Tariff Wars: Will China's Loss be India's Gain? 

Dear Viewers

I recently came across a tweet where a gentleman was pitching the solar sector stock with target price to earnings (PE) of over 80x.

First, it was Modi effect.

Close on the heels of Ram Mandir event, he announced the launch of Pradhanmantri Suryodaya Yojana. His target is to install rooftop solar on 1 crore houses. Soon after, the stocks in the sector hit upper circuits.

And now, it is Mr Biden energizing Indian solar stocks.

The US President has criticized China's government subsidies that offer Chinese companies an unfair trade advantage. In the spirit of protectionism, he has gone on twitter to announce a tariff war on Chinese goods.

The tariffs on EV batteries will be raised by over 100%. Duties on semiconductors will be up 50%. On photovoltaic cells used to make solar panels, the duties will be doubled.

The public on twitter can't celebrate this move enough. Companies making solar panels are in news.

If you are planning to join this frenzy, keep in mind the potential second order effects of this move.

It needs a mental model that factors in not the linear logic and immediate effects, but long-term consequences.

As Daniel Kahneman in his book - Thinking Fast and Slow said:

• "We can be blind to the obvious, and we are also blind to our blindness."

So upper circuits and the hype aside, let's consider potential long-term consequences of such moves.

Will China's loss be India's gain?

It's possible that India will rush to fill in the potential gap created due to such trade wars.

It is also possible that China, amid over production and oversupply, finds a way to dump these products in India and other economies at even more aggressive prices. This will hurt Indian manufacturers and exporters. Afterall, China has a lion share of 80% in photovoltaic products.

Furthermore, when it comes to technology, Chinese firms have world breaking records for efficient PV technology that generates more energy.

Given the tall targets and commitments that Indian government has set for renewable energy, especially National solar mission, I won't be surprised if the policies are tweaked to allow dumping by China , to prioritize the penetration of solar energy consumption . We could indeed get to faster adaptations of solar energy at more affordable prices. But this could be over the graves of domestic companies that have set up manufacturing companies.

You see, the domestic solar industry is already undergoing a price war that could threaten its roots.

You can see managements of leading solar panel manufacturing companies voicing this concern.

This could get worse. Imagine someone making a huge debt financed investment in manufacturing unit, only to end up making products that are witnessing price erosion.

Some players in the solar energy supply chain are already facing such issues.

Here's the management commentary from presentation of Borosil Renewables. This company makes solar glass used in solar panels.

The management of Borosil Renewables lamented the fact that ex factory selling price has crashed by over 18% in nine months of FY24, leading to steep margin erosion.

The domestic selling prices for solar glass have been impacted despite the rise in input cost. Reason- anti dumping duties were discontinued in August 2022, leading to dumping of cheaper goods by China, Vietnam and Malaysia. In short, there is no level playing field anymore. As a result, the company has reported a loss as against profit last year. The hit has been harder because company had taken debt for capacity expansion last year. High depreciation expenses and interest expenses have further deepened the losses.

That's a scenario that could play out for some other domestic manufacturing companies in the solar energy ecosystem as well. And not just solar sector, such risks could materialize in other targeted sectors such as steel and EV batteries.

Here is another possibility.

The high tariffs imposed by the US will increase the project cost and adversely impact the investments in the renewable energy there. The slowdown in such projects could have a ripple effect on multiple companies in the supply chain, including Indian suppliers. For instance Waaree Energy, due for IPO, has been expanding operations to make solar modules in the US . The company plans to use the raw materials for South East Asian countries. With such tariffs, the project might get adversely impacted.

Further, in a rising wave of protectionism by the US heads, India could be the next target. As I write this, US has warned India of potential sanctions, in the backdrop of India's deal with Iran to develop Chabahar port.

I am no solar sector expert. It's a transition phase for energy sector and thing could turn out either way. But as someone who prioritizes safety in investments, these are some risks we should be mindful of while betting on manufacturing companies in solar ecosystem, and before acting on news. Especially because of the high multiple these companies are commanding.

Do you agree with me? Let me know your thoughts in the comments section.

Thank you for watching. Goodbye.