Shining a Spotlight on Solar in China

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When it comes to the powerful long-term structural case for investing in emerging markets, we have identified several “new realities” that encapsulate the growth drivers propelling these markets forward and unleashing compelling investment opportunities.

One of these new realities is how emerging markets have leapfrogged developed markets when it comes to innovation and technology. Drilling down further, it is disruption in certain industries, the transformation of certain agile companies and the opportunity around digitization that is capturing our attention.

Solar is one opportunity we identify within this theme of disruption.

The sun is of course a remarkable source of energy—every 90 minutes it provides enough energy to power all of humanity’s needs for an entire year. However, cost and conversion inefficiencies (the amount of power generated from a given amount of sunlight) mean that only a fraction of sunlight has been effectively harnessed and distributed—that is, until now.

Advancements in technology and innovation are allowing more sunlight to be converted into energy, and the scope for future growth is considerable.

One aspect of solar that has deterred investors in the past is policy risk. This risk is falling, however, as new solar projects no longer require government subsidies, meaning that market forces should increasingly determine the price of solar power.

Furthermore, thanks to innovation, solar is now the cheapest source of energy in many countries today, so there should be even less reason going forward to use environmentally harmful fossil fuels such as coal.

Indeed, the environment and concerns about global warming are top of global leaders’ agendas.

For example, in China, President Xi has set a target for the country to be carbon-neutral by 2060 and for 25% of the energy mix to be from renewables by 2030. This is testament to China’s long-term commitment on going green, as well as its ambitions to foster a global champion industry.

With the International Energy Agency referring to solar as the “king of electricity” and expecting it to account for 80% of the growth in global electricity generation in the next decade,¹ the future does appear to look bright for solar.

China is a world leader in solar production; in 2019, 71% of solar modules were produced in China vs. 3% in the United States. ²

For investors looking to tap into the opportunities presented by this disruptive secular trend, China has the two largest players in what is a highly concentrated market.

One is the world’s largest solar photovoltaic (PV) glass producer. It commands a global market share of 32% and key competitive advantages are its scale and the ability to produce increasingly thinner solar glass. All of its solar glass production uses natural gas while some of its peers are using carbon-heavy coal and oil, so this company goes further in helping to resolve climate challenges.

It also has a solar farm subsidiary and has seen impressive growth, expanding from two to 32 solar farms across China in just six years. And, it is selling its power generation into the immense Chinese electric grid.

China is also home to the second largest global solar glass producer with a 21% global market share and the overseas market representing 30% of its sales.³ The company recently expanded capacity further, starting a new operation in Vietnam. This new location offers further advantages such as relatively cheaper wages, abundant raw materials (including silica sand), cheaper electricity and tax benefits.

As Chinese electricity generators race to grid-parity with coal, independent of state assistance, it is forecasted that solar will jump from about 2% of China’s energy mix to 6% by 2023.⁴

So, when it comes to emerging markets leapfrogging developed markets in innovation and technology, we believe China offers an opportune investment hunting ground for identifying global leaders that are disrupting the market.

What Are the Risks?

All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.

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1. Source: International Energy Agency, World Energy Outlook 2020. There is no assurance that any estimate, forecast or projection will be realized.

2. Source: International Energy Agency, Photovoltaic Systems Programme, “Trends in Photovoltaic Applications 2020,” data as of 2019.

3. Source: Franklin Templeton research.

4. Source: World Economic Forum, as of December 31, 2020. There is no assurance that any estimate, forecast or projection will be realized.