Why China – cheap capital?

By Gerard Cachon, The Wharton School at the University of Pennsylvania. Source: Matching Supply with Demand.

Gérard Cachon

In 2008 Evergreen Solar opened up a solar panel factory in Devens,  Massachusetts, but they just announced that they will layoff their 800 workers and move production to China (NY Times 1/14/11). Why? Well, of course, it is too expensive to manufacturer in the U.S. And low cost production is critical – the price of solar panels has fallen from $3.39 per watt in 2008 to $1.90 per watt now. Evergreen Solar has reduced its cost to $2.00 per watt, but Chinese manufacturers are producing at $1.00 per watt.

But labor is NOT the reason for the high cost of production in the U.S. – labor is a small portion of the cost to make solar panels. Nor does it seem a lack of technical skills. Instead, the issue is the cost of capital – a solar panel plant can cost $400 million and Chinese manufacturers have access to low cost bank loans.

It it is likely that there will be more movement to China for reasons other than the cost of labor.


One Response to Why China – cheap capital?

  1. This is a very interesting article. The impact of international outsourcing has had detrimental effects on the U.S. economy as its labor force is under employed and its available disposable income diminishes. As the largest economy on the planet, it was overlooked that our standard of living is what drives our size and it is our citizens that earn the standard of living. Lose one, and you lose the other. While I’m not a large advocate for government intervention I can see how certain strategies of investment could re-balance the advantages of a domestic based economy. I’ve done a study on domestic outsourcing v. international outsourcing. The study did not account for the fact that working capital is more readily available in certain countries. Instead it focused on the “direct costs” of labor, shipping, taxes, inventory carrying costs and quality. The reason other countries have such vast reserves of working capital is because our outsourcing to their shores put it there. Its time to actively re-balance our economy.

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