The world’s new PV capital?

When Sky Solar announced on May 7, 2011 that it was moving its headquarters from Beijing to Shanghai, its press release provided two main reasons: first, the better utilization of capital and financial resources from both China and overseas and second, “to leverage the advantages of being close to the most developed PV production region, the Yangtze River Delta.” This article will explore the advantages Shanghai offers companies in the PV industry, whether they are coming from overseas or considering a move within the vast country that is China. In many ways, Shanghai reflects the state of the Chinese PV industry and as China becomes more of a domestic market for solar power and less dependent on exports, Shanghai will need to reposition itself as well in order to maintain its status as China’s PV capital. Given the fact that China produces more photovoltaic cells and panels than any other country and uses only a fraction of these products in its own market, the case could be made that Shanghai is in fact at the center of the global PV industry, at least when it comes to the supply of PV products. While little PV production actually takes place in Shanghai, Shanghai is at the center of the Yangtze River Delta and serves as a bridge between the massive production taking place in this delta and overseas markets. In the other direction it serves as the port of entry and logistics hub for foreign PV production equipment, components and materials destined for PV manufacturing facilities in the Yangtze River Delta.
However, much more is involved in putting Shanghai at the center of China’s (and the world’s) PV production and trade. China’s export-driven model and success is premised on a range of advantages this megacity offers. In addition to its production hinterland in the Yangtze River Delta and its prowess as a trading and logistics hub, Shanghai offers an educated workforce, a strong base in basic and applied research in the semiconductor industry and PV, an international orientation, an increasingly sophisticated financial industry, and an environment suitable for foreign investment and PV professionals.
Key figures reflect Shanghai’s pivotal position in China’s development. Its population numbers 19.4 million (2009) and its per capita GDP and disposable income are the highest in China. For the year 2009 GDP per head amounted to 78,989 renminbi and disposable income per head amounted to RMB 28,838. Trade in 2009 was very balanced with exports of 136 billion U.S. dollars (USD) and imports of USD 137.3 billion. Foreign investment amounted to USD 10.5 billion, putting Shanghai in fourth place behind three other Chinese provinces.

The amazing transformation

Like several other cities in China (Beijing and Chongqing are two other examples), Shanghai has the political status of a province, which puts it right under the control of the central government in Beijing. Its development was given a boost in the 1990s, when the city’s former Mayor and Party Chief Jiang Zemin was promoted to national-level party leadership. With support from the central government, Shanghai has gone through an amazing transformation, rising from what seemed like a big village in the early 1990s to a modern metropolis with an extensive system of subways and elevated highways, new airports and train stations and a skyline full of glitzy skyscrapers. The author first visited Shanghai in 1990 and has witnessed first hand this historic rise.
While Shanghai was transforming itself from a sleepy big town to a world-class city, the PV industry was rising in its shadows in its hinterland and increasingly using Shanghai to handle specific tasks related to trade, finance, marketing and other functions. Ironically the real impetus for China’s PV industry came from the other end of China in the remote regions of western China in provinces like Tibet. Working with the World Bank and the United Nations Development Program, China’s central government launched the Township Electrification Program in 2002 to provide off-grid solar power to remote villages and towns in China. Private entrepreneurs like Suntech’s Zhengrong Shi spotted this as an opportunity and this program became the first market for China’s first PV ventures like Shi’s Suntech. So it is indeed quite a jump to find, yearslater, Shanghai as the hub of China’s PV industry. The distance between Shanghai and Tibet’s capital Lhasa is 3,250 km and it takes over four hours to cover this distance by plane. A stunning new railway connects these two cities, but it still takes 52 hours to make the journey. China’s solar entrepreneurs did not set up shop in western China, near where these off-grid systems were being installed almost ten years ago, since western China did not offer the technological base and logistics they needed to manufacture their solar panels.
Instead, Shanghai and the surrounding Yangtze River Delta offered ideal circumstances. Local governments in this area were keen to attract high tech ventures and PV manufacturers could easily source inputs from overseas and find skilled workers with a background in the electronics industry. After all, Shanghai had already developed as China’s center for the semiconductor industry and this expertise could be readily utilized in the photovoltaic industry. There were even some state-owned enterprises (SOEs) in Shanghai who had supplied photovoltaic equipment for aerospace use as early as the 1960s and were already familiar with the process of manufacturing photovoltaic cells.
The Aerospace Bureau in Shanghai supplied PV technology for satellites in the 1960s and up until the year 2005 Shanghai Solar, which emerged from the Aerospace Bureau in 1999 as an independent manufacturer of PV cells and modules, was China’s leading supplier of PV products. It has built up significant expertise in the supply of off-grid solar plants in western China, as well as the construction of high-profile on-grid systems, including for the 2008 Olympics, 2010 World Expo and the Hongqiao Railway Station. Shanghai Solar is one of the major system integrators in China.
Shanghai’s universities and research institutes also played a pivotal role in supplying the expertise to this young industry. Leading the way was and is Shanghai Jiao Tong University (SJTU) and it has supplied talent and know-how to numerous PV manufacturers in the Shanghai region. Prominent examples are Shanghai Topsolar Green Energy Co., Ltd., which started as a joint venture between SJTU and the SOE Shanghai Electric in 2003, Solarfun, now Hanwha SolarOne, EGing PV, LDK Solar, Chaori Solar and the backsheet manufacturer Jollywood. All of these companies have operations in Shanghai and/or the adjacent Yangtze River Delta and their development was boosted by their proximity to institutions like SJTU.

Access to cash

Another important factor was access to capital. Sky Solar mentioned this factor as one key reason for its relocation from Beijing to Shanghai and this is certainly a critical piece of the puzzle in becoming a contender in the PV industry, whether in China or elsewhere. PV manufacturing plants are very capital intensive, so the PV industry in China was very dependent on access to capital. Shanghai provided a very good platform for raising capital and engaging both domestic and foreign players in this sector. We mentioned Suntech earlier and Suntech was the first Chinese company ever to tap the New York Stock Exchange for capital. This historic achievement in 2005 provided Suntech with the funding to become China’s and the world’s leading manufacturer of solar panels. Undoubtedly, Shanghai played a role in providing access to financial professionals to make this happen. It is now the undisputed financial center in mainland China and an ideal place for China’s solar companies to meet Chinese and foreign financial professionals to discuss the best way of funding and growing their business.
Suntech led the way, but the process continues with new startups seeking capital to fund their expansion. One example is Involar, a young company with expertise in the micro-inverter field. This is a very promising segment in the PV supply chain and Involar aims to become a global leader in this market, much like Chinese panel manufacturers rise to become global champions in their product category. And like Suntech, which sells 19 of every 20 panels outside of China, the key market for Involar is overseas. According to Richard Liu, Executive Vice President at Involar, 90 percent of their output in 2012 is earmarked for overseas markets. To become a global player in the micro-inverter segment and further develop their technology, Involar is seeking up to USD 20 million in growth capital. In Shanghai Involar can tap a wide range of venture capital (VC) and private equity (PE) firms, many with foreign backers, and these VC and PE firms can also serve as strategic partners in opening doors in other markets and bringing a company like Involar to a domestic or foreign stock exchange.
The Involar story also illustrates another advantage Shanghai has to offer. It is probably the most liveable place for foreign expats and for an entrepreneur like Richard Liu, this is an important factor. He says it took some time to convince his wife to relocate from the United States to China and given Shanghai’s dramatic development in the past twenty years, it now offers many of the amenities foreign expats need to feel comfortable. The management teams of China’s leading PV manufacturers are full of expats and so-called “returnees,” meaning Chinese who left their country to study and work overseas and then return back home, often after getting a very compelling offer they just can’t refuse. This is what happened to Suntech’s Shi, who had no plans to leave Australia in the 1990s, but was swayed by a very generous offer presented to him by officials of the Wuxi government, a city close to Shanghai in the Yangtze River Delta. They offered him the opportunity to launch a solar company in Wuxi with a starting capital base of USD 6 million.
Shanghai’s quality of life has also attracted foreign companies to its shores. The vacuum specialist Edwards already established a presence in Shanghai in 1994 and ten years later it established a manufacturing facility in the Wai Gao Qiao Free Trade Zone (“FTZ”) in the eastern part of Shanghai called Pudong. Pudong and especially its FTZ were earmarked by China’s leadership as a place to experiment with new forms of foreign investment. It allowed Edwards and other foreign companies to establish so-called ‘wholly foreign-owned enterprises’ (WFOEs), which has now become the preferred way of establishing a business in China. By being closer to its customers in China, Edwards can offer delivery times that are 30 percent faster than competitors without a manufacturing base in China.
The Edwards example is an interesting one, since it reflects China’s transformation from export-led growth to a more balanced economic model, where domestic consumption plays a much more important role. When Edwards setup its manufacturing plant in the FTZ, the focus was on exports, since the FTZ allowed Edwards to import and export goods without going through Chinese customs. This worked very well as long as most customers were in foreign markets. But as the number of Chinese customers grew, including PV manufacturers in the Yangtze River Delta eager to integrate Edwards’ technology in their production lines, the FTZ was no longer the best place to be based, since equipment destined for the domestic market still needed to pass through Chinese customs. As a result, Edwards might be moving even closer to its customer base in the Yangtze River Delta and the Chinese mainland. The same trend is apparent in Involar’s numbers for future sales in China and overseas. We mentioned the 90 percent number for overseas revenues in 2012, but already in 2013 Involar forecasts 25 percent of its micro-inverters to be used in China. Of course, it is possible that a fair share of these inverters will be bundled with panels from the Yangtze River Delta panel manufacturers and then shipped overseas, but the upswing in domestic sales is too significant to not indicate a strong shift in domestic demand. Indeed, PV demand in China is now forecast to grow to at least 50 GW in 2020, much more than was anticipated at the beginning of this year.

Preparing for more

For Shanghai and the Yangtze River Delta, this will be a big shift in how PV business is played. They have been extremely successful in the export-driven game, much like their counterparts in the south (Hong Kong and the surrounding Pearl River Delta), which have done equally well as the world’s production and trading hub for electronics, toys and other products. The success of both regions and their leading cities has also led to higher production costs and wages. This has been especially evident in the last twelve months, where worker unrest, especially in Guangdong province near Hong Kong, forced manufacturers to boost wages for their workforce.
First Solar’s recent decision to set up a thin-film manufacturing plant in Saigon, Vietnam, as well as similar moves by other PV manufacturers in Southeast Asia, show that wage pressures in China are leading some PV manufacturers to consider production centers in other Asian countries where labor and other production costs are cheaper. In order to prosper as they have done so far, the Yangtze River Delta, and the Pearl River Delta, will have to move up the value chain to offer more than just low cost cells, modules and inverters. We see this process happening at PV leaders like Suntech and startups like Involar, where know-how is brought in from China and overseas to generate more value-added products.
Shanghai is also taking steps to showcase its role as a future hub of the domestic PV market. One of the highlights of last year’s World Expo was the use of building integrated PV (BIPV). Given the tremendous amount of new construction in Shanghai and China in general, this part of the world could very well become BIPV’s biggest market. Three of the four permanent building structures in the Expo Park use BIPV to meet their energy requirements and supply excess power to the grid. The most prominent examples are the China Pavilion and the Theme Pavilion, with a combined power output of 3.12 MW.
China’s biggest BIPV installation is not in the Expo Park, but at the other end of the city in Hongqiao district. Hongqiao Railway Station features a rooftop BIPV system spanning 20,000 panels and covering an area of 61,000 square meters. It has an annual output of 6.3 million kilowatt-hours of electricity, enough to power 12,000 households in Shanghai. The station was opened for service on July 1 of last year and this summer it was back in the media as the endpoint of the world’s longest high-speed railway connection. The brand new Shanghai to Beijing line will cut the travel time between the mainland’s leading cities in half to just under five hours.
Shanghai will continue to promote BIPV installations and has set aside an annual budget of RMB 50 million to support such projects. The Shanghai government consults with local experts such as SJTU’s Institute of Solar Energy to evaluate BIPV projects in the city. Unlike its Yangtze River neighbors Jiangsu and Zhejiang – the two provinces bordering Shanghai – Shanghai has not yet adopted a provincial solar feed-in tariff (FIT). Yet both of these provinces are very strong on the PV manufacturing side and this undoubtedly played a role in establish ing these provincial FITs. While Shanghai may emerge as a leading application center for BIPV, it is already the hub for PV exhibitions and conferences. So far these events have been export-oriented, but as China’s domestic PV market ramps up, there should be more of a balance between domestic and international orientation.
Clearly at the top of Shanghai’s PV calendar is the SNEC trade show, which will take place from May 16 to 18, 2012. It filled all thirteen halls of Shanghai New International Expo Center in February this year and the organizer Shanghai New Energy Industry Association (SNEIA) is keen to maintain SNEC as the leading show of its kind in China and in fact all of Asia. Next spring will be a busy one in Shanghai, since SNEC will be preceded by Semicon/Solarcon China 2012 (March 20 to 22) and AsiaSolar (March 21 to 23). All three events will take place in Pudong and the fact that SEMI China’s Solarcon China 2012 overlaps with AsiaSolar reveals how PV trade show organizers in China are jockeying for position as the market heats up. As solar power emerges as an important power source in China and other new markets, the competition should intensify even more. With excellent infrastructure in place like Shanghai New International Expo Center and BIPV-powered Hongqiao Railway Station, Shanghai seems very well equipped to remain at the center of China’s PV market. Its drive to become an international financial center will bring even more capital to innovative solar companies in Shanghai, the Yangtze River Delta and other parts of China. In the future we might even see foreign players with a strong solar brand list on Shanghai’s stock exchange, just as foreign brands in the luxury market are scrambling to list in China. While solar brands might not be as sexy as Prada, which listed this summer in Hong Kong, they should receive a lot of attention in a country hungry for electricity and a cleaner environment.