Blame China for Solyndra’s Downfall?

by Marlo Lewis on September 22, 2011

in Blog, Features

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Tomorrow, the House Energy and Commerce Committee will hold its second hearing on Solyndra, the manufacturer of innovative non-silicon-based solar panels that borrowed $527 million only to file for bankruptcy, shutter its brand new Freemont, Calif. factory, and lay off 1,100 employees on September 6. Expect Committee Democrats to blame China and the allegedly unforeseen fall in the price of conventional silicon-based solar panels for the debacle.

That’s the line the Department of Energy’s (DOE) witness, Jonathan Silver, took at the Committee’s first (September 14) Solyndra hearing, noting China’s provision of more than $30 billion in subsidized financing to its solar manufacturers, which rapidly dropped silicon prices, “taking Solyndra, and many industry analysts, by surprise.” DOE’s blog, Energy.Gov, had already adopted this explanation on August 31, the day Solyndra announced it would file for bankruptcy.

Similarly, Solyndra’s August 31 announcement coyly cited the “resources of larger foreign [i.e. Chinese] manufacturers” and a “global oversupply of [mainly Chinese] solar panels” as factors foiling the company’s business plan. Solyndra’s ex-employees have applied to the Department of Labor (DOL) for aid under the Trade Adjustment Assistance (TAA) program, claiming that China put them out of work. If DOL approves the application, Solyndra’s former workers will receive allowances for job retraining, job searching, and health care for up to 130 weeks, or about $13,000 per employee. Blogger Scott Linicom decries such double dipping:

So to recap: massive government subsidies created 1,100 “green jobs” that never would’ve existed but for those massive government subsidies.  And when those fake jobs disappeared because the subsidized employer-company inevitably couldn’t compete in the market, the dislocated workers blamed China (instead of what’s easily one of the worst business plans ever drafted) in order to receive . . . wait for it . . . more government subsidies. Behold, the Circle of Government Life.

Whether it’s Solyndra execs and DOE officials trying to save face, ”progressives” defending the honor of green industrial policy, or former employees looking for more taxpayer freebies, they all would have us believe that Solyndra’s $535 million loan guarantee was a good bet at the time it was made. They need a scapegoat for Solyndra’s crash, so they blame China. Indeed, some (e.g. Grist) claim Solyndra’s collapse shows that the U.S. government isn’t doing enough to help our “clean tech” companies “compete.” Balderdash.    

Solyndra’s business plan was dubious from the getgo. Committee Ranking Member Henry Waxman (D-Calif.) claims that “under both the Bush Administration and the Obama Administration, DOE officials strongly backed Solyndra.” In fact, on January 9, 2009, Bush’s DOE declined to approve Solyndra’s loan guarantee application, citing several “unresolved” issues including lack of an independent study of the company’s long-term prospects, questions about the company’s financial strength, and concern about the scale-up of production assumed in the business plan (Documents Entered into Record, p. 1).

As for the allegedly unanticipated glut in rooftop solar panels, which made Solyndra’s thin-film panels uncompetitive, it was the topic of a January 12, 2009 USA Today article. In an email dated January 13, 2009, Bush DOE staff cited the glut, reported in USA Today, as the reason for the DOE Credit Committee’s “unanimous decision not to engage in further discussions with Solyndra at this time” (Documents Entered into Record, p. 2).

Emails obtained by the Committee suggest that White House pressure for quick approval may have compromised the depth and quality of DOE and Office of Management and Budget (OMB) review of Solyndra’s loan application (Documents Entered into Record, pp. 4, 11, 12):

  • “There’s a recurrent problem with the [White House] scheduling office looking for events [loan guarantee approvals] before they are ready to go.” (March 10, 2009)
  • “As long as we make it crystal clear to DOE that this is only in the interest of time, and that there’s no precedent set, then I’m okay with it. But we also need to make sure they don’t jam us on later deals so there isn’t time to negotiate those, too.” (August 27, 2009)
  • “We have ended up in the situation of having to do rushed approvals on a couple of occasions (and we are worried about Solyndra at the end of the week). We would prefer to have sufficient time to do our due diligence reviews and have the approval set the date for the announcement rather than the other way around.” (August 31, 2009)

DOE approved the Solyndra loan guarantee on September 4, 2009 — an event timed to coincide with the ground breaking ceremony for the company’s Freemont, California factory. Speakers included DOE Secretary Steven Chu, California Gov. Arnold Schwarzenegger, and Vice President Biden (via satellite feed). But a scant two weeks before, on August 19 and 20, emails between DOE staff note that when Fitch modeled Solyndra’s cash flow over time, the company ”runs out of cash in Sept. 2011 even in the base case without any stress. This is a liquidity issue” (Documents Entered into Record, pp. 8-9). Rarely has a government business forecast been so accurate!

In addition to the liquidity problem, it is unclear whether Solyndra had a viable plan to reconcile its production costs and sale prices. According to an ABC News analysis:

While Energy Department officials steadfastly vouched for Solyndra — even after an earlier round of layoffs raised eyebrows — other federal agencies and industry analysts for months questioned the viability of the company. Peter Lynch, a longtime solar industry analyst, told ABC News the company’s fate should have been obvious from the start.

“Here’s the bottom line,” Lynch said. “It costs them $6 to make a unit. They’re selling it for $3. In order to be competitive today, they have to sell it for between $1.5 and $2. That is not a viable business plan.”

Along the same lines, ELECTRO IQ (November 8, 2010) posed the question: “Can Solyndra reconcile cost-per-watt and sale price?” From the article:

In the last year, there have been numerous stories about CIGS [copper idium gallium selenide] thin-film manufacturer Solyndra’s troubles — a pulled IPO, a restructuring of the executive team, and, most troubling, the high cost of module production. (In an S-1 filing a year ago, the company said its average sales price was over $3.20 a watt, about 65% more than leading crystalline-silicon PV manufacturers. Its cost of manufacturing was over $6 a watt). Solyndra aims at $3.5 per watt by the end of 2011.

Tim Worstall, writing in Forbes (September 17, 2011), argues that, “Yes, it was possible to see this failure coming.” Defenders of the loan argue that the fall in silicon solar prices was unforeseen, hence “Solyndra’s non-silicon technology got bushwhacked by something no one could have anticipated.”

In reality, it was “blatantly obvious” that competitors’ prices would fall. In the mid-2000s demand exceeded supply and the price soared. But as Econ 101 tells us, soaring prices create incentives to increase supply, which then push prices down.

What’s more, says Worstall, by 2008, First Solar, a leading supplier of non-silicon modules, had already achieved lower cost-per-watt than Solyndra hoped to achieve by 2011.

Concludes Worstall: “It wasn’t an unexpected fall in silicon prices that did in Solyndra: they were never even close to being competitive on pricing against non-silicon technologies. They weren’t even in the right ballpark at all.”

Let’s take a closer look at DOE loan program director Silver’s ’don’t-blame-DOE-or-Solyndra’ explanation of why the company went bust:

In 2009, Solyndra appeared to be well-positioned to compete and succeed in the global marketplace. Solyndra manufactured cylindrical, thin-film, solar cells, which avoided both the high cost of polysilicon — a crucial component used in conventional solar panels — and certain costs associated with installing flat panels. But polysilicon prices subsequently dropped significantly, taking Solyndra, and many industry analysts, by surprise. Among the principal beneficiaries of this pricing environment were four of Solyndra’s Chinese competitors, which sell polysilicon panels and received $20 billion in credit from the China Development Bank in 2010.

* * *

Unfortunately, changes in the solar market have only accelerated in 2011, since the restructuring [of Solyndra's loan guarantee in February 2011] — making it more difficult for the company to compete. Chinese companies have flooded the market with inexpensive panels, and Europe — currently the largest customer base for solar panels — have suffered from an economic crisis that has significantly reduced demand and forced cuts in subsidies for solar deployment that were important to Solyndra’s business model. The result has been a further and unprecedented 42% drop in solar cell prices in the first eight months of 2011.

All of that may be correct, but the pertinent issue is whether anyone could have foreseen these changes in the marketplace in 2009 and 2010 when the U.S. government decided to bet taxpayers’ money on Solyndra. Far from being unforeseeable that China would subsidize its ”clean tech” companies to beat out U.S. firms and capture market share, this was a major premise of DOE’s loan guarantee program. We had to fight fire with fire or else lose the “clean energy race,” Obama officials warned. As DOE Secretary Chu said in testimony on October 27, 2009:

China has already made its choice. China is spending about $9 billion a month on clean energy. . . .The United States, meanwhile, has fallen behind. . . .We manufactured more than 40 percent of the world’s solar cells as recently as the mid 1990s; today, we produce just 7 percent. When the starting gun sounded on the clean energy race, the United States stumbled. But I remain confident that we can make up the ground. . . .The Recovery Act includes $80 billion to put tens of thousands of Americans to work developing new battery technologies for hybrid vehicles, making our homes and businesses more energy efficient, doubling our capacity to generate renewable electricity, and modernizing the electric grid.

Moreover, one did not need to be a rocket scientist to predict that if the U.S. government leverages billions of dollars in private investment to compete with Chinese firms, China would up the ante. After all, Beijing is flush with cash, whereas Washington is deep in debt.

Nor was any great acumen required to anticipate that the economic crisis would cut subsidies and thereby reduce demand for solar panels in Europe. In October 2009, the Rheinisch-Westfälisches Institut (RWI) reported that Germany’s feeder tariff system was on course to subsidize solar voltaic modules to the tune of $73 billion from 2000 through 2010, yet solar power was providing less than 1% of the nation’s electricity. Such lavish subsidies are unsustainable, especially during a financial crisis.

One also wonders why Solyndra had to hire 3,000 people to build a brand new factory (“Fab 2″). Wouldn’t it have been cheaper to rent space in an existing building? Ah, but then there would have been no groundbreaking and no photo-op for Secy. Chu, Gov. Schwarzenegger, and Vice President Biden. Mixing politics with business politicized Solyndra’s business plan.

Even if one makes the dubious assumption that Solyndra’s business plan was sound at the time DOE approved the loan guarantee, why did S0lyndra stick to the plan when it became clear the company was going broke?  ”The Fed money was explicitly tied to being *solely* used to build Fab 2. Solyndra could not use the loan proceeds for *anything* else,” according to an anonymous member of Solyndra’s management team. The DOE loan guarantee, it seems, reduced Solyndra’s ability to adapt to changing market conditions.

Sadly, the one lesson Team Obama will never draw from Solyndra’s failure is the most important one: the folly of government trying to play venture capitalist. Heritage Foundation economist David Kreutzer offers some choice words in two recent blog posts:

“We have such a great product that nobody will lend us the money,” was the nonsensical argument from Solyndra and its backers. Those who did not see the logical flaw in 2009 cannot help but see the flawed result in 2011. Unfortunately, some still do not see the logical problem that led to the mess.

Indeed, two of the criteria for the loan program show how silly it is to have government run a bank. One is that the loan must be for a commercially viable project. Another is that the applicants have to demonstrate that they could not get private financing. By definition, the second criterion rules out the first.

 

 

Ken Glozer September 22, 2011 at 6:46 pm

Someone ought to call Pete Domenici up and ask him why he insisted on the Title XVII DOE loan program in the first place.

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