On December 31, 2013, SolarWorld Industries filed a new antidumping/countervailing duty petition before the U.S. International Trade Commission. This petition seeks to close the so-called "loophole” from SolarWorld’s initial petition filed in October 2011 wherein Chinese module manufacturers can produce solar wafers in China, ship them to Taiwan for cell manufacturing and then back to China for module assembly, and therefore avoid a 30 percent U.S. import tariff.
This petition could significantly impact the U.S. solar market, in large part because of its scope. In contrast to the initial tariffs, which apply only to crystalline silicon PV cells manufactured in China, this petition broadens the scope both geographically (adding Taiwan) and vertically (adding both wafers and modules). Here is the language directly from the petition:
“The merchandise covered by this investigation is crystalline silicon photovoltaic cells, and modules, laminates and/or panels consisting of crystalline silicon photovoltaic cells, whether or not partially or fully assembled into other products, including building integrated materials. For purposes of this investigation, subject merchandise also includes modules, laminates, and/or panels consisting of crystalline silicon photovoltaic cells completed or partially manufactured within a customs territory other than that subject country, using ingots, wafers, or partially manufactured cells sourced from the subject country.” [Emphasis added.]
At a minimum, SolarWorld seeks import duties on Taiwanese cells, which would eliminate the Taiwan tolling strategy currently employed by most Chinese suppliers. In addition, in order to prevent Chinese manufacturers from simply shifting their cell tolling to another country, the petition also seeks tariffs on modules that use Chinese ingots or wafers, regardless of where the cell manufacturing takes place. There is one point of confusion here: the language in that last sentence is not clear on whether the module itself must be assembled in China in order for the product to be subject to the tariff. To help clarify, here is our interpretation of the petition scope:
Source: GTM Research
The Department of Commerce, which ultimately determines dumping and subsidy margins, has broad authority to dictate the scope of the investigation, so its decision on this issue when it initiates its investigation in late January will make a big difference. If tariffs are ultimately imposed on any module using Chinese ingots or wafers, there will be essentially no ability to use a value chain strategy to avoid the ultimate tariffs. China dominates the ingot and wafer manufacturing landscape with 73 percent of current global wafer capacity, and there are far fewer non-Chinese wafer suppliers than there are for cells or modules.
But even a much narrower scope interpretation, one that only examines Taiwanese cells and Chinese modules, would have a ripple effect in the U.S. market if significant tariffs were imposed. True, some Chinese manufacturers have the capability to outsource both cell and module manufacturing beyond China and Taiwan, but they are the exception rather than the rule. And absent new tariffs, China would ship nearly 3 gigawatts of modules into the U.S. this year, and another 4 gigawatts in 2015 -- more than could easily be routed elsewhere.
There are more important nuances to the ITC and Department of Commerce's quasi-judicial process of determining import tariffs. For example, Taiwan is considered a “market economy” for the purposes of these investigations, whereas China is not. The primary result of this classification is that import tariffs on Chinese products are both more easily imposed and generally larger than those on Taiwanese products. So one can envision a scenario where the Department of Commerce imposes low tariffs on Taiwanese cells and no tariffs on Chinese wafers/modules, thus creating a minimal overall impact.
Separately, there is always the looming possibility (albeit slim) of a “critical circumstances” finding, which would make any resultant tariffs retroactive 90 days before the preliminary margin determinations.
For now, the key point is that SolarWorld did its homework on this case and submitted a petition that could effectively force Chinese solar manufacturers to pay tariffs or be shut out of the U.S. market. But everything hinges on the Department of Commerce’s scope determination and, of course, the final determinations regarding subsidies and dumping in both China and Taiwan.
The impact of either increasing prices on Chinese modules or shutting Chinese producers out of the market would be most severe in the distributed solar market. According to the GTM Research U.S. PV Leaderboard, Chinese manufacturers had a 71% market share of installed modules in the residential and commercial markets in the first three quarters of 2013.
Of course, this could all be rendered moot if the U.S. and China were to reach a negotiated solution. This was the result in Europe and might well be the result here as well (in fact, that would be my bet). But in the meantime, we would caution not to make the mistake of taking this petition lightly -- it is likely to reshape the U.S. solar market in one way or another.
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Shayle Kann is the Senior Vice President of Research at Greentech Media, where he leads GTM Research. GTM Research clients have access to the analyst team’s ongoing coverage and analysis of the AD/CVD petition and its likely market impacts. For more information, contact Justin Freedman at freedman@gtmresearch.com.