Here Comes the Sun (Tariffs)- How isolationism and the pending ITC ruling could impact SunPower and the U.S. Solar Industry
U.S. solar energy is currently confronting isolationist backlash via trade protection against an influx of inexpensive Chinese-made photovoltaic (PV) panels that have spurred rapid industry growth. Two struggling domestic manufacturers, Suniva and SolarWorld (both owned by international parent companies), recently successfully petitioned the U.S. International Trade Commission (ITC) (1) to impose tariffs on internationally-produced modules.(2) The resulting recommendation by the ITC (to be approved by the U.S. president) will have stark impacts across the industry, including on leading player SunPower, a vertically-integrated firm that manufactures panels and develops and finances power projects.
Isolationism via the ITC ruling is a major concern for SunPower, directly on its global supply chain and indirectly via decreased supply, increased prices and dampened demand across the industry. In its latest 10-Q, the company labeled the uncertainty around the decision as a material risk, listing “market volatility, price fluctuations, supply shortages, and project delays” as potential impacts.(3) SunPower produces panels through wholly-owned and joint venture plants, primarily in the Philippines(i), Malaysia, Mexico and China, all of which could be affected by the decision. In testimony to the ITC, CEO Tom Werner stated that the tariff and ultimate pricing uncertainty already caused the company to lose a multi-hundred-million-dollar bid to a competitor whose specific technology will not be affected by the ruling.(4) Additionally, in February SunPower signed a joint venture with two of its Chinese supply chain partners to significantly expand existing manufacturing capacity; if this capacity can no longer be used for U.S. demand, it will have significant impacts on SunPower’s ability and cost to serve U.S. customers and on its overall asset utilization and financial results.(5) The ITC determination will have a chilling effect over the entire industry which will indirectly further threaten SunPower. Solar supports 260,000 jobs across dealers, installers, and other manufacturing sectors;(6) it’s estimated that the tariffs would double the price of foreign-made panels, which supplied 87% of 2016 installations,(7) resulting in a two-thirds decreased demand in new solar projects and ultimately costing up to 88,000 jobs.(8) SunPower has 850+ suppliers and 515 dealers in the U.S. who could exit the market if the sector contracts,(9) further risking its supply chain operations.
SunPower is addressing this concern through lobbying efforts and by building out its domestic and regional capacity. In the (very) short term, Warner has asked the ITC for its high-end proprietary technology to be excluded from the ruling. He argues the ruling should address only the low-cost, low-efficiency modules that the plaintiffs cannot competitively produce, and should exclude the high-margin, high-efficiency technology created by domestic R&D teams like SunPower’s.(10) SunPower has also invested in manufacturing capacity for its low-end P-Series panels in Mexico; depending how the ruling regards NAFTA, these panels may not be subject to tariffs, in which case SunPower could shift production there.(11) Longer-term, SunPower responded in August by announcing a “pilot production line” in Silicon Valley, which has begun operating on a small scale for its high-end X-Series panels, but could scale up and expand to the rest of its product portfolio if domestic manufacturing is required to comply.(12) Differentiated solar technologies are one way to both avoid the potential isolationism tariffs and win in the marketplace. SunPower should further invest in its U.S.-based R&D capacity, utilizing its site in Silicon Valley, to improve its innovation and product development processes and reduce its time-to-market for new technologies. It should also conduct a thorough supply-chain assessment across both domestic and international markets to identify consolidation opportunities where it may gain economies of scale, improving its own costing, and shore up supply chain partners who may be threatened by the ruling. For example, Warner cites sourcing of silicon from Michigan and Tennessee, power electronics from Colorado, and metal products from Arizona and Minnesota,(13) all of which may provide opportunities for better supply chain management. It may consider how to best segment production between its U.S. and Mexican facilities (assuming NAFTA excludes it from tariffs), and it may enter foreign markets with strong solar growth and use its foreign capacity to serve those markets. Finally, it should continue to engage the government by advocating for an extension of the Investment Tax Credit (ITC) and increased federal procurement of domestic solar power.(14)
The immediate question of the degree to which tariffs will impact SunPower will be answered soon by the president, but the larger potential re-negotiation of NAFTA is an important consideration for SunPower as it reacts to isolationism. To what degree will this situation be further complicated by the NAFTA renegotiations? Should SunPower conservatively forego further expansion of Mexican manufacturing capacity? For an emerging major solar player, the question of how isolationism could disrupt their growth will power their strategic focus in the years to come.
i To be closed as of a December 2016 announcement.
1 Solar Energy Industries Association. “Solar Section 201 Case – Frequently Asked Questions.” 2017. Solar Energy Industries Association. Web. 12 November 2017.
2 The Wall Street Journal. “Solar Power Death Wish.” The Wall Street Journal 16 September 2017: 1.
3 SunPower Corporation. “Form 10-Q (Q3 FY17).” 1 October 2017. www.sec.gov. Web. 12 November 2017.
4 Werner, Tom. “SunPower CEO Tom Werner’s Oct. 3 ITC Testimony.” 3 October 2017. Sunpower.com Blog. Web. 12 November 2017.
5 Osborne, Mark. “SunPower enters major China manufacturing JV for P-Series solar modules.” 24 February 2017. PV-Tech. Web. 12 November 2017.
6 Werner, Tom. “Why ITC Solar Trade Case Is Far from Over.” 22 September 2017. Sunpower.com Blog. Web. 12 November 2017.
7 KANN, MJ SHIAO AND SHAYLE. “6 Ways to Encourage American Solar Manufacturing Without Import Duties.” 25 September 2017. Greentech Media. Web. 12 November 2017.
8 Solar Energy Industries Association. “Solar Section 201 Case – Frequently Asked Questions.” 2017. Solar Energy Industries Association. Web. 12 November 2017.
9 Werner, Tom. “SunPower CEO Tom Werner’s Oct. 3 ITC Testimony.” 3 October 2017. Sunpower.com Blog. Web. 12 November 2017.
11 Houim, Travis. “SunPower Could See a Windfall If Tariffs Hit the Solar Industry.” 13 July 2017. The Motley Fool. Web. 12 November 2017.
12 SunPower Corporation. SunPower Unveils Silicon Valley Pilot Manufacturing Line for High Efficiency Solar Panels. San Jose, Calif.: PRNewswire, Aug. 14, 2017. Web.
13 Werner, Tom. “SunPower CEO Tom Werner’s U.S. International Trade Commission Testimony.” 15 August 2017. Sunpower.com Blog. Web. 12 November 2017.
14 KANN, MJ SHIAO AND SHAYLE. “6 Ways to Encourage American Solar Manufacturing Without Import Duties.” 25 September 2017. Greentech Media. Web. 12 November 2017.
Photo Source: https://inhabitat.com/worlds-cutest-solar-farm-in-china-is-shaped-like-a-panda/
Student comments on Here Comes the Sun (Tariffs)- How isolationism and the pending ITC ruling could impact SunPower and the U.S. Solar Industry
I am glad you wrote about this topic Angela because this is a very important issue that is drastically affecting companies across the nation given the uncertainty of the rulings and the volatility created by secret political agendas in Washington.
It is well known that for decades, domestic companies have looked overseas to manufacture goods in order to remain competitive in the market and take advantage of economies of scale, reaching 80% of the world’s manufacturing concentrated in China (https://goo.gl/oqrgan). The important question for the government is how much should they intervene to protect the internal economy by providing subsidies in the form of tax credits without becoming a disruptor and fostering a “ghost” economy (eventual collapse of the economy once the subsidies are taken away). Also, the key challenge for the national corporations is how can they protect their operations from the influence of existing or new regulations by implementing contingency plans while still remaining profitable. As fundamental that those questions are, there isn’t a unique or simple answer, in part because political factors are usually changing every four years with every new government.
As you cleverly pointed out, the North American Free Trade Agreement (NAFTA) signed between Mexico, Canada, and the US will be crucial for SunPower as it will define their corporate strategy and product route map for future years. Besides of the lobbying efforts that SunPower does, I can imagine how much the American counterparts that will benefit from isolationist measures will lobby as well to make sure they get substantial benefits from the modification of the treaty. I also think there are several components that need to be discussed in an open national forum such as the education of government officials on the long-term impact of trade policies on local economies across different sectors, and the role of the government on modifying past treaties or signing new ones and what safeguards can be imposed to avoid being used as part of a political agenda.
As far as for the photovoltaic (PV) industry, we have seen for years that manufacturing costs are significantly lower in Asian countries predominantly in China and for the US competing in that arena will prove a costly mistake. Instead of focusing on the direct manufacturing, American companies such SunPower should concentrate their attention on improving processes that decrease fabrication times and strive for higher energy conversion by leveraging advanced R&D in the US. In addition of that, growing emerging markets are demanding more and more PV panels but that would be questionable if the demand will be enough to have a plant in Mexico working at full capacity in case the NAFTA negotiations take an undesirable direction for SunPower. However, after recent turns in the environmental regulation of Chinese factories of polysilicon, the main component of PV panels, several factories have been shut down causing an increase on this raw material of up to 35% and constraining the supply chain of this product (https://goo.gl/M1romb). Perhaps it won’t be even a bad idea for SunPower to move forward with their Mexican factory as they could supply the shortage in the world demand of PV panels.
Great topic, Angela! The politics surrounding trade agreements and economic protection never cease to be interesting. An article today said the White House is asking for further information from the ITC on how foreign competition has harmed US manufacturers, and points to the WTO standard requiring companies to have faced unforeseen circumstances from foreign competition before tariffs can be imposed. As US manufacturers could have foreseen foreign solar panel competition a tariff ruling would not hold with the WTO, so there still may be some hope for SunPower and foreign manufacturers.
I think it’s really interesting how big of a role government regulations can play in the private sector, for better or for worse. As you mentioned in your blog post, SunPower has been forced to reevaluate its strategic focus and its current business model thanks to the government. Some of the changes SunPower will make will ultimately be beneficial, but other changes may ultimately be harmful and not the most efficient/effective for the business or its customers. The shift towards isolationism, while nominally supposed to benefit the American people and American companies, can ultimately hurt the people it’s supposed to help.
Hi Angela, great article! We really live in a time in which isolationism is playing the role of the lion in forcing companies to redefine their strategy. In particular, i like the topic you chose for its complexity both in terms of production sites, spanning from China to Mexico and USA, and in terms of overall benefit for the planet and the environment. In particular, i’m worried that due to these isolationistic policies, we are not only damaging SunPower, but the overall energy ecosystem. On the other side, we have seen already how in many other industries (E.g., Automotive with Fiat Chrysler) many companies are shifting their production to USA with limited impact on their finances. The cost of work is only one of the many variables to be taken into account and therefore i would like to know what you think about it. Do you think that despite regulations and isolationism, will the production be moved back to USA or is the differential in overall cost still so huge and high to not compensate for the benefits?
Great post, Angela! I think this an interesting industry to look at in terms of the impact of isolationism because it could end up having a larger negative impact on the other macro trend we’ve been looking at – global warming. If the US government passes these tariffs and / or the NAFTA agreement does not favor SunPower, I would assume this would make it even more costly to use / shift to solar power within the US. In turn, we could potentially see less investment in the US solar power industry long-term. I would assume that these trade deals are done on an industry (and maybe even company) level, so I would hope that any new trade agreements take into account the negative impact that they could have on the U.S. / global environment.
Great post! Its been unfortunate to see the degree these tariffs have hurt industries, particularly the solar energy industry which is so important for the future. Instead of focusing on innovation and operational improvements, companies like SunPower are forced to instead spend money on lobbying the government. Additionally, it seems for the most part companies end up finding creative ways around tariffs by shifting production to other plants or making small changes to the imported part such that it no longer violates tariffs. Given the pressing need for more sustainable energy solutions its sad to see solar companies thwarted due to this regulation.
I surely hope that the ITC sides with SunPower and excludes their higher end products from the tariffs. It’s hard for me to see the tariffs as productive, and the greater question of sustainability needs to be considered when the ITC is making its decisions. Unfortunately, I’m guessing that the coal industry will play a major role in interfering here with its lobbying capabilities.
Great article Angela! After reading the comments, I’m wondering whether the other players of the U.S. solar industry, e.g. the competitors of SunPower, won’t actually be more impacted than SunPower itself. It seems that SunPower is a leader in its field and is vertically integrated and therefore might be better positioned to deal with the ITC ruling. As you said, it’s the whole supply chain that will be impacted so SunPower’s competitors might lose suppliers/partners and eventually disappear. So we might witness a market consolidation – certainly not a good thing for the end consumers but it might not be the worse thing for SunPower.
Great article Angela!
This topic has been something that I have been thinking for a long time.
Should company spend money on lobbying on import tax and barrier or on innovation and advancement.
Both of the above can help company to gain competitive advantage. The former might be faster and less riskier, and the later might be slower and risker.
From my own perspective, I would rather to have companies to spend money on technology than on government lobbying. The downside is obvious in the short term. But the advantage is more solid and the impact is much bigger to the company and even the entire society in the future.
This is a great article, Angela!
I would like to share my thoughts on the impact of isolationism for US.
For most people, It seems that isolationism is good for the country. It helps a country to protects is business from the impact of foreign businesses. But is the impact really that good for the companies? This case is a good example of this controversial issue. Clearly for Sun Power, it is a huge negative impact. They are suffering for this isolationism policy of their own country.
I am pretty sure this is not the only example of the backfire of isolationism. Nowadays, many US companies have presence in the entire world. Rather than saying they suffer from globalization, they actually benefited a lot from it. For them, isolationism means limitations on their global footprint, which will have a huge impact on their company profit and will eventually hurt their employees back in the US.
Great topic Angela, this is a huge concern for most countries in the world. The problem with protectionist governments is that they are effectively making the industries less efficient by imposing ridiculous barriers in order to boost some local industries. The issue lies in that these industries are no longer efficient in that specific country due to several reasons (e.g. higher purchasing power) and the government is punishing the entire population in order to protect a group. The result of completely isolating an industry is to either increase the prices of products or hire a cheaper labor force, turning the problem to immigration issues and making it a lose-lose situation.
Although it is difficult to prevent governments from isolating some industries, in order to mitigate such retrograde but inherent risks, companies such as SunPower can improve or redesign their processes and products so that they rely less on raw material procurement from other countries.