PV Industry: Market-Driven Approach to Clear Excess Capacity

On October 14th, the Photovoltaic Industry Association organized a special symposium in Shanghai to address the "involutionary" vicious competition within the industry, with the theme of orderly resolving supply-demand imbalances and clearing excess capacity.

Recently, the market prices of photovoltaic products have continued to decline, with mainstream product prices significantly lower than production costs. In the first quarter of 2024, the terminal module price lingered around 0.9 yuan/watt for a period; by the end of June, the majority of enterprises had entered a stage of cash cost loss. Currently, module prices continue to drop, generally below 0.65 yuan/watt, and some enterprises have quoted prices below 0.6 yuan/watt.

Behind the decline in quotations is a price war. The new capacities in the Chinese photovoltaic industry, such as cells and modules, have been put into production in the past two to three years, with a high degree of homogeneity in production technology, making it difficult for enterprises to differentiate themselves, ultimately resorting to price wars.

Another reason is insufficient demand. Currently, some leading enterprises can achieve a polysilicon operation rate of up to 80%, but the overall industry operation rate is low, with most enterprises maintaining a rate between 50% and 60%. More extreme is that there are now more than six domestic enterprises with suspended factory operations. Even under these circumstances, supply exceeds market demand. For enterprises, insufficient operation leads to costs that cannot be spread thin, and they hope to increase production to average out costs, but the shrinking demand forces them to desperately grab orders through price wars.

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In this situation, the Photovoltaic Industry Association believes that the entire industry has fallen into an irrational competitive vicious cycle and convened this meeting to "jointly discuss and orderly resolve supply-demand imbalances and clear excess capacity." A reasonable guess about this meeting is that it aims to guide enterprises to jointly reduce production and raise prices, which is price fixing. In May of this year, the Chinese Photovoltaic Industry Association also held a "High-Quality Development Symposium of the Photovoltaic Industry," which proposed encouraging industry mergers and reorganizations, smoothing market exit mechanisms, and increasing the crackdown on vicious competition through sales below cost prices.

However, if it is indeed in the form of an agreement, requiring enterprises to reduce production, set prices, and punish those who violate the agreement, it may涉嫌违反《反垄断法》—Article 17 stipulates that it is prohibited for operators with competitive relationships to reach various types of monopoly agreements, including: fixing or changing commodity prices; restricting the production or sales quantity of commodities.

Such examples are not rare. In 2023, at the China Automotive Forum, 16 car companies signed an agreement called the "Automotive Industry Commitment to Maintaining Fair Competition Market Order." The core content of the agreement was to prohibit car companies from participating in price wars in the name of maintaining market order and fair competition. This agreement sparked widespread criticism.

Many people believe that the joint action of car companies is actually a price alliance, depriving consumers of the right to enjoy more favorable prices. Faced with public criticism, the China Association of Automobile Manufacturers had to remove the clause about "not扰乱市场 with unreasonable price reductions" from the "Commitment," stating that car companies should "set prices autonomously" according to the market.

Even setting aside violations of the "Anti-Monopoly Law," such price alliances are difficult to implement due to the lack of coercive power of industry associations themselves. The elimination of some capacity and mergers and reorganizations in the photovoltaic industry are the general trend. Who merges whom, who is merged, all depend on strength to compete in the market. Even if enterprises reach an agreement on the surface, it is difficult to adhere to the contract behind the scenes. At this meeting, some enterprises clearly expressed their disagreement with reducing production. Enterprises worry that if they reduce production, others will secretly produce and grab orders without being punished, which becomes a contract of "whoever does not comply, whoever benefits." Why should enterprises participate? To some extent, the price war in the photovoltaic industry stems from overinvestment. At the 2023 Annual Conference of the Photovoltaic Industry, Longi Green Energy Chairman Zhong Baoshen said that in 2023, the photovoltaic industry's capacity increased significantly, leading to overcapacity, which is essentially caused by non-market resource allocation. His view was supported by Trina Solar Chairman Gao Jifan, who believes there are four reasons for enterprise expansion: enterprises are willing to invest, local governments support, financial institutions facilitate financing, and there is a strong desire for cross-industry integration.Price wars can be brutal and should certainly be avoided. However, in the face of an industry where production capacity has been inflated, price wars also serve as a way to clear the market. Although it may seem wasteful, compared to using administrative subsidies to support companies involved in price wars or using administrative orders to end them, price wars are actually the most efficient method. They can help eliminate inefficient companies in the market and promote the concentration of resources towards more efficient ones.

In fact, this is also a top-level design. Following the mention of preventing "involution" at the meeting of the Political Bureau of the CPC Central Committee on July 30th, the next proposal was: "Strengthen the market's survival of the fittest mechanism and ensure smooth channels for the exit of backward and inefficient production capacities." Therefore, the best way out is through market-oriented mergers and acquisitions, integrations, and accelerated industrial agglomeration.

For photovoltaic companies, even if the phenomenon of homogenization in basic technology is difficult to change in a short period, the clearance of inefficient production capacities and the continuation of price wars will last for a considerable time. However, non-core technologies, services, and even market marketing can still form value-added competition beyond price. So, companies might as well think of more ways. In the long term, increasing investment in technological research and development and improving product efficiency are the true reliable strategies.