Caixin
DOING BUSINESS IN CHINA

Solar Subsidy Meltdown Spotlights How Beijing Gives, Takes Away

Make hay while the sun shines, and don’t store all your Chinese eggs in one basket. Those farmyard bits of wisdom are two of the biggest lessons coming from this week’s column, inspired by a reduction in Beijing’s generous solar power subsidies that came with little warning. The sudden change caught the industry napping and sent solar stocks plunging, spotlighting one of the biggest challenges facing both domestic and foreign firms doing business in China.

One of my contacts in the media industry, one of the most highly regulated in China, summarized the situation nicely when it comes to challenges posed by Beijing’s famously shifting regulatory winds. “There are maybe 50 or 60 challenges of doing business in China, too many to count to be honest,” he told me. “But this is easily on my list of the top five challenges by a far stretch.”

The latest policy shift that left everyone scrambling came quietly just before the weekend in a posting on a government website, a common practice in China. I won’t go into the details here and instead will include a link to our previous story for anyone who wants to know more.

The bottom line was that Beijing decided a building frenzy of the last few years had produced more than enough new solar power capacity, and that it was sharply reducing or outright eliminating many previous incentives to promote the sector. Chief among those moves was a sharp reduction in subsidies that had previously allowed solar farm operators to sell their power at inflated government-set prices that were well above market rates for cheaper coal-produced electricity.

The resulting carnage saw shares of solar panel manufacturers plunge, especially those that had come to rely heavily on their home market. One of my industry sources, an American who helps to design small-scale rooftop-style solar systems, noted the biggest impact for him was the huge uncertainty the change suddenly brought to the market. That meant that financiers and energy buyers were suddenly far more reluctant to enter into agreements, putting a huge chill on new development, he said.

Here I should step back and look quickly at the bigger picture in this type of situation. The broader reality is that this kind of development is completely par for the course in China and poses one of the biggest headaches for businesses that participate in such highly regulated sectors. The issue is bad enough in industries like media and energy, which are tightly controlled by Beijing. But it’s even worse for sectors like solar, which have been targeted for development and thus receive generous government subsidies that create artificial demand for products that would never be viable otherwise.

Beijing gives, takes away

But Beijing has shown time and again that what the government gives, it can also take away, often very quickly and with little notice. Another sector that has learned that lesson the hard way this past year is new energy cars. Beijing previously gave out generous subsidies to makers of such cars, offering grants for manufacturers and tax and other rebates to offset those cars’ high price tags.

Those efforts led to an explosion in new-energy car manufacturing, much of it by companies with little or no previous experience, resulting in a flood of mediocre vehicles into the market. Beijing abruptly slammed the brakes on the campaign by sharply reducing many of the subsidies last year, depriving many producers of their primary sales drivers. At the same time it switched the onus of promoting the sector to producers of traditional gas-powered cars, suddenly mandating that a fixed percentage of their annual sales come from new-energy vehicles. Months later the chaos created by all that change is still playing out.

All that said, my contacts did offer a range of comments and observations on some things companies can do to protect themselves from this kind of regulatory whimsy. The biggest involves diversification, especially when you’re doing business in a highly regulated area. One of my solar contacts pointed out that many of China’s largest solar panel manufacturers now sell large amounts of their output overseas, which has helped to shield them somewhat from the sudden chill in China.

The media contact I cited at the top of this column gave another example of an importer who had a hot product that was far superior to locally produced ones. For a while that company enjoyed huge profits, only to wake up one day and find it had been abruptly kicked out of the market by new government policies aimed at promoting the domestic industry. Fortunately, the company had used earlier profits to diversify its product mix by then, helping to cushion some of the blow.

That brings us to lesson No. 2, which says to make hay while the sun shines. A couple of contacts pointed out that government incentives for particular industries often offer golden opportunities for people who are well-placed to take advantage of the situation. At the same time, they added, such companies should also have an emergency escape route built in to their business plans for the day when the rug inevitably gets pulled from under their feet, as so often happens.

One source from the drug industry said his company doesn’t incorporate government incentives at all into its business plans, and simply treats them as an unexpected windfall when they occasionally occur, for example through subsidies for particular new medicines Beijing wants to promote.

Another source from the new energy car sector pointed out it’s often possible to get some advance warning when upcoming policy changes get discussed at industry forums or the government issues “requests for opinions” or certain topics. Such signals can help a company detect which way the political winds are blowing at any given moment, and perhaps provide a few extra months to prepare for major changes. But at the end of the day, most people pointed out there’s very little you can do to completely protect yourself from such regulatory whimsy, and that such changeable conditions are simply one of the costs of doing business in this market where government policy plays an unusually heavy role.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

ladingImg
You've accessed an article available only to subscribers
Try 4 weeks for $0.99
SUBSCRIBE
Share this article
Open WeChat and scan the QR code
Copyright © 2017 Caixin Global Limited. All Rights Reserved.