in key markets.

Made in India, Owned by Chinese?

India with its strong installed capacity now and big solar targets heading right up to 2030 and beyond, finally offers a proven market with a definite size and future visibility. Thus, it is no surprise that the government has been desperate to see manufacturing take root in India for its solar needs. However, as with much other government-led initiatives, the efforts have simply struggled.

For all the efforts made by the Indian government, total solar cell and module capacity in the country, according to the MNRE (Ministry of New and Renewable Energy) figures, is at just around 3GW for solar cells, and just over 9 GW for modules. Of this, it is estimated that just 1.5 GW in cells are in active production. Travails of module makers in the small scale sector have been well documented, thanks to their troubles with GST and tax treatment vis-a-vis larger players operating out of SEZ’s.

By the MNRE’s admission, a significant part of this capacity is relatively outdated technology. A relentless focus on pricing for large projects has already meant that India has become the largest market if not a dumping ground for polycrystalline cells and modules even as the developed markets move to mono and even Bifacial.

But almost no one argues against the need for manufacturing in the country. Besides the issue of cutting dependence on imports, there is also the issue of foreign exchange outgo with India targeting 100GW of solar by 2022 and 350GW by 2030. At current trends, that could mean an impact of tens of billions of dollars by 2030 when the country already has a massive trade imbalance with China.

On manufacturing in India, Guy Rong, president, Arctech Solar said: ”In India, solar costs are already among the lowest in the world, despite imports. That is because costs are dependent primarily on the equipment and land (acquisition) costs. Impact of people cost on manufacturing costs, is quite low”. In his way, he makes a case for manufacturing when land is valued even more as the efficiency of more high tech modules like Bifacial and Mono Perc will make a case for themselves by reducing land requirements.

As of now, the only possible move which promises results when it comes to manufacturing is the government’s CPSU scheme II for 12 GW of manufacturing linked solar. This scheme, by linking bids to use of domestically sourced products, with viability gap funding of over Rs 8200 crores, and finally, being meant for captive consumption by central undertakings, is the most comprehensive effort to bypass World Trade Organisation restrictions, which seem to prohibit any manufacturer subsidy meant for use by the public.

But even the well-intentioned CPSU scheme faces serious challenges. One reason is the fragmented nature of the market right now in India. In solar, being integrated, working in clusters close to each other always helps. Existing Indian manufacturers do not pass this test. Everything in the solar chain, from making polysilicon or mono silicon from sand, casting it into ingots, cutting the ingots into ultra-thin wafers, making cells with the wafers by etching current-conducting silver wires on them, and making the panels or modules with the cells is all distributed in India today. Today, there is no Indian company that even produces wafers.

Setting up integrated plants is a capital and power intensive business that would require special incentives. And state support for critical issues like water linkages. Schemes like the ‘Modified Special Incentives Package Scheme’, or M-SIPS, which offers a 25 percent capital subsidy to electronics, semiconductor and solar manufacturing units, have worked out only for Adani in Gujarat. And even the Adani project stops at wafers, not back to polysilicon. So could make in India be done with Chinese firms?

That will certainly require a mindset change in government though nothing forbids Chinese firms to step in. Interestingly, with the business evolving to be a low to mid-margins business with 8-15 percent net margins, the case for allowing Chinese investment is quite strong, if they bring in majority capital.

Firms like Arctech Solar, a specialist in the solar tracker business, have almost had to shut shop and exit the market here, due to low demand. “Solar trackers can add 11-14 percent to a project cost, for the higher efficiency they bring. When the focus is not on efficiency, some developers avoid using these altogether”, said Guy Rong of Arctech Solar. But the firm remains keen on India, seeing the market as too critical to stay away from. They plan to be back in India in early 2020, with a product ‘made for India’. Which would mean cheaper and hopefully not a major compromise on quality and effectiveness.

Polaris Li of Seraphim points to another important consideration for Chinese firms to manufacture in India – the potential for exports. Which should be welcome for India too.”India’s continuation on the GSP list with the US would have been very good. The Generalised System of Preferences or the GSP allows countries on the list to export to the US with zero duties.” India’s removal from the list in June by the Trump Administration might have made it just a tad more unattractive as a manufacturing destination that could have been used for exports to the US market. In fact, the GSP factor was a big reason for the rush to invest in Malaysia, and lately, Vietnam.

Similarly, Yiming Wang, President, Ginlong, a global leader in inverters, said that “we’re considering that (manufacturing in India). I think there are many reasons we try to move the manufacturing. Is it close to the main market, is it big enough for the capacity, and then costs? It has to offer a cost-competitive option. Finally, one looks at factors like the trade disputes right now, which can all combine to create the case for manufacturing in another market”. Ginlong, for now, is busy with a 15GW capacity expansion near its existing facility in China.

India, while it meets the key requirements of a strong domestic market, slips up when it comes to its regulatory issues and price sensitiveness. That is why Hanwha Q Cells, a leading Korean firm that is also among the leaders globally, has opened manufacturing plants in the US, besides other locations in China, Korea and Malaysia, but has no such plans for India. While exports from India is one possibility, for a premium player like Hanwha that positions itself at the top end of the technology chain in solar, the Indian market is much better served with a simple marketing office.

Even Trina, and Longi, two of the bigger Chinese players with a strong presence in India, have both held back on manufacturing in India. In the case of Longi, this has been done despite the firm picking up land for the plant as far back as 2018 and announcing plans for a 1 GW line in Andhra Pradesh. The fact that India rushed to an auction-based system fairly early in its solar journey also meant that local industry never quite got the time or profits to prepare for bigger investments. The state of the country’s power sector today, with Discoms bleeding and hurting everyone in the ecosystem, also means that the kind of amounts that manufacturing demands will always be at a premium in India. Frequent policy changes, besides the sort of issues we see in Andhra Pradesh on signed PPA’s, have further spooked both developers and potential manufacturers.

That could simply mean inviting in the firms who have been doing business in India, and done well out of it. Firms that have a degree of comfort with the market now, and much like many other multinationals, might value the Indian market for more than its hard numbers. The soft power of Indian human resources, married to Chinese manufacturing nous, might make for a great combination after all. As the countries most likely to be the engine for the global solar market, it might be in everyone’s interest to see these giant two neighbours find common cause with each other here.