US solar panel tax casts a faint shadow on Malaysian manufacturers

This article first appeared in The Edge Malaysia Weekly, on January 29, 2018 - February 04, 2018.
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IT finally happened. It has taken slightly over a year, but one Malaysian industry has found itself in the sights of US President Donald Trump’s administration, which took protectionist trade action by imposing a 30% import tax on solar panels.

Last week, the president approved two Section 201 cases undertaken by the bipartisan US International Trade Commission (ITC) — one targeting the import of large residential washing machines and the other, the import of solar photovoltaic (PV) cells and modules.

Malaysia is the third largest solar cell and module manufacturer in the world, behind China and Taiwan. Malaysian solar product exports totalled RM11.1 billion or nearly 1.1% of total exports in 2016. Malaysia is also the largest supplier of solar cells and modules to the US.

The US currently imports nearly 80% of its solar cells and modules, and Malaysian products make up nearly 25% of said imports by value or 30% by volume.

Naturally, the immediate concern is that the trade action will negatively impact Malaysian manufacturers, potentially hurting jobs and investment.

GTM Research analysts estimated that the import tariffs would reduce US solar installations by nearly 7.6gw over the next five years, down to 61.3gw. For perspective of how big the drop is, the US’ entire installation capacity in 2015 alone was roughly 7.6gw as well.

The Solar Energy Industries Association was quick to weigh in, estimating that the move would cost roughly 23,000 jobs going forward.

The headline figures certainly look disturbing, but the impact on Malaysia could be substantially more muted for a number of reasons.

For starters, it is important to note that the import tariff will be reduced by 5% every subsequent year for three years. Thus, by year four — the last year of the trade action — the tariff would have fallen to a mere 15%.

Another important point to note is that the tariff may not even last the full four years. It could be reversed following a World Trade Organization complaint or (as some analysts are already expecting) retaliatory action by China.

Recall that there were two import taxes imposed on solar cells and modules during the Obama administration, which prompted retaliatory tariffs by China on polysilicon imports — an important input for solar manufacturing, of which the US is still a net exporter.

Furthermore, one of Malaysia’s largest solar manufacturers will actually be exempt from the tax.

US-based First Solar, which has a plant in Kulim Hi-Tech Park with an estimated capacity of 2gw of solar cells and 100mw of solar modules, will not be subject to the import tax because it produces the less-efficient thin-film PV panels. The import tax only applies to monocrystalline solar panels.

Another major manufacturer, US-based SunPower Corp, may also have a way to avoid paying taxes. The company only produces solar cells in Malaysia. The assembly of the cells into the solar modules is undertaken in other facilities across the world — like China, Mexico and even the US itself.

It is worth noting that the Section 201 action came with one exemption — up to 2.5gw worth of cells are excluded from the tariff. This means that SunPower could export its Malaysia-produced cells to the US for assembly without being subject to the tax.

It is estimated that the US currently has 2.5gw of annual module assembly capacity — just enough to make use of the quota. SunPower has an estimated production capacity of 1.4gw of solar cells.

Of course, some of the other major solar manufacturers like Cyberjaya-based Q-Cells Malaysia Sdn Bhd, which produces monocrystalline solar panels, will certainly be affected.

However, it should be noted that the import tax did not catch the solar industry by surprise. The Section 201 case was filed with the ITC last April by US manufacturers seeking relief from the flood of solar imports that was putting them out of business.

“From 2012 to 2016, imports grew about 500% and prices dropped precipitously. Prices for solar cells and modules fell 60%, to a point where most US producers ceased domestic production, moved their facilities to other countries, or declared bankruptcy,” notes the Section 201 fact sheet on the tax.

“By 2017, the US solar industry had almost disappeared, with 25 companies closing since 2012. Only two producers of both solar cells and modules, and eight firms that produced modules using imported cells remained viable. In 2017, one of the two remaining US producers of solar cells and modules declared bankruptcy and ceased production.”

The US has directed previous trade action at China, the largest producer of solar cells and modules in the world. However, Chinese manufacturers found a workaround by shifting production to other countries like Malaysia. Thus, China only directly supplies about 10% of US solar imports.

With the solar industry expecting the tax hike, many have begun to undertake forward procurement, especially the utility-scale solar players. GTM estimates that 2gw of solar capacity has already been forward purchased and should cover solar developers well into the first half of the year.

Thus, analysts only expect the worst of the tariff to affect US solar developers next year. By extension, the impact should not be as immediate on Malaysian manufacturers as well.

Taking a longer-term view, there should not be a major concern that the US unilateral trade action would stifle foreign direct investment in Malaysia’s solar manufacturing sector.

It is important to note that US solar demand is still relatively small as part of global demand despite being the second largest installer.

At roughly 14gw of installations per annum, the US is installing less than half the solar capacity of China (estimated at 34gw a year).

Furthermore, analysts are less than convinced that the tax will be sufficient to encourage US companies to invest in domestic capacity. The step-down nature of the tax, coupled with the possibility that it may be scrapped before the full four-year period, makes it challenging for investment.

Against this backdrop, the global landscape for solar systems is still a promising one. China has been and continues to be the key driver of demand, but as solar PV costs continue to drop, it has managed to attract investment from other countries as well, boosting global demand.

The International Energy Agency estimates that solar PV systems generated 1.8% of total electricity demand in 2016, from a staggering 303gw of installed capacity globally. And as prices continue to fall, solar systems will feature more prominently as an option for policymakers and drive additional demand.

In short, the US import tax will sting, but the sun will not set any-time soon on Malaysian manufacturers.

 

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