Hanergy's plant in Heyuan, Guangdong Province, which opened in November 2011
Visiting government officials from the sunshine-and-palm trees city of Haikou were taken aback by ostentatious luxury as they stepped inside the headquarters of solar equipment manufacturer Hanergy.
Jaws dropped as Li Hejun, Hanergy's founder and dealmaker-in-chief, welcomed the visitors from China's far south to the company's plush offices in Beijing.
After grabbing their attention, Li quickly sweetened the surprise with a stunning plan to expand his business in Haikou, promising to generate hundreds of jobs and steady tax revenues.
By building a new factory and research center, Li declared, "Hanergy will invest 17.5 billion yuan in Haikou over next 10 years," recalled one visitor, who asked not to be named.
Li even doubled his pledge on the spot after one official implied he would prefer a shorter time frame. "Then let's do it in five years!" Li snapped.
That meeting in early 2010, which ended with a major agreement between Hanergy and the city of Haikou, was just one of many orchestrated by Li in recent years as part of a nationwide campaign to build Hanergy and promote its key products – solar power panels equipped with a unique type of thin-film photovoltaic cell, and solar energy plants powered by these panels.
He's been hosting visitors at the Beijing headquarters and trotting across China since 2008 with a pitch that's won over investors, bankers, state-owned business leaders and nearly a dozen local governments.
Unfortunately for Li and Hanergy, however, neither the boss nor the company have lived up to all their promises. Factory projects are behind schedule or have been halted. Even Haikou government officials have questioned the wisdom of their agreement.
Indeed, enthusiasm for the company and its solar cells appears to have peaked. In recent months, the global economic slowdown, falling demand for solar panels in Europe, overseas trade barriers that target China's solar industry, and questions about Hanergy's business have been drowning out Li's upbeat message.
Several local governments that initially backed Hanergy projects with loans and land for factories have started cutting financial support. They are among the 11 cities across the country that forged alliances with Hanergy for manufacturing bases, power plants and other investments.
The Haikou city government is refusing to give Hanergy land for the second phase of its factory project. Heyuan officials are demanding financial details and production data about a Hanergy solar plant, while they also plan to delay action on company mining rights and land-use applications.
Hanergy expanded rapidly. The company set up nine subsidiaries and more than 10 power plants in just four years, and built a workforce that's now around 5,000.
The company's goal, based on contracts signed around the country, was to become the world's largest manufacture of thin film panels by end of 2012. The privately held company does not release financial data, but its plans have called for investing 189 billion yuan jointly with local governments around the country in the next few years.
Most Hanergy's solar panels are not sold but are instead made exclusively for special, solar energy plants that the company has built or plans to build and jointly operates with local governments, sometimes in remote areas such as Qinghai Province.
The company's closed-loop business model thus leans heavily on government support in areas including financing, project cooperation, land transfers, power plant operations, tax breaks and other incentives. Electricity produced by Hanergy solar plants is planned to be sold through agreements with state-run power companies.
This business model is in trouble. One reason is that the Chinese government typically releases solar energy subsidies at a snail's pace, complicating business plans. Investors are jittery about volatility in the global solar sector. And due to high operating costs, Hanergy has to sell electricity generated by its solar plants at above-market prices.
A former Hanergy executive who asked to remain anonymous said in recent months the company's cash holdings have been stretched dangerously thin. To access money, he said, Hanergy "has to continually initiate big projects to leverage government investments and bank loans."
No Holding Back
Undeterred by critics and the company's challenges, though, the 45-year-old Li continues to beat a drum for his energy empire.
Interviewed on the CCTV primetime business show Dialogue in November, Li told the broadcaster's nationwide audience that, as a technology leader, Hanergy is a company in a class by itself among China's major solar suppliers.
Li was challenged on stage, though, by fellow panelist and businessman Liu Hanyuan, chairman of the new-energy company Tongwei, who wryly replied: "Just because someone wants to lead doesn't mean he actually can lead."
Lately, Li has been focusing on cutting deals with governments in smaller, third-tier cities. He's also been busy buying advanced companies in the United States and Europe in a bid to move up the technology ladder.
Raised in a rural family, Li has business in his blood. He dabbled in a consumer mineral water business and real estate before founding Hanergy in 1994 in Beijing.
Li has been eagerly promoting Hanergy among local government officials as their golden opportunity to make money by latching on to China's new-energy movement. He's focused particularly on selling his plans to officials outside China's major cities, particularly those who want to recruit big companies in up-and-coming industries. He's found these officials easy to court and generous with taxpayer-supported incentives.
Li got his feet wet in his own backyard. To win support from officials from his hometown Heyuan in Guangdong Province, where he cut the first deal on building a solar panel plant, he sprinkled around a few million yuan to support community charities and promised to boost the economy by building five-star hotels, golf courses and an airport.
At first, Heyuan officials were blown away by Li's plan to invest 40 billion yuan for a thin-film, solar panel plant that he said would be the largest of its kind in the world. They had never considered an investment of that scale, nor dreamed of rising to top of a global industrial chain.
Li later cut the investment to 21 billion yuan. The company's Haikou factory started production in November 2011.
Hanergy has also invested in other renewable energy businesses. For example, it built two hydroelectric power plants on the Zhujiang River near Heyuan in 2000. Hanergy also locally mines quartz sand, which is used to make glass for solar panels.
Heyuan's city fathers had no money to offer to help Hanergy get off the ground, but they were happy to sign over free and discounted land.
Hanergy more recently has cast eyes overseas by purchasing foreign solar companies with more advanced technology. For example, it bought a German company that makes thin-film panels called Solibro GmbH, a subsidiary of Q.Cells, in June for an undisclosed price. And in October, it bought the American thin-film maker Miasole for US$ 30 million.
Before these purchases, Hanergy received 30 billion yuan credit line from China Development Bank, the nation's biggest policy lender.
Products from Solibro's factories are said to be the most efficient in the global solar industry, and Miasole's are also more efficient than Hanergy's. Their technologies are based on a material called copper indium gallium selenide, while Hanergy's production is based on less expensive amorphous silicon.
Splitting Costs
A project's financial burden under Hanergy's business model is divided into thirds. Typically a local government, a bank or banks, and the company each provide 33 percent of the start-up funds. Li made an exception for his financially weak hometown by covering all the expenses but elsewhere local governments have been quick to wire their agreed-upon investment stakes.
According to Haikou officials, however, Hanergy itself has often been late in paying its promised 33 percent share. For the Haikou project, for example, Hanergy executives dragged their feet for more than a year before paying the pledged share of the costs.
Some of the company's projects look very expensive comparing with traditional solar panel plants. A Guangdong official once challenged the 20 billion yuan price tag attached to Hanergy's solar panel plant in Heyuan, saying a comparable factory in another provincial city, Foshan, cost only 3 billion yuan.
Still, no one denies that Li is an expert at striking lucrative deals with small-city officials. In addition to recent solar power plants, his enthusiasm for deal-making worked well in the Yunnan Province city of Lijiang, where Hanergy built a hydropower plant named Jin'anqiao on the Chin-sha River in 2002.
Critics of Hanergy note, however, that the Jin'anqiao project has been riddled with controversy. For example, although the project was first proposed in the 1990s, the plant was delayed and started generating power only last year.
Hanergy has yet to pay all of the hydroelectric project's contractors, and banks are owed about 20 billion yuan, said a former staff of Hanergy. A report in the Guangdong-based 21st Century Business Herald newspaper claimed Hanergy had failed to win official government approval before launching the project, and at one point banks were ordered by the China Banking Regulatory Commission not to lend any money to Hanergy for the hydropower project.
Only a few Hanergy solar panel plants have yet to start full production. To date, only the 500 megawatt-a-year thin-film factory in Heyuan and a 300 megawatt-a-year plant in Shuangliu, Sichuan Province, have reached expected production levels. These plants supply a company-owned solar energy farm in Qinghai.
A plant built in Changxin, Zhejiang Province, failed to meet scheduled production levels, said a former Hanergy employee. The government in that city now wants to scrap plans for a second phase, he said.
Construction of a plant in Shuangyashan, Heilongjiang Province, began in 2010, but its production start-up has been delayed.
Hanergy sold what sources said is an incomplete solar power plant in Pizhou, Jiangsu Province, earlier this year to a public-listed company Shenzhen Energy Group.
Industry insider said Hanergy plans to sell a solar power plant in Yucheng, Shandong Province, as well.
Ambitious Haikou
Tourism, fishing and farming are at the heart of the economy in Hainan Province, an island whose capital is Haikou. Only recently, the city widened its development to include the solar industry. And solar panel manufacturer Yingli Group was among the first to set up shop at an industrial park built by the Haikou government.
New York-listed Yingli, one of the world's largest solar suppliers, invested 760 million yuan in 2009 to build a Haikou plant that can produce up to 100 megawatts worth of solar panels. Production started in May 2010 at a time when global demand was strong.
Encouraged by Yingli's success, Haikou officials started searching for another solar company to open a plant in the industrial park. They found Li and Hanergy eager to invest – and promising to overshadow Yingli.
"We will beat Yingli" with a stronger, more advanced and more cost-effective business, Li reportedly told Haikou officials.
His argument was all about production costs, since Yingli's panels rely on polycrystalline silicon (c-Si), which is more expensive than the material used for thin-film cells.
Hanergy wasn't the first company to make thin-film panels in China. Suntech Power Holdings opened a thin-film plant in Shanghai in 2009, in part because company founder Shi Zhengrong is an expert in the process. Later, though, Suntech's plant was retooled for c-Si production.
The processes differ in efficiency levels and costs: Thin film can convert up to 12 percent of sunlight into electricity and c-Si up to 19 percent, but originally thin-film cells were less expensive and thus preferred by some manufacturers.
C-Si production costs have fallen in recent years, though, and thus thin film has lost its advantage. Indeed, the share of the global solar energy market for thin film shrank to 13 percent in 2010 from 17 percent the year before.
During their talks with Li, Haikou officials raised doubts about the Hanergy plan to dominate the world market for thin-film panels. But Li shrugged off their concerns and pointed to his company's success in Heyuan and Yunnan, arguing that advanced technology and strong government backing can make almost any project work.
Today, Hanergy's hydropower plant in Yunnan generates an income of 2 billion yuan a year. Based on that successful project, Li's company won over local government officials for other deals – and a 30 billion yuan China Development Bank line of credit for solar power projects.
Caixin obtained a copy of the Haikou deal inked in October 2010. Hanergy promised to invest 12 billion yuan over five years for a thin-film panel plant with annual output of 1 gigawatt. It also agreed to spend 3 billion yuan on a global R&D center and 2.5 billion yuan to build a solar power plant.
The city sold Hanergy – at about half the market price – 53 hectares for solar power plants. A separate bargain was arranged with the city for a 27-hectare site for the R&D center and employee living quarters.
The Haikou government provided a 300 million yuan, interest-free loan to support Hanergy's projects. The company counts that loan as part of the 600 million yuan in registered capital for its Haikou division.
The city also helped Hanergy secure 60 million yuan from the Industrial and Information Bureau of the provincial government as well as a 500 million yuan loan from a local credit union.
For the project's first phase, Hanergy promised 2.4 billion yuan including 300 million yuan for infrastructure construction. The rest of the money was to go toward buying and installing equipment.
The project got a 1.6 billion yuan boost via Hanergy's decision to buy manufacturing equipment from a subsidiary, Apollo Solar Energy Technology Holdings Ltd., a Fujian-based company listed in Hong Kong. Hanergy bought a nearly 30 percent stake in Apollo for 1.1 billion yuan, and later increased its share to 50 percent.
According to the former Hanergy official, the Apollo deal not only helped Hanergy cut its investment costs but inflated the cost to help the company meet its investment promise for the Haikou project. As a result, he claimed, the company's true contribution for the first phase of the 12 billion yuan project was only about 400 million yuan.
Suspicious of Li's financial maneuvers, the Haikou government early this year ordered an audit of the Hanergy project. The results have yet to be released to the public.
The Haikou government has so far refused to turn over land promised to Hanergy for its project's second phase. And so far, according to a company worker who asked not to be named, the sole destination for the plant's output has been a small solar energy farm on the factory roof.
Li and other Hanergy executives continue to espouse confidence. The company's website claims it's a "large and well-funded" operation that will soon add enough annual manufacturing capacity to produce more than 6 gigawatts of solar power equipment. It also says company factories will grow to more than 2 gigawatts of annual solar panel production capacity by the end of 2012.
Following its acquisitions of the German and U.S. solar companies, Hanergy also has projects on the drawing board for customers in Russia and Italy.
Critics of the company, concerned officials in the Haikou government and others who wonder about the sustainability of Hanergy's business model do not seem to bother Li and other executives who continue to promote their plans nationwide.
One source said Hanergy managers he recently spoke with brushed aside concerns about the slumping solar industry and thin-film production costs, arguing their company "is not a seller of thin-film panels. We sell electricity."
Indeed, the company's marketing mantra and Li's enthusiasm are flying high on flags fluttering from every power pole at the Haikou facility. Each flag is stamped with a bright-idea slogan: "Hanergy makes the world cleaner.
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