An article from Daily Economic News gives us a glimpse of the vicious competition in Chinese industry and how China's attempts to stimulate rural demand and "go green" play out in actuality. A whiff of cash draws Chinese entrepreneurs out of the woodwork. Before you know it, heated (no pun intended) competition drives prices down and profits disappear.
The article focuses on solar-powered water heaters. These are metal tanks with a series of tubes that sit on the roof of a building to heat up water for household use. They are popular in villages and in cities among folks who want to lower their electricity bills. And, of course, they are a sign that China is a "green" energy-saving country.
An ad for solar-powered water heaters aimed at villagers in Guizhou Province.
The government has pulled solar water heaters on to the bandwagon. They fit in nicely with the program of "building a new socialist countryside," so many villages have been designated as "solar water heater model villages" where villagers get subsidies to buy the heaters. In China's stimulus plan to promote rural consumption by "sending appliances down to the countryside," solar water heaters were added to the list of eligible products that could be bought with subsidies by rural consumers.
The article reveals that this flourishing market has attracted over 6000 companies making low-tech products, often with low-quality materials. With so many companies making similar products, it's hard to distinguish among brands, so companies have to engage in price wars to move their products. With prices scraping bottom, profits have vanished and many are quitting the industry.
The article takes the reader to a small street in Laohekou, a small city in northern Hubei Province. A sign on the second floor of a small building advertises "Fei yang" (flying sun) solar-powered water heaters. The small company's glum proprietor, Chen Yang, tells the reporter that the company has already shut down, less than 2 years after starting up.
Solar-powered water heaters work on a relatively simple principle, utilizing heat from the sun to raise the temperature of water. According to the article you can get into the business easily with a 10,000-yuan ($1400) investment in equipment and 3-to-5 people, "although the quality may not be that good." The low threshold for entering the industry allowed lots of companies to enter, and many of the workshop-style businesses were like “contract shoe manufacturers.”
As in many other industries in China, small companies churn out generic products and rely on price-cutting to compete. Many small companies churn out poor quality products. According to the article, "Some solar water heaters leak, don’t hold water, have weak pressure, or other quality problems. The reporter understands that there is a high rate of complaints, with some consumers complaining their units start leaking within a week after buying them."
The industry is described as a "mixed bag" ("dragons and fish"). It includes big companies like Haier [added June 13: I noticed Yingli Green Energy, another "dragon" company selling solar energy equipment based in Baoding, Hebei Province, had prominent advertising on the field sign boards in this weekend's World Cup soccer games], but 80% of the companies are "fish"--medium and small businesses. There are 171 companies on the list approved to sell in the "down to the countryside" subsidy program. Thousands are not even registered with commercial bureaus. There is no licensing and no strong third-party certification. The industry association formulated a standard, but there is no national government standard.
Tongling "World Flower Garden" in Anhui Province, a "model" project.
In the Laohekou City “Solar Energy Contract Production Base” the reporter saw a workshop of less than 40 square meters with all kinds of solar-powered water heaters in various states of assembly. A couple of simple machines were in the middle of the floor. Outside there were several pieces of equipment with the company’s emblem ready for sale. The company makes solar water heaters according to the specifications of various customers.
The reporter noticed that these solar water heaters had no production date, nor the name of the factory. There was no quality certification, just a name to distinguish it from other brands. The base price is 180 yuan and it’s lower if you buy in quantity.
Solar energy companies have increased in number at an alarming rate. Nationally production is increasing by 30% each year. In one city, Yixing in Zhejiang, there are over 300 solar heating companies. 100 new production lines for collector tubes were added. Even in a small city like Laohekou, there are 7 or 8 companies. One company, Huangming Solar Energy Corporation LLC, expanded its production area to equal the entire capacity in Europe and twice that in North America.
China is estimated to account for 70% of world production of solar water heaters. The article complains that China is not as green as its massive solar water heater production might suggest. Apart from water heaters, solar power applications include solar-powered street lights, air conditioners, lights, and buildings. However, "...the embarrassing reality is that water heaters are the only solar-powered equipment commonly in use."
The article reports, "Solar electricity generation accounts for less than 2% of power, far behind developed countries."
The article continues, "Most companies only can enter the low-threshold, low-tech equipment market, building up capacity with thousands of companies crowded in a small space."
An industry official said, “Actually, it would be a good thing for these small companies to shut down.”
What China would like to have more of.