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Introduction Constant innovation is essential for success in the solar power industry. In 2008, it appeared that the industry was on the cusp of a new generation of technology based on thin film modules. Venture capital investors poured almost $3 billion1 into numerous U.S. solar startups, all hoping to bring their versions of cutting edge thin film modules to the scale required to compete on cost with c-Si. But by 2012, the picture had changed dramatically. Venture capital investment was near zero, and 5 of the top 8 U.S. solar module producers in 2011 had filed for bankruptcy or ceased operations by the end of 2012 (see Figure A).2 Figure A: Total value of venture capital investment in U.S. solar firms (2008-2012)

Unfair competition from overseas, particularly China, drove this collapse in the U.S. solar industry. Software theft, government subsidies and other unfair practices allowed Chinese solar manufacturers to flood the U.S. market with cheap modules based on older crystalline silicon (“c-Si”) technology. In this case study, we demonstrate that software theft by Chinese solar manufacturers represents a double-edged sword to U.S. innovation, helping to prevent products by U.S. startups from reaching the market, and giving Chinese manufacturers an unfair cost advantage in the R&D process. Competing technologies The U.S. has historically been the undisputed leader in solar power innovation. The National Renewable Energy Laboratory reports that since 1975, over 70% of solar efficiency milestones have come from business, academic and government institutions in the U.S., while no milestones originated in China.3

1 Mercom Capital Group Solar Funding Report 2 International Energy Agency: Trend Reports 3 NREL (2012)

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As recently as 2008, modules based on thin film technology and produced by U.S. firms looked poised to gain prominence in the marketplace. Thin film solar technology offers several advantages over older c-Si based modules. As Figure B shows, thin film’s fixed and variable costs of production are both lower than c-Si. Researchers estimate that a 1,000 megawatt thin film plant costs $350 to $450 million to build, while a similar sized c-Si plant costs over $1 billion. The variable cost of thin film is lower in part because the technology uses less absorber material (polysilicon or other substances) than c-Si. Figure B: Comparison of crystalline silicon and thin film solar technology4

Due to these factors, electricity generation from thin film panels is less costly than electricity generated from c-Si panels. This advantage holds despite c-Si panels producing more power over a given surface area. Industry analysts estimate that the cost per Watt of thin film panels is at least 25% lower than the cost per watt of c-Si panels. Despite these numerous advantages, c-Si panels manufactured in China continue to dominate the market. In the next section, we explore how practices such as software theft prevented innovative thin film modules from coming to market and forced a generation of U.S. solar startups out of business. Unfair competit ion stif les U.S. innovation Over the period 2008-2012, Chinese manufacturers increased their production capacity for c-Si based modules by a staggering 17-fold5, raising their own market share to above 50% while U.S. market share fell below 5%.6 Figure C shows the impact of this massive ramping up by Chinese producers on global market share. Figure C: U.S. and Chinese share of global solar module market7

4 Market share from GTM; Efficiency from SEPA PV Technology Characterization Report; Materials & structure from http://climatetechwiki.org 5 Cardwell, Diane and Keith Bradsher, “Chinese Firm Buys U.S. Solar Start-Up,” New York Times, January 9, 2013. 6 National Renewable Energy Laboratory, Oct 2011 (Citing Navigant Photovoltaic Manufacturer Shipments & Competitive Analysis 2011/2012 (April 2012)) 7 US Solar Market Insight Report 2011, GTM Research, March 2012; Energy Insights Report, IDC, December 2011

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In addition to government subsidies, unfair competitive practices such as software theft enabled Chinese manufacturers to flood the market with cheap panels based on inferior technology. At least three of China’s largest solar module manufacturers are known to engage in software theft, each avoiding an estimated $5-6 million in costs per year.8 This significant cost avoidance, amounting to almost 1% for the firms’ total costs, harms both U.S. manufacturers and consumers all over the world by stifling innovation. When developing a new or improved technology, it is essential for solar module manufacturers to reach a scale sufficient for the new product to compete on cost. But scale requires demand. In the face of an influx of obsolete but inexpensive Chinese c-Si modules, the vast majority of U.S. solar start-ups based on thin film technology were never able to reach sufficient scale. At least 12 U.S. manufacturers, including market leaders such as United Solar and Evergreen, filed for bankruptcy in 2011 and 2012 (see Figure D).

8 Estimates from proprietary analysis based on data from software publishers and Chinese firms’ public filings

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Figure D: Major U.S. solar bankruptcies (2011 – 2012)

The deep harm to U.S. solar innovation and production brought on by unfair competitive practices such as software theft is further illustrated by the single lasting success story in U.S. thin film module production: First Solar. First Solar was the only U.S. firm using thin film technology to sufficiently bring its product to scale before the influx of Chinese c-Si modules began. This fortunate result of early timing allowed the company to reach sufficient scale to compete with Chinese manufacturers on cost. In 2009, before other U.S. solar firms left the market en masse, First Solar had more than nine times the production scale of United Solar, its closest thin film competitor.9 Only First Solar, which was able to bring its thin film product to sufficient scale prior to the influx of Chinese product, was able to maintain significant market share. This influx of low cost Chinese modules, fueled in part by software theft, harmed consumers around the world by blocking a new generation of technology from reaching the market. Software theft reduces Chinese manufacturers’ cost of innovation In addition to preventing innovative U.S. modules from reaching the market, software theft by Chinese solar manufacturers provides direct cost savings in the process of innovation. Our research shows that software accounts for as much as 11% of solar firms’ R&D budgets. Therefore, software theft leads to a large reduction in those companies’ incremental cost of R&D, providing the incentive to engage in more R&D activity that leads to a greater rate of innovation. This fact is echoed by interviews with U.S. solar executives. “We spend an inordinate amount of time working with software. If I could just tear down the hardware of a tool and take the software for free, it would be a huge advantage,” said Chris Norris, CEO of Alta Devices. The CTO of a leading solar company added: “Extra capital would allow us to have more prototypes, more investigations, more explorations. The information gained would drive more learning and innovation.” Software theft by Chinese solar firms has been a major contributing factor to conditions that have driven U.S. firms out of business, made it unfavorable for U.S. firms to invest in innovation, and enabled Chinese firms to save on R&D expenses.

9 Global Solar Technology, http://www.globalsolartechnology.com/solar/index.php?option=com_content&view=article&id=7189:thin-film-industry-remains-optimistic&catid=43:columnists&Itemid=5