EU lets China suffer

George Scholz types on his keyboard and his suppliers’ prices appear on the computer screen. “The price advantage for Chinese modules has vanished,” asserts the head of the PV business at the solar installation company ad fontes in Hamburg, Germany. Whether it is Yingli or REC – the price level has been equalized. The prices for REC modules even slightly increased by two to three percent after Easter, he says. The pressure on European manufacturers from the Chinese competition has apparently relaxed to some degree.
This can also be seen in Spain. “Prices have increased because the supply of modules from China has declined,” explains Alberto Sanroman, General Director of the Spanish solar wholesale distributor Albasolar to pv magazine. “This increase can be seen as of the beginning of March.” This is due to the mandatory registration required by the European Commission (the executive body of the European Union) and valid since March 6 for all “crystalline silicon photovoltaic modules or panels and cells and wafers of the type used in crystalline silicon photovoltaic modules or panels […] originating in or consigned from” China as described in the European Commission’s Regulation No. 182/2013.
However, this price development has not automatically resulted in dismay among installers: “It is legitimate if Europe’s manufacturers raise their prices somewhat,” comments Scholz. “At the end of the year we also need suppliers who can guarantee us a supply of good modules.” In this case he means manufacturers other than the Chinese, in particular, because: “Without exception our customers ask for non-Asian modules.” Yet as a result of the insolvencies and business shutdowns of the past months it has also become difficult to refer the customer to a supplier who is likely to survive beyond the specified warranty period. “This question has become even more difficult to answer after Bosch’s announced withdrawal.” Thus he has no objections to antidumping duties that improve the business prospects of manufacturers who compete with Chinese PV producers. According to a survey by Europress, this sentiment is also shared by a majority of the remaining installers in Europe. According to the survey 84% of the installers asked in the 27 EU countries regarded it as “important” and/or “very important” that European solar modules continue to be available as an alternative to Chinese competitor products. The EU proceedings are also viewed in a favorable light by the practitioners – two thirds welcome the measures and consider penalty duties as appropriate in the case of a judgment for damages by the European Union.

Already effective

Whether it will actually come to that is still open. The European Commission will rule on provisional penalty duties in June at the earliest. Thus a final decision will hardly be made before the end of the year. However, possible customs fines already threaten the European market like a sword of Damocles. This is because the European Commission announced that imports are to be registered, and this count creates the possibility of being able to retroactively impose penalty duties on the registered goods – a measure which it has already employed in comparable instances, as is currently the case in proceedings sought by the European biodiesel industry against imports from overseas. Since then there has been a substantial shift in the orientation of the European PV market.
“Even prior to this period only a few Chinese companies imported their modules directly into the European Union through subsidiaries in Europe,” notes Albasolar head Sanroman. This situation has now intensified since registration is mandatory. Moreover, “the few Chinese suppliers who currently offer their products in Europe have also increased their prices.” But while several European solar participants had been independently active before this time and imported goods from China on their own account, hardly anyone does so in the meantime, attests Sanroman: “No European dealer currently purchases modules from China.” That also applies to the company from Madrid which, apart from REC, also offers Jinko Solar modules for example. Apparently, they exhibit the same quality as the range of European products offered by the Spaniards. However, Albasolar is currently not purchasing any of them.
This seems like a paradox because there is obviously enough merchandise in China – despite or perhaps precisely because of the insolvency of the large-scale module manufacturer Suntech. JA Solar is one example: “We offer the majority of our products ex-China, i.e. duty free,” Philipp Matter, Vice President of JA Solar Germany, reported to pv magazine.
But since the introduction of mandatory registration, purchases have become a gamble for Europeans. There are only a few market participants who choose to get involved with Chinese imports at their own risk, says Matter. Albert Engelbrecht, Business Director of the PV wholesale dealer Frankensolar in Nuremberg, is not one of them. “We are not exposing ourselves to such a risk. For us bonded goods are out of the question,” he insists. Those who import products affected by the antidumping and anti-subsidy investigations since March 6 of this year will have to account for any penalty duties that may be retroactively imposed later. In plain language this amounts to high subsequent payments for which provisions have to be made. In addition, these imported goods now also have to be reported and registered with customs. Failure to do so could result in prosecution by the customs authorities for the smuggling of imports.
Yet a closer look at the respective conditions would also have to be taken even in the case of solar products from China that have already been declared, Frankensolar CEO Engelbrecht adds. Although the individual importer is required as a rule to pay customers duties, he is also able to pass on any payment obligation to his customers. “That is why any contracts should be carefully examined.” Engelbrecht did so and determined that there are Chinese suppliers who are prepared to bear the complete risk. He continues to offer such Chinese products, he says without indicating any names. In individual cases they are even cheaper than European competitor products.

JA Solar assumes the risk

How this functions in principle was described to pv magazine by JA Solar VP Matter. “We provide strategically important customer solutions with which we assume a share of the risk of subsequent duties.” To this end the company calculated a risk premium which covers possible subsequent duty payments. However, this price markup with which the Chinese company sells its declared products to key customers in Europe does not cover the entire potential retroactive penalty duty. Matter prefers not to disclose the precise amount of the risk component, but he makes it clear that it is clearly below the maximum penalty duty of 85% specified by the European Commission. “No one on the market would be willing to pay a markup of 85%. However, we also assume that such dimensions will not be reached.” Nevertheless, if this does turn out to be the case, then JA Solar would probably be compelled to make substantial subsequent payments. With this strategy the company attempts to prevent any loss of its key customers to the European competition.
JA Solar estimates that the financial risk is rather limited since the company considers retroactive duties to be improbable in light of EU antitrust law. In order to justify such duties the import quantities of Chinese modules must have increased significantly prior to the investigations. However, this has not been the case, assures Matter. In legal terms it is not completely clear whether increasing import quantities represents a mandatory condition for the imposition of retroactive duties, explains Christian Tietje, professor for commercial law at the University of Halle-Wittenberg, Germany. “In the final analysis, however, I assume that an actual increase in import quantities is a prerequisite for retroactive duties, starting from the point in time when the institution of proceedings could be expected,” indicated the lawyer to pv magazine.
The initiative Afase (Alliance for Affordable Solar Energy) – a group of European dealers, installers, project developers and European subsidiaries of Chinese manufacturers that have taken a position against penalty duties – repeatedly stress that there has not been any increase in imports. Citing the China PV Industry Alliance, the Chinese government newspaper China Daily reported at the end of last year that the export value of solar products exported in 2012 declined by 40% compared with the preceding year. However, what also has to be taken into account is the fact that this slump is probably largely owed to the general deterioration in prices and does not necessarily indicate a decline in the quantity of exports to Europe.

Continued uncertainty

But even if there are weighty arguments against retroactive penalty duties, Tietje sees little reason for Chinese suppliers to be optimistic when it comes to the actual decision with regard to penalty duties. Although registration of imports from China does not represent a preliminary legal decision: “From a political point of view the Commission is hardly going to order customs registration of the imported goods if the suspicions that led to the institution of the proceedings had not been confirmed by previous investigations.” Frankensolar head Engelbrecht hopes for a quick decision: “Then there will finally be more certainty on the market again.” And Chinese suppliers will then be able to calculate their prices more reliably. Yet with the provisional duties that are expected to take effect as of June no ultimate clarity will prevail. Only when duties are fixed months later will JA Solar see a basis for further decisions on how solar products are to be produced for Europe in the future. And only then will there be any certainty as to whether subsequent duties will be required for the mandatory registration period.

Alternatives

“Establishment of a factory in Europe is an alternative, exactly the same as in other regions outside of China,” says Matter. External manufacturing is also conceivable, he adds. Henning Wicht, director of the analysis company IHS, also believes that the Chinese could relocate a share of the output chain to Europe in the future if antidumping duties are introduced: “Tier-1 companies will initially focus on markets outside of Europe that are currently more attractive. Afterwards they will establish factories outside of China in order to be able to serve Europe.” However, pure module factories will probably offer only a slight advantage as long as wafers and cells continue to be produced in China. In contrast to the USA, where antidumping duties were imposed only on cells, both wafers and modules are affected by the EU proceedings. Only those products for which all of the specified stages of the output chain take place outside of China will remain completely free from penalty duties, while all mixed products on the other hand will be subject to penalty duty costs at every stage of the “Chinese” output chain. “Manufacturers’ decisions on a business location will depend on the concrete composition of the penalty duties,” says Wicht. JA Solar’s Matter stresses that the question of relocation or reopening of factories depends on the prospects still offered by the European market. Asian markets and the market in the U.S. are in any case more lucrative at present.

Appraising the impact

At this point it makes very little sense to speculate about the amount of possible duties. However, the Commission has already defined a kind of upper limit– not necessarily the rule in other proceedings. According to the information in the registration order the “estimated amount of possible future liability” in the case of a dumping offence is 60 to 70% and in the case of subsidy violations another 10 to 15% “on the CIF import value of the product concerned” (the International Commercial term “CIF” includes cost, insurance and freight to the port of destination). Based on general experience with dumping and subsidy cases, the actual amount will probably be less; in particular when it comes to securing jobs in Europe.
In contrast to disputes before the World Trade Organization (WTO), EU competition law holds out the possibility of imposing only minimum duties or none at all – even in the case of verified dumping – if this is in the “exceptional interest of the Union,” points out legal expert Tietje. This can be justified if, for instance, European consumers are threatened with substantial price increases or a high number of jobs are jeopardized.
With the job argument, Afase is attempting to convince the European Commission to not impose possible duties and to this end it has commissioned the economic research institute Prognos with calculating the effects that penalty duties would have on jobs.
“The study determined that although a penalty duty of 60% in the third year after its introduction into the European Union would create 58,000 jobs, approximately 300,000 jobs would be eliminated at the same time,” stresses Afase spokesman Thorsten Preugschas.
The proponents of the duties, the ProSun initiative – who got the antidumping and anti-subsidy proceedings underway in the first place – see it differently, and insist that the study suffers from technical errors when it comes to its calculations. Thus, for example, the Prognos study anticipates that large-scale field systems in Germany will become uneconomic in the future, but it fails to point out that this would be the case even without any duties at all because of the resolved reduction in feed-in tariffs, complains ProSun spokesman Milan Nitzschke. “Therefore field installations with Chinese modules and no penalty duties would also be uneconomic. However, the study calculates job losses through this loss of the large-scale segment and characterizes it as a consequence of the duties.” Felix Goedhart, CEO of the Hamburg solar park operator Capital Stage AG, also sees declining tariffs and not duties as the gravediggers of large field installations: “In the long run the reduction in feed-in tariffs in Germany has put such pressure on the rates of return that we are hardly interested in any new projects at the present. Penalty duties exert much less of an influence.” However, when speaking with pv magazine he added, “Of course we would be critical of any artificial increase in the price of modules as a result of penalty duties.”

Increasing system costs

Nitzschke openly admits that the duties will limit the market. “Those who relied on modules for €0.45 will no longer obtain them. They will be more expensive.” Market analyst Wicht forecasts that the market in Europe in the year 2013 could lose up to two gigawatts with an arithmetically assumed duty of 50% on Chinese modules (with a price of €0.45 per watt ex factory): “System costs would increase by €0.15 to 0.20. And thus large systems in Germany without private consumption would no longer be worthwhile, so that approximately one gigawatt of installations would be lost in 2013. In France, Great Britain and Italy the module price rise would have less of an effect because their system costs are higher. Nevertheless, large-scale installations would also be affected here as well – all in all, 500 to 1,000 megawatts less in 2013 than without duties,” he calculates.
For Nitzschke this scale is not a problem: “One has to accept the fact that individual projects simply cannot be realized. This affects installations that never were economical under ‘fair’ conditions.” If one gigawatt were lost in Germany, then this would be a healthy development in view of the strong political headwind which has led to excessive cuts in the feed-in tariffs as a result of the sharp increase in additional installations, says Nitzschke. And that is precisely what concerns Afase. The initiative admits that duties would provide advantages to European manufacturers, but not for the downstream stages along the output chain. However, it remains to be seen whether things will develop in this manner. At least George Scholz and many other installers in Europe appear to be less disconcerted by the prospect of penalty duties.