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.