Last week, some stunning news reverberated across the state of MassachusettsEvergreen Solar Inc. announced that it would shutdown its two year old existing $430 million manufacturing facility located on a former military base in Devens Massachusetts.  This news was very disappointing, not only because it represents the potential loss of 800 or more jobs, but also because it involves such a strategic industry for future growth in U.S. manufacturing capability.  Evergreen management noted that it was a victim of weak U.S. demand and competition from cheaper manufacturing capabilities in China, where the government provides solar companies with generous incentives.  Evergreen, however, also sources some production in Michigan, as well as higher volume production with a partner in China. The company had been increasingly hinting that China would be a more strategic manufacturing focus for the company.

Local media sources were quick to point out that Evergreen had the benefit of governmental grants and loans valued at $76 million, and the company ended up taking about $58 million in aide. The Boston Globe article notes that the Governor of Massachusetts had been previously criticized by his rivals for providing such generous aide to a private company during challenging fiscal times, but felt strongly about establishing a strategic manufacturing capability and presence within the state to insure an economic future for alternative energy technology manufacturing.

No doubt, Evergreen management and its investors may have what it believed to be compelling reasons for this decision.  The company has reported a cumulative loss of $54 million through the first nine months of 2010 and has also burned through $685 million since its founding.  The company may have further placed more emphasis on research and development vs. production capabilities. It is no secret that U.S. demand for solar panels to date has been tepid and disappointing, considerably lagging other countries such as China. The changed political climate in Washington also indicates a period of conservatism in any future incentives for alternative energy development.

Interestingly enough, while lamenting the news, I also came across a Bloomberg BusinessWeek article with the headline, Chinese Plants Grow on U.S. Turf. This article profiles China’s Suntech Power Holdings which, as of October, has been producing solar panels in a 117,000 square foot production facility in Goodyear Arizona.  The facility provides savings in transportation costs for U.S. based customers and received a $2.1 million manufacturing tax credit through the U.S. economic stimulus package.  According to the BusinessWeek article, Suntech invested in the U.S. to bring itself closer to U.S. customers and to accommodate “Buy American” requirements in some government contracts.  It further notes that this strategy seems to be working since Suntech plans to double its payroll by the end of next year.

Also noted are extracts of a recently disclosed by WikiLeaks cable sent by the U.S. ambassador to China in January of 2010.  The ambassador wrote: “Chinese companies, thanks to government-backed loans, monopolies, and preferential treatment, are awash in cash and should be a source for investment in the U.S. economy.” The article goes on to note that Suntech has chosen to deploy more advanced manufacturing equipment in its Arizona facility, allowing 30 U.S. workers to produce the same number of solar modules as 100 in the home factory in China to overcome obvious higher U.S. labor and benefit costs  It quotes a Suntech executive as noting that if successful, these same advanced manufacturing methods could be brought back to China to effect labor and productivity savings in China as well.

The contrasts in events and strategy are startling and should be a cause for concern for U.S. legislative leaders and U.S. based companies.  While Massachusetts made significant concessions to help a local private company develop and deploy world class competitive production capability in solar panel production, an existing Chinese company elects to deploy its own capabilities in the U.S. and is garnering U.S. based customers.  While Chinese companies have the benefit of multiple years of subsidies and grants to develop and deploy competitive capabilities, a U.S. based company pulls the plug on U.S. developed production capabilities in just two years.

In our view, the contrast of a U.S. based company who has decided that it cannot profitably produce solar panels in the U.S. with a noted Chinese company who claims it can is rather startling. There is no doubt many inter-related issues are at play.  Perhaps Evergreen provided a unique set of challenges and/or setbacks, as noted in the Boston Globe article.  Perhaps Suntech is not being totally forthcoming in its U.S. profitability.  In either case, the contrast in events is troubling and should be a cause for concern for U.S. based companies and legislative leaders.

Perhaps the answer to this dilemma is for Massachusetts leaders to offer the Devens facility to a Chinese or other foreign-owned firm. Then again, is that what ‘Buy American’ is suppose to mean.

What’s your view?

Bob Ferrari