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:
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:
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:
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):
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:
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:
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.
Related links:The Impact of China’s Production Surge on Innovation in the Global Solar Photovoltaics Industry - ITIFA duel in the sun - MIT