By Doug Young
Young’s China Business Blog
Traditional consolidation in industries suffering from overcapacity typically sees stronger companies merge and weaker ones close, resulting in a healthier, more sustainable sector where everyone is profitable. But such conventional “right sizing” is less common in China, where struggling companies in strategic industries are often kept alive through financial and other support from local governments that are highly reluctant to let those ventures simply fail or be purchased by outsiders. Such artificial support may save jobs, but it does nothing to solve the overcapacity problem that created the need for consolidation in the first place.
That’s exactly the dilemma facing China’s struggling solar sector, which is now posting huge losses even though we’ve yet to see players close or merge despite a flurry of such activity in the West. In the absence of proper consolidation, Chinese companies appear to be taking the next-best logical step by shuttering idle capacity and implementing massive layoffs in a bid to stem their losses, according to one report.
The main question is: will this kind of action be enough to avoid any of the closures that everyone seems to dread so much? My suspicion is that this “right sizing” will help some of the weaker players to perhaps survive a little longer; but at some point local governments will eventually tire of pumping more and more money into ventures that clearly have no hope of returning to profitability anytime soon, if ever.
If interested in discussing energy matters, you can contact Court Rich, director of Rose Law Group’s Renewable Energy Implementation Department, email@example.com