The Dying of Suntech: the Result of Irrational Fiscal Subsidies
On March 20, the Wuxi City Intermediate People’s Court approved Suntech's filing for bankruptcy organization. Being the world’s largest solar-panel maker in 2010 and 2011, Suntech Power Holdings is the first photovoltaic enterprise in China that is listed abroad, and its founder was the former richest Chinese. Therefore, as soon as the news comes out, it has caused wide public attention.
What is more impressive than the news is the big amount of tax rebate gained by Suntech. According to the media report, Suntech has been refunded taxes as high as 8.6 billion yuan in 6 years, ten times higher than taxes it paid. There are even reports pointing out that most of goods that enjoyed huge export rebates have been sold to Suntech’s subsidiaries abroad. In other words, gaining such tax rebates is a kind of affiliate transactions transferring profits out of China.
In fact, Suntech is not the only company that enjoying subsidies through export tax rebates. It is the general practice adopting by all Chinese photovoltaic industry. Even, it’s the core competitiveness of the Chinese photovoltaic industry. Since 2008, the top ten photovoltaic enterprises in China has provided 30% of the world’s total photovoltaic products; and in 2012, it even reached 63%. In recent years, the rapid development of the Chinese photovoltaic enterprises even has triggered the bankruptcy tide of the photovoltaic enterprises in the U.S. On September 1st, 2011, the solar energy company Solyndra in Silicon Valley that with high expectations followed Evergreen Solar and Spectra Watt into bankruptcy court.
Why the U.S. solar energy enterprises were defeated by Chinese enterprises? Is the technology of the Chinese photovoltaic enterprises more advanced? Of course not. Though the market occupancy rate of the Chinese photovoltaic enterprises is very high, the core parts of solar products still rely on import. In fact, the lower price is the key of winning.
Taking the prices of June to November 2009 as an example, the average component price of European and American factories was 2.13 Euro/watt, and the price of domestic enterprises in the same period was about 1.5 Euro/watt. Besides the cheap labor force of Chinese enterprises and land resources, a more important reason is the 17% “export tax rebates,” thereby their own competitive advantages were formed. For many domestic enterprises, if the export tax rebates are deducted, the profits can almost be ignored.
In fact, export tax rebate is just one of the fiscal subsidies gained by the Chinese photovoltaic enterprises. Up to last year, in all 31 provinces, municipalities and autonomous regions in the whole country, the photovoltaic industry had been listed as an emerging industry for priority supports and development. As an industry with local governments’ priority supports, the photovoltaic enterprises have enjoyed a series of preferential policies given by the government in the aspects of construction land quotas and bank credits etc., and Wuxi Suntech is one example. A large amount of capitals have been attracted into the photovoltaic industry by various fiscal subsidies either overt or covert.
But what the local governments have not thought about is, due to the shrinkage of demands from European and American markets, the rapid expansion of photovoltaic productivity in various regions have quickly become a huge burden for local governments—in 2012, the loss of the Chinese photovoltaic industry almost spread all over the whole industry. In this sense, “either success or failure boils down to the same person,” and the governmental fiscal subsidies to a great degree have led to today’s dilemma of the Chinese photovoltaic enterprises. For the reason why the governments provided subsidies to photovoltaic enterprises, the original intention was to compensate the problem of excessive high costs of photovoltaic products so as to enhance the competitiveness of these products on international markets, but the final result is very regretful.
As everyone knows, the government itself does not create wealth. When a certain enterprise gains fiscal subsidies, it means that the government transfers the taxes collected from all taxpayers to a few enterprises. If the enterprise itself is already in the state of loss, it means the government is protecting an enterprise that fails in the market competition; if this enterprise is profitable, it means that the government provides subsidies to the winner of the market——and in the market economy, the rewards for a winner should come from consumers. No matter viewing from which angle, the fiscal subsidies given to enterprises by the government is contrary to the nature of market competition.
However, these are not all the maladies of governmental subsidies. Because in most industries, the market prices will balance supply and demand and the profit level is the signal of investment opportunity. Entrepreneurs provide better products and services at lower prices through innovation. And once governmental subsidies have intervened, it means that the market mechanism is unable to operate normally in the market. The governmental subsidies will lead to market distortions including overproduction, excessive borrowing and lack of innovation etc.
Of course, not all fiscal subsidies are meaningless. If the subsidy mechanism is properly designed, the fiscal subsidies can not only have the function of income distribution, but also can be related to relative price changes, playing the role of adjusting resources allocation. The reason why problems occur for these above subsidies is because the subsidies are all provided to the suppliers, therefore in the operation process, often leading to that those who have close relationship with the government can get subsidies from the government, and for this reason, even the power rent-seeking occurs.
So what is a good subsidy mechanism? In my opinion, efficient subsidies should be provided to consumers instead of producers: because only consumers know which product or which service is proper. The subsidies on consumers actually are the respect on the choices of the market, turning the original subsides distributed by administrative organizations into market competition, thus good products and services are identified.
In this sense, the export tax rebate is a mechanism of providing subsidies to consumers, then why it can’t work for photovoltaic enterprises? It is because companies can easily gain subsidies by establishing foreign affiliates. Still taking Wuxi Suntech as an example, in 2011, the amount of selling from Wuxi Suntech to Suntech International and Suntech U.S. was as high as 9.778 billion yuan and 4.59 billion yuan, an increase of 32% and 72% on year-on-year basis. And in the same period, the growth rate of the operational income of Wuxi Suntech was only 6%. On the financial statement of Suntech, the percentage of the account receivable was as high as 40% which was the cost of export tax rebate.
Apparently, it’s even the usual practice of most export-orientated enterprises. How to avoid the Suntech phenomenon to happen again? The most important thing is to lower the export rebate rate of the photovoltaic industry as far as possible, while reducing other fiscal subsidies of government on photovoltaic enterprises. Only by doing so, the Chinese photovoltaic industry may really being sustainable, otherwise, more fiscal subsidies may only become profits of producers, and has nothing to do with the public interests.
Originally published on Southern Metropolis Daily | March 26, 2013-3-26
