Our Solar Trade War With China Just Took Another Turn

The solar trade war between the U.S. and China escalated yesterday, and now the debate is starting to hit installers and investors where it hurts. When the U.S. first imposed tariffs on imports from China in 2012, it left a huge loophole by limiting the scope of the case to Chinese solar cells, which rendered them almost useless.

Residential solar installations like these by SolarCity may see costs go up slightly short-term because of solar tariffs. Source: SolarCity. 

The loophole allowed Chinese solar companies to buy cells from Taiwanese suppliers or elsewhere even if ingots or wafers, which are the first two steps in making cells, came from China. By what's called "tolling" in Taiwan, the Chinese suppliers who were found to have received government subsidies and were dumping products at a loss were able to avoid tariffs that ranged from 34% to 254%.  

SolarWorld, who brought the original case, brought a new trade case last year that intended to close that loophole, and the Department of Commerce ruled yesterday in favor of SolarWorld. Most solar companies will have to pay a 26.89% tariff, except Suntech Power and Trina Solar , who got 35.21% and 18.56% tariffs, respectively.

Solar farms like this one still account for most of the solar installed in the U.S., and SunPower and First Solar, who are unaffected by the tariff, dominate this part of the industry. Source: SunPower.

Who this affects
Every Chinese solar manufacturer will be affected, but some will be hurt more than others. Yingli Green Energy is highly leveraged with $2.4 billion in debt and is still losing money. Even Trina Solar, who has the lowest tariff, will be negatively affected because it increases the cost to buy panels for U.S. buyers. 

What investors should keep in mind is that the solar market is now global, and Yingli and Trina have been diversifying their customer base to reduce risk. So, while this is an incremental negative for them, it's not a deal-breaker for them as countries. In 2013, the U.S. only installed 4.8 GW of solar to 37 GW worldwide, so there are large opportunities elsewhere. 

One of the key buyers of Chinese solar panels that will be negatively affected is SolarCity , who has benefited from low-cost Chinese panels since prices plummeted in 2012. Management has addressed this in previous conference calls and has suppliers from outside of China that can fill the gap. But it will likely lead to higher costs, which is significant even if it's only a few pennies per watt.

On the flip side, a company that should benefit is SunPower , who manufactures in Malaysia and is currently known as one of the highest-cost suppliers on a per watt basis. SunPower was already competitive with Chinese panels in the solar market, but this will either bring its costs more in line with competitors, or increase margins, both of which would help the company.

SunPower may parlay this ruling into a bigger market share in residential solar. Source: SunPower.

Is this a game changer?
What investors should understand is that this is more of an incremental impact on the solar industry rather than a major shift, despite the violent reaction solar stocks are having today. Trina Solar or Yingli Green Energy may shift sales from the U.S. to Japan, Europe, or Africa, but it isn't as if they're going to go out of business because of these tariffs alone. SolarCity may have to get panels from suppliers like Kyocera or Sharp, and costs could go up slightly, but the impact will be measured in pennies per watt, so it's only incrementally negative. Even SunPower, who is a beneficiary, won't see a major impact because of the tariffs.

Assuming they stand, beefed-up solar tariffs on Chinese imports will be a slight negative for the solar industry, but solar panels themselves are now only about 25% of the cost of a typical residential solar installations, so a few extra pennies won't fundamentally change the industry's trajectory. The media may have a field day with this, but investors can view it as noise in the great long-term investment thesis for solar stocks.