The landscape of China’s solar industry is changing. While still very overcrowded with over 400 enterprises remaining active in the market, the country may see consolidation in 2013, as losses have been piling up for over a year now and the business outlook for manufacturers remains depressed. Yet, a new shift is appearing on the horizon, which could threaten this possibility.  Furthermore, it may keep a lot more companies in the game, a condition that could hold the industry in the existing deadlock for longer than anyone hopes.  

Average selling prices have taken a staggering toll on many companies, so there is no surprise that enterprises are looking into any opportunity to get ahead.  Unlike example of Taiwanese wafer maker Green Energy Technology refusing to take on low-bid orders, Chinese wafer companies are less selective, or more accurately stated, unable to be selective. So, in many ways, they use different methods to sell or frequently hand over their inventory with a promise of cash. Given there is a lot more headcount competition in China, being creative is necessary in order to see another day.

There has been a rapid increase in efficiency expectations in the market for solar wafers. Efficiency is one of the ways in which a company can get the product out of the door. The standard wafer efficiency has reached an average of 17.1-17.2%. Wafer scoring over 17.5% is considered a high performance (HP) condition. GCL-Poly Energy Holdings Limited. (HKG:3800) is selling standard wafers at 6.2-6.3 CNY /pc, or $0.84/pc. It is aggressively promoting its HP wafer, at prices between 6.5 to 7.0 CNY/pc, or $0.88 to 0.95/pc. Right now, its volume is still low, supplied mostly to its LT customers like Canadian Solar (NASDAQ: CSIQ), but GCL has already sent samples to the wide range of existing and potential customers, and some have started placing orders.  GCL Poly is the largest wafer maker in the world.  Price matching with a giant like GCL would usually be a losing game, but others just keep trying.

ReneSola (NYSE:SOL) and LDK Solar (NYSE:LDK) are selling mostly to Taiwan, with pricing similar to GCL’s.  SPVI has been told that LDK's M2 wafer, a new polycrystalline product, has received a good reception and is seeing good demand, in comparison to reduced utilization. Next-generation product M3, which is still in the R&D phase, displayed a quite impressive 17.7% when tested by cell makers.

Some wafer companies, like Xi’an Fenghuo PV Tech, Dongguan FullHoard PV (FH Solar), Xi'an LONGi Silicon Materials Co Ltd (SHA:601012), or Jiangxi Sornid Hi-Tech Co, also offer HP product over 17.2%. A few eyebrows have been raised, as the gained efficiencies were not a consequence of in-house R&D efforts. Apparently, there is no collusion here.  It only takes recruitment of an experienced professional to make necessary adjustments and a company with 400MW of ingot capacity can obtain data on its own. After all, everyone is using the same equipment, making differentiation almost impossible in the long run. 

For most, however, they are struggling with sales and the liquidity, while others simply shut down. Those left, not able to find alternates to improve sales, use discounts and credit terms to push their product. Our sources provided us with quotes at 5.8 CNY /pc or $0.79/pc for a cash payment on efficiencies over 17.0%, and 6.0 CNY /pc or $0.81 with 30- to 60-day credit cycle.

Apart from efficiency, in the quest of sales and to attract customers, other sale structures are taking place. One of the most interesting ones is GCL-Poly’s strategy. The company apparently had 300 million wafers in inventory as late as September, but by October only 200 million remained.  Not all of this reduction came in the form of sales. The company makes “sell-buy” arrangements with its clients.  One such example would be a purchase of 10MW of modules by GCL in return for 30MW of wafers, 10MW of OEM work and 20MW as wafer sales.  The payment for OEM work is paid in wafers as well.

Big and small customers are in this setting, including companies like Realforce Power Co., Ltd. andZhongli Talesun Solar, but also Trina Solar (NYSE:TSL), Hanwha SolarOne (NASDAQ: HSOL)  and Ja Solar (NASDAQ:JASO).  The size of the orders has achieved such a volume that some articulated doubt that GCL will be able to pick up the modules in the short term, while some sceptics hold the view that it may never happen. It was rumored that GCL had even loosened up some of the credit terms for its long-term customers, which in return has swollen its accounts receivables with hundreds of millions of Yuan.

Even with financial arrangements and high-efficiency products, the glaring truth is that making it through this crisis as a manufacturer is insurmountable.  So there is no surprise that everyone, from wafer to equipment makers, is attempting to do project development.

Some wafer makers, like Zhongwei Yinyang New Energy Co., Ltd. and Tianjin Zhonghuan Photovoltaic Solar Energy, are doing quite well with their projects in China.

Zhongwei Yinyang, a wafer maker, and Beijing Jingyuntong Technology Co Ltd (SHA:601908) (JYT), solar furnace maker – yes, the solar furnace – have announced a JV to develop a 100MW solar farm in Ningxia, China. This has been big news, since JYT has decided to put 80% of the cash obtained from the IPO into this JV, and also because Yinyang is considered a small-size company (500MW).

Another wafer maker, Xi'an LONGi, announced last week a 50MW solar project at a site not far away from Yinyang's. Rumor has it that the company will use Suntech Solar’s (NYSE: STP) modules, part of a settlement of accounts receivable obtained from the big module maker.

But, of course, the big wins are seen for the module makers. Trina has restructured itself recently, with system sales becoming the number one department. Top management has transferred to there from the module sales division, which was the only selling channel prior to the change.  In the case of Talesun, we were told that the company has stopped selling modules to third parties altogether, and only supplies them to its own EPC projects, mostly overseas. 

Yingli Green Energy (NYSE:YGE) and Hareon Solar Technology Co Ltd (SHA:600401) are mainly focused on domestic sales these days, and the business keeps them busy. Yingli had confirmed full ordering for the month of November and most tier-1 module makers are running at full or near full capacity.

Despite the trade war, many foreign manufacturers and development companies, such as First Solar, Inc. (NASDAQ:FSLR), Wirsol, IBC and others, have set up their sub-companies in China, searching for opportunities in EPC. Looking at the Q3 results for First Solar and including the successful transitions forMEMC and SunPower into developers, it is difficult to question the Chinese for having the same desires. Certainly, the EPC path offers more than survival; it can actually offer profitability.