Is solar manufacturing a highly automated business?
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The big news in solar manufacturing for the last decade, if not more, has been the incredible cost reductions fuelled, to a large degree, by China’s dumping of cheap modules on the international market.
The price collapse, in turn, has transformed an unviable renewable source into one that can finally compete with carbon alternatives. All good news.
But now reports are emerging that some of these cost reductions may have been generated by something as unpalatable to ESG investors as a high carbon footprint: forced labour in the Xinjiang Uyghur Autonomous Region. In particular, a highly cited investigation by Sheffield University, has asserted that up to 45 per cent of global polysilicon comes from the area, drawing on potentially coerced labour from the ethnic minority group.
These claims have since drawn the attention of US officials, with John Kerry, Biden’s Special Presidential Envoy for Climate, noting last week the issue posed a problem for America’s green energy transition. Kerry also hinted the US might consider sanctions in response.
Michael Shellenberger, a writer and activist who has long argued renewables are not as clean as they seem, further noted the incident supported his view that the true cost of solar had, in large part, been disguised by these processes:
I have extensively documented how renewables everywhere make electricity more expensive. Supposedly cheap solar panels increased the price of electricity in California seven times more than prices increased in the rest of the U.S. over the past decade. But the Xinjiang episode further exposes as fraudulent the claims that solar panels are cheap electricity.
The need to use the cheapest possible labor, enslaved, and the cheapest energy, coal, underscored the underlying physical problem with solar and all renewables, which is their very low “power densities.” Power density is simply the amount of electricity produced per unit of land, labor, or capital.
Chinese officials have strenuously denied the claims. An article over the weekend in the Global Times, largely considered to be a mouthpiece for the Chinese Communist party, described the claims as “groundless”. To back its position up, the piece referred to eye-witness reports from a recently organised open day at the Xinjiang Daqo facility.
But as Bloomberg’s noted, the facility is not one of those directly suspected of using the forced labour in question:
Unlike three other companies in Xinjiang that produce polysilicon—a key ingredient in solar panels—Daqo hasn’t been linked to alleged human-rights abuses. Yet Daqo has upheld the same secrecy as its peers with ties to the government-run labor program that’s under international scrutiny. As recently as March, the company declined interview requests for its executives and turned away foreign observers.
Nonetheless, the Chinese government is not alone in its cynicism about forced labour claims. Renewable fans responding to the news online have been equally perplexed. Their befuddlement stems from the largely accepted fact in investing circles that solar manufacturing is a highly automated business, which would imply there is little to no need for forced labour at all.
But we think it is possible that both facts could be true at the same time. To understand why, it’s worth going back in time to tell the story of how China became the largest producer of photovoltaics in the world. The following graphic from Statista shows the state of the market in 2019:
In the early days, the names that dominated the sector were Japanese, German and US manufacturers. China, overall, was a relative latecomer to solar, only turning its attention to manufacturing in the mid-noughties. By 2009, however, the impact of Chinese industrial might on the sector was already being felt.
Faced with rapidly bloating global PV supply as Chinese volumes increasingly flowed in, and the need to cut operational costs following the global financial crisis, the first to be edged out the market were mid-tier European manufacturers like BP Solar who operated in countries like Spain.
By 2014 the excess supply flooding in from China began to take its toll on even on the world’s most efficient and established producers such as Japan’s Sharp, which responded by cutting its workforces in the United States and Europe.
In January 2021, Japan’s Panasonic, another early leader in the industry, officially confirmed it would be scrapping its solar cell manufacturing operations because of ever-increasing competition from China.
So what drove the price competition? How was China able to compete so effectively when other more entrenched and arguably more innovative players could not? Could it all have been down to cheap labour? And if so, how did the world’s investment community miss this?
In January this year, a Goldman Sachs’ equity team under Alberto Gandolfi argued the mass cost reduction in global PV could be attributed to the following three factors:
Solar PV power generation costs have seen a remarkable decline over the past ten years. This has mostly been driven by: (1) lower capital costs: since 2010, capex per kW has fallen by nearly 70%, owing to larger scale, manufacturing automation, cheaper labour and more digitalised processes; (2) lower interest rates; and (3) higher module efficiency, which has improved utilisation rates to 22% (250-300 bp higher than ten years ago).
Here is the supporting chart:
It’s fair to say the downward trajectory in prices was highly welcomed by the renewable community at large. Charts from all sorts of sources depicting the curve were reproduced across the media, with some arguing that solar was experiencing a Moore’s Law type of effect.
But sometimes we see only what we want to see. With further scrutiny the Moore’s Law argument did not stand up. As Goldman’s January report identified, the cost reduction of the last 10 years had less to do with photovoltaic innovation and more to do with industrial processes, automation and modular efficiency. And also, importantly, cheap labour.
That’s not to say innovation wasn’t happening. As this MIT report from 2013 concluded, there were advances, but by and large “the lower manufacturing cost of a Chinese factory relative to a US factory today is explained by scale and supply-chain advantages, such as supplier location and transportation costs.”
More recently, the Information Technology & Innovation Foundation found that China’s entry may, however, have led to a stalling in PV innovation (our emphasis):
Conventional indicators of product innovation, such as patenting and the ratio of research and development (R&D) to sales, dropped precipitously in the wake of the Chinese surge. The decimation of PV manufacturing outside China drove many innovative firms out of the business, in large part because they could not match the predatory prices offered by government-subsidised Chinese competitors. China’s new PV giants have innovated in important ways, especially through process innovation that moved the industry’s dominant technology rapidly down a steep experience curve. But the prospect of shifting to better, cheaper PV products with the potential for even greater emissions reductions over the long run, has been deferred or even lost.
At the heart of the China’s dominance, as ITIF noted, is the fact that its major PV manufacturers were able to operate for the better part of a decade without making much money. This suggests that subsidies shaped international competition in this industry.
But it also hints at a gig economy-style model that is happy to not just undercut its way to market share, but to lean heavily on regressive labour practices to get ahead, often at the expense of innovation.
As the ITIF concluded:
While the Chinese mercantilist-backed surge into PV manufacturing was a gift that accelerated global adoption in the 2010s, it also altered the trajectory of technological innovation. Mercantilist policies helped destroy many innovative firms outside of China, constrict new entry, and limit investments in innovation by the survivors. The shift in trajectory has precluded, to date, fully exploring some technological opportunities with the potential to yield better results over the long run. Looking forward, sustained mercantilist behaviour might undercut a coming wave of innovation that would otherwise allow PV to take another great leap forward.
This contrasts quite dramatically with the image portrayed by Zhang Dan in the Global Times, in which she portrayed “humming production lines with robots and a small number of workers - in stark contrast to stereotypes and accusations of outdated production equipment and the use of ‘forced labor’”
What is true, is harder to say.
Unless western media or analysts get unfettered access to facilities producing polysilicon wafers as well as modules (because that’s where the real advantage of using manual processing lies), it will be hard to support the theory that the solar industry overly relies on potentially coerced labour with anything other than publicly available data.
On that note, it’s worth pointing out a quick Google image search certainly shows up a lot of labourers in the stock images:
Is it farfetched that China would have resorted to outdated manufacturing methods just to throw its real competitive advantage (that being cheap labour) at the problem? Perhaps. Perhaps not.
In another life, this FT Alphavillain used to work as an editor at BP’s internal magazine, BP Horizon. In 2004 she had the opportunity to visit what was then BP Solar’s photovoltaic manufacturing plant in Tres Cantos, near Madrid. A key learning at the time was just how labour intensive the whole production process was due to the delicacy of the silicon wafers.
At the time, the factory was gearing up for automating more of these extremely fragile processes. Nonetheless, everyone seemed to agree that it would be tricky to do.
In the May 2004 BP Horizon noted:
. . . to compete effectively, BP Solar will have to continue to increase its production volumes and continuously drive costs down. Until now one of the main issues around production costs has been the delicate nature of the solar cells themselves; around 0.3mm (0.011 inches) thick, they can be easily broken if not handled properly. As a result, production in the past has largely been dependent on manual handling. This slows down production and just a single misplaced thumbprint is enough to render a cell useless.
That long-lasting memory led us to speculate some years ago that labour intensive practices may not necessarily have gone away in China. We were quickly shot down by allegedly more informed Twitterati on the basis the industry was clearly highly automated.
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