Solar panels against the Shanghai skyline.
Credit: iStock Photo
By David Fickling
There’s a comforting but erroneous explanation for why your solar panels, home battery and electric car are increasingly likely to be made in China.
The economy is awash in easy money from state banks; its renewable manufacturers are undercutting rivals everywhere else in the world; ergo, China’s comparative advantage isn’t scale, cost efficiencies or innovative prowess, but the availability of cheap government subsidies.
In the EV industry “everybody has an endless supply of loans and support from the local government,” the Financial Times quoted Jörg Wuttke, former president of the European Union Chamber of Commerce in China, as saying in a recent article.
That theory provides a compelling justification for trade restrictions. If Chinese manufacturers are only surviving thanks to a drip feed of government cash, there’s no way for overseas rivals to compete. Best, then, to use tariffs, investigations and other hurdles to exclude their products altogether, and give homegrown competitors a chance.
It’s a persuasive narrative because swathes of China’s economy really do run this way. In the middle of the 2010s, all-but-forgotten Dalian Wanda Group Co., Anbang Insurance Group Co., HNA Group Co. and Fosun International Ltd. went on a multi-billion-dollar shopping spree for foreign companies. The bursting of that bubble prompted another to inflate in real estate. We’re still seeing the aftereffects in every fresh gloomy headline about property developers China Evergrande Group, Country Garden Holdings Co., and China Vanke Co.
You can see the pattern in the published accounts of Fosun, currently aggressively divesting businesses amid a credit squeeze. It spent a net 112 billion yuan ($15.56 billion) of cash on acquisitions and other investments over the decade through June 2023, but generated just 65 billion yuan in spotty, volatile operating cashflows:
Were it not for the 127 billion yuan in cash from financing — the vast majority of it debt — there is no way the company could have paid its bills.
The contrast with Berkshire Hathaway Inc., the company that Fosun is most often compared to, could not be more stark. Warren Buffett’s $341 billion of investments over the past decade were more than covered by the $384 billion in steady, predictable operating cash his businesses generated. Just $51 billion came from financing:
Is the same thing happening with clean technology? It doesn’t look that way.
If Chinese solar, wind, battery and EV manufacturers are doing well because of easy credit, it should leave clear fingerprints on their financial statements. You can measure this by comparing their operating cashflows to the average debt they held during the year: Where cash is low relative to debts, it’s going to take a very long time to pay back creditors.
Looking through a group of 145 renewable companies with at least $1 billion in annual revenues — 77 of them Chinese — this is the result you get:
As you’d expect in a sector experiencing rapid growth, leverage is often relatively generous — but it doesn’t look significantly higher among Chinese companies. Many of the most feared and aggressive renewable exporters, such as Longi Green Energy Technology Co., Tongwei Co. and JA Solar Technology Co., have very low borrowings relative to their cashflows. Plenty have enough cashflow to pay off 25 per cent of their debts in the current year. This doesn’t look like a sector being propped up by government loans, or indeed loans of any sort.
For the sake of comparison, let’s look at an industry that has pretty clearly been the beneficiary of easy government money: real estate:
What’s notable here is that long before the crisis hit (the data above is for 2019), Chinese real estate companies already had markedly poorer coverage ratios than their international competitors. If you measure things in terms of the amount of time it would take for operating cashflows to pay off total debts, the median Chinese renewable manufacturer comes in at just under 10 years, a fraction of the nearly 27 years in the data for real estate. Non-Chinese companies came in a little under eight years, regardless of which industry they were in:
To be sure, Chinese manufacturers still enjoy powerful advantages. Generous and consistent purchase support for EVs and solar panels gives owners confidence to invest aggressively, just as the same policies do in Europe and the US.
The government remains fixated on keeping costs low: China is home to nearly half of the world’s special economic zones, whose main advantages are cheap land, easy regulation, and low taxation. It also offers reduced corporate tax rates for companies in new technology industries. Fundamentally, it’s the biggest single market for clean technology, so domestic factories have scale advantages that competitors elsewhere could only dream of.
The problem for developed countries is that, when applied to their own economies, these measures are all supported as old-fashioned pro-business policies, rather than unfair mercantilism.
It would be comforting if China’s success in clean tech was a result of easy credit from a communist state. In truth, though, this boom is a capitalist success story on a grand scale.