Chinese trade spats threaten Dow Corning exports

The expanding trade war between the U.S. and China over solar module production could further hurt the joint venture's revenue.

By Trefis Dec 30, 2011 3:46PM
Image: Solar energy (© Mick Roessler/Corbis)Dow Corning is a joint venture between Dow Chemical (DOW) and Corning (GLW), and was formed in 1942 to develop silicon products.

It has stayed true to its mission, manufacturing silicon products worldwide. It's also the majority owner of Hemlock Semiconductor, a market leader in the production of polysilicon and other key materials for solar industry.

We estimate that the joint-venture contributes around 22% of Corning's stock price. Dow Corning had made heavy bets on the expansion of the solar industry, but the worsening macroeconomic environment has already taken some of the sheen off the business. Now, the company fears that an expanding trade war between the U.S. and China over solar module production could hurt its revenue further.


We currently have a $16.50 Trefis price estimate for Corning, which is around 30% ahead of the market price.


See our complete analysis of Corning

Misplaced bet on solar industry expansion?


In the last few years, Dow Corning and Hemlock Semiconductor have announced $5 billion in investments to provide materials to the fast-growing solar technology industry. Both companies expected that the industry would take off by end of 2011, but the market bludgeoned solar stocks this year.


The solar industry includes First Solar (FSLR), LDK Solar (LDK), SunPower (SPWRA) and other companies.


The European Union has been the most ardent investor in solar power, making threats to the eurozone's economies indirect threats to solar. Severe austerity measures in Europe will threaten government subsidies to the industry, which will hurt demand if the cost is passed on to the consumers instead. Moreover, as cuts in government spending reduce demand for solar power, the sector will increasingly rely on consumer demand, which will only recover if unemployment falls, wages recover, and confidence returns to the market.


Corning Equity in Earnings of Affiliates

U.S. China trade war to hurt exports


The Chinese government has focused on increasing the competitiveness of its solar manufacturers through free or subsidized land from local governments, extensive tax breaks and other state assistance. That has reduced solar panel prices by 30% to 42% per kilowatt-hour in the last year.


Chinese manufacturers have made deep inroads into the U.S. and European markets as cheap prices supported increased exports. This prompted a United Steelworkers union complaint last year asking the Obama administration to investigate China's clean-energy subsidies and other policies and to bring cases against them at the World Trade Organization.


More recently, SolarWorld has filed a case against Chinese solar manufacturers alleging that Chinese trade practices have harmed American solar manufacturing. This has been endorsed by the U.S. Trade Commission, paving the way for potential tariffs on Chinese solar panels sold in the United States.


Other solar manufacturers, including Dow Corning, fear that this will lead to a Chinese backlash and threaten America's polysilicon exports to China (worth $873 million last year) and local demand for solar products. They have requested SolarWorld to withdraw its case. But SolarWorld rejected the request and persists in its demand for punitive duties on Chinese solar products.


Recently, China slapped punitive duties on cars imported from the U.S. after the country failed to block U.S. tariffs on Chinese tires. This growing propensity towards politicization of trade spats between the U.S. and China can hurt Dow Corning's exports to China, which in turn will hurt Corning's equity earnings from the joint-venture.


You can drag the trend lines in the modifiable chart above to see the impact of these trends on Corning's stock value.



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