While interest groups advocating U.S. manufacturing cheered, those in favor of cheaper clean energy to reduce U.S. greenhouse gas emissions denounced the decision.
These critics have a point. Tariffs have been ineffective at reducing China’s stranglehold on the solar-panel manufacturing industry (seven out of the top 10 global panel manufacturers are Chinese), and they have raised U.S. prices for historically cheap Chinese panels. But even if such critics are right in the narrow argument that tariffs are bad policy, it would be a mistake to conclude that the concentration of the solar panel industry in China is good in the long run for the United States or the world.
Solar is headed down a path of profitless prosperity, dimming prospects for innovative improvements to solar technology.
Some contend that by subsidizing its domestic manufacturers, China also subsidizes clean-energy deployment around the world. This sort of argument by pro-deployment activists suggests that China’s dominance in solar manufacturing is a boon to the world.
In the near term, they are right: solar deployment is booming around the world, fueled by cheap Chinese panels. But in the long term, today’s silicon technology will not suffice for solar to displace a substantial fraction of fossil fuel energy. This near-term/long-term disparity stems from the economics of electricity grids: solar’s value declines as its penetration on the grid increases.
Therefore, for solar to play a leading role in slashing global emissions, it needs to be an order of magnitude cheaper and boast a higher efficiency at converting sunlight into electricity. The next-generation technologies to do just that exist in laboratories today. I worked on one promising technology, solar perovskites, which could beat silicon on efficiency and cost if ramped up to scale production.
But there are two reasons why dramatically superior technologies likely will not emerge if the solar industry remains concentrated in China.
First, Chinese firms are more likely to pursue incremental process improvements and cost reduction — optimizing factory layouts, strengthening supply chains — rather than product innovation.
Some might argue that this is a dated caricature of a newly dynamic Chinese innovation complex which benefits from lavish state-funded laboratories and improved coordination among universities, research institutes, and corporations. Still, solar technology researchers in China are struggling to close the gap with Western counterparts, and most major solar manufacturers have displayed little interest in seriously funding alternative technologies. (The major exception, Hanergy, which bought up several innovative U.S. startups, recently lost over half its market value in the Chinese stock market and just announced it would cancel plans to deploy new, flexible thin-film panels.)
As panel manufacturers scrape by on razor-thin margins, kept afloat by government credit, investing in fundamentally new technologies is far from a priority.
The second reason for pessimism that innovation will flourish in a Chinese-dominated solar panel industry is that increasing vertical integration will stifle disruptive change.
China not only dominates the panel manufacturing business, but has also consolidated the entire upstream supply chain within its borders, from polysilicon to solar-cell production. Where the supply chain is not formally vertically integrated, it is de facto monolithic, simply by virtue of co-location in massive industrial centers like the Yangtze River Delta Economic Zone.
This trend of increasing vertical integration stands in stark contrast to another industry based on silicon but far more innovative: semiconductors.
The trend in that sector was dis-integration, from vertically integrated giants IBM and AT&T in the 1950s to today’s global network of suppliers competing at every step of the value chain to redesign components and dramatically improve the performance and cost of electronics. By contrast, clustered solar supply chains in China will reinforce the industry’s focus on today’s technology, rather than allowing competition to drive tomorrow’s advances.
Imposing a tariff on Chinese solar panels helps nobody, and in fact substitutes for substantive action by the United States to capture a lucrative segment of the solar value chain. In semiconductors, the United States plays to its comparative advantage in innovation, as “fabless firms” design components that are manufactured elsewhere.
In solar, this is easier said than done, and will require more than just throwing money at the problem. From 2006 to 2011, venture capitalists invested over $25 billion in clean technologies and lost over half their money — needless to say, VC interest in new solar startups today is minimal.
Rather, large U.S. companies have a crucial role to play in driving innovation in solar, and government support can accelerate their success. Firms like Applied Materials and DuPont still achieve levels of quality that the Chinese have been unable to replicate (in solar cell production equipment and materials, respectively), giving the United States a toehold in the solar supply chain.
Moreover, two large solar panel makers — First Solar and SunPower — are American and employ more advanced technologies than their Chinese competitors. And SolarCity, a downstream residential solar installer, recently acquired an innovative solar technology company and will produce its own panels in Buffalo, New York.
These American solar players are far more amenable than their Chinese counterparts to exploring new technologies for commercialization, and they have the sector expertise, manufacturing prowess, and project pipeline to bring new solar technology to market where VCs failed. State incentives, like those that attracted SolarCity to New York, can support American companies and drive local economies; federal research funding should also be aimed at fostering partnerships between major American firms and cutting-edge research in universities and national research laboratories.
In solar, the United States should see an industry waiting to be disrupted. But the more the solar industry concentrates and calcifies in China, the harder such a disruption will be.
Varun Sivaram is a fellow at the Council on Foreign Relations. This post was originally featured in the CEF EcoInnovator Blog and was reprinted with permission.