ENERGY FROM ABOVE: Dr. Hao-Lin Chen, a resident of Lafayette, California, the United States, points to the made-in-China solar panels on the roof of his house (WU KAIXIANG)

Blind expansion

In addition to being the scapegoat of failed U.S. solar cell makers, the Chinese solar industry is also going through difficult times at home.

Although Suntech denied recent rumors of its bankruptcy, the fact is that its net profit plunged nearly 50 percent in the second quarter of this year, according to its company report. LDK Solar, Asia's biggest polysillicon solar wafer maker, based in Jiangxi Province, saw its gross profit margin decline to 2.2 percent in the second quarter of this year from 31.5 percent in the previous quarter.

China's photovoltaic industry is suffering loss, no matter big or small.

"Things will be even worse in the third and fourth quarter for many Chinese solar companies," said Wang Yuming, an analyst of the photovoltaic industry with Beijing-based financial consultant Snowball Finance.

Even though China's solar industry is the biggest in the world—five of the biggest solar panel manufacturers are Chinese—quantity does not necessarily mean quality.

"China has a big, but not a strong solar sector. The high-profit segments, like silicon material, are controlled by foreign companies. Most Chinese companies are engaged in the processing and assembly which create meager profits. What makes the Chinese solar industry more vulnerable is that more than 90 percent of its solar products were exported. Once the market fluctuates, China would be the biggest victim," said Xu Ang, an analyst with the Beijing-based Adfaith Management Consulting Co. Ltd.

Even in this vulnerable industry, too many players have made the competition very fierce.

Official data showed that so far China has more than 500 photovoltaic enterprises, five times more than three years ago.

"The expansion last year was crazy. The market is not so big to hold all this production capacity and reshuffling cannot be avoided," said Shi Limin, Vice Executive Secretary of China New Energy Chamber of Commerce of All-China Federation of Industry and Commerce.

The report by Solarbuzz, a market research firm based in San Francisco, said global photovoltaic equipment spending has reached a "historic peak" of $13.1 billion thus far in 2011, and projected a "continuous shakeout" of uncompetitive photovoltaic cell manufacturers around the world.

"Almost half of photovoltaic equipment spending in 2011 has been stimulated by new entrants to the industry or from existing Tier-2 or Tier-3 manufacturers seeking to increase revenues simply by adding more capacity," the report said.

Official data showed that 80 percent of photovoltaic overcapacity was from China.

"High profit margin allured many investors to join in solar industry," said Zhou. In October 2010, the Zhejiang-based famous hosiery manufacturer LangSha Group decided to march into the solar energy industry, establishing a photovoltaic company with an investment of 1 billion yuan ($157.48 million).

Nationwide, industrial insiders said, more than 50 photovoltaic companies have closed down. Others are on the verge of closure.

Despite a business slowdown and an oversupply in production facilities, some Chinese photovoltaic companies are still investing in new projects. LDK Solar announced that the government of Hohhot, capital of Inner Mongolia Autonomous Region, held a ground-breaking ceremony on November 1, 2011, for a polysilicon manufacturing facility with an annual output of 30,000 metric tons in its Jinsan Development Zone.

Shen Fuxin, Secretary General of the Zhejiang Solar Energy Industry Association, predicted that the mainland photovoltaic industry will see some 30 percent of its member companies close down over the next two to three years.

When the bubble breaks

Small and medium-sized companies will suffer the most. Out of 210 photovoltaic enterprises in Zhejiang, 60 percent were small and medium-sized, according to Shen.

"It is much harder for small and medium-sized enterprises to obtain lending from banks than big ones, especially in tough market," said Du Jun, General Manager of Changzhou Jiangnan Photovoltaic Technology Co. Ltd.

The whole photovoltaic industry will go through a reshuffle in the next three years and some small enterprises will be eliminated once their outside financing collapse, Shen said.

To avoid low-end repetitive production, Diao Shijing, Vice Director of the Department of Information Technology under the Ministry of Industry and Information Technology, suggested that China support the research and development of high-end photovoltaic battery technologies.

According to Diao, China's photovoltaic production accounted for nearly half of the world's total in 2010, but its domestic installed capacity was only 2 percent.

"China's solar panel market has not been developed yet. Too high dependence on overseas markets poses problems for our photovoltaic industry," Diao said.

While easing dependence on overseas markets, boosting the domestic market could be a real remedy to save the industry.