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China dominates global solar panel production. It’s share of all key manufacturing stages exceeds 80%. It has grown from zero to global dominance in the last 15 years through government subsidies and questionable practices ranging from forced labor to dumping prices. As a result, the EU solar industry was effectively bankrupt by 2019.

Learning the lessons of Russian gas, the EU now wants to become less vulnerable by building a local solar industry. It is providing subsidies for the construction of factories. However, according to studies, initial European production will have a cost disadvantage of 20-25% compared to Chinese cost levels. About half of this initial cost gap is due to the disadvantage of lower production volumes.

In 2021, the U.S. banned some imports of polysilicon that comes from Xinjiang, as well as goods made with those products, over concerns about slave labor. The Chinese region accounts for more than 40% of the world’s polysilicon production. The ban affects some of China’s largest manufacturers, including Longi Green Energy Technology Co Ltd, Trina Solar Co Ltd and JinkoSolar Holding Co. This, of course, gives U.S. manufacturing a breathing space.

But as a result, these banned products end up in European warehouses, further depressing prices and making it even harder for EU production to grow.

A fine line to walk
So production subsidies are clearly not enough when you have to compete with products from an industry that has been subsidized by a foreign government for over a decade and is flooding your market. As one marketing executive at a leading global manufacturer put it, “We need demand too, not just supply.”

European policymakers will have to strike a balance between keeping a foreign supply chain intact until the gaps are filled, while protecting and nurturing an industry. This will require an intelligent mix of subsidies and market protection mechanisms.

Some politicians argue that none of this is necessary, that the “free market will prevail”. But history has already proven them wrong once.