China and the Neijuan of systematic overinvestment: State capitalism as a growth accelerator and structural trap

How systematic overinvestment transformed a once celebrated success story into an existentially threatening structural crisis

The anatomy of an industrial policy paradox: Why China's solar dominance is becoming a global challenge

Within a decade and a half, China has achieved an unprecedented rise to become the undisputed global power in the photovoltaic industry. With a market share of over 95 percent in polysilicon for solar applications, 97 percent in wafers, 85 percent in solar cells, and 75 percent in modules, the country dominates virtually all stages of the value chain. This dominance initially appears to be a triumph of targeted state industrial policy and technological innovation. But behind the impressive production figures lies a fundamental systemic crisis that clearly reveals the limits of centrally controlled capital allocation.

The Chinese phenomenon of Neijuan, originally described as agricultural involution, describes a destructive form of competition without productive progress. In the solar industry, this term now manifests as senseless price wars in which manufacturers systematically sell below cost, thereby not only endangering their own existence but destabilizing the entire global value chain. The four largest Chinese module manufacturers, Longi, Jinko Solar, Trina Solar, and JA Solar, reported combined net losses of 11 billion yuan, approximately $1.54 billion, in the first half of 2025 alone, representing a 150 percent increase over the previous year. Jinko Solar recorded a 32.63 percent decline in revenue while simultaneously exploding losses, while Longi suffered a 14 percent drop in profits despite revenues of 32.8 billion yuan.

This development has far-reaching implications that extend far beyond China's borders. European and American manufacturers have been almost completely squeezed out of the market, and the German solar industry, once a global market leader with companies such as Q-Cells, Solarworld, and Centrotherm, practically ceases to exist. In September 2025, Meyer Burger, the last major European producer, closed its German plants in Bitterfeld-Wolfen and Hohenstein-Ernstthal, with 600 employees losing their jobs. The West's strategic dependence on Chinese supply chains for a key technology of the energy transition confronts political decision-makers with a fundamental conflict of objectives between climate protection, industrial sovereignty, and economic efficiency.

This analysis examines the complex mechanisms behind China's solar industry crisis through a systematic investigation of the historical genesis of government-induced overcapacity, current market dynamics and consolidation processes, the international impact on competitors and trade relations, and technological innovation flows. Finally, strategic implications for various players and possible development scenarios for the coming years are discussed.

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State capitalism as a growth accelerator and structural trap: The historical course of the Chinese solar industry

The roots of the current overcapacity crisis go back to 2010, when the Chinese central government made the development of renewable energy a strategic priority. This decision was based on the sober realization that China was technologically lagging behind Western and Japanese manufacturers in conventional internal combustion engines, but could bridge this gap by making a technological leap to electric vehicles and solar energy. What followed was one of the most comprehensive and coordinated industrial support campaigns in modern economic history.

Between 2010 and 2023, an estimated $200 billion flowed into the photovoltaic sector in the form of direct purchase premiums, tax exemptions, infrastructure funding, and research subsidies. This support manifested itself in several dimensions. Buyers of solar systems received discounts of up to 30 percent on end-user systems, while a ten-year exemption from value-added tax further depressed prices. At the same time, provincial and local governments invested billions in establishing production capacities, often without regard for actual demand or long-term profitability. The Kiel Institute for the World Economy calculated that BYD alone received subsidies of over €2 billion in the automotive sector in 2022, although the actual aid was likely significantly higher. A comparable amount is likely to have flowed into the solar industry.

This policy initially yielded spectacular success. The number of Chinese photovoltaic manufacturers exploded from a handful in 2010 to over 500 in 2018. China became the world's largest producer of lithium-ion batteries, controlling approximately 75 percent of global solar module manufacturing capacity and more than half of the processing of critical raw materials such as lithium, cobalt, and graphite by 2023. Domestic photovoltaic capacity expansion reached a new record of 277.57 gigawatts in 2024, representing an increase of 28.3 percent over the previous year. Cumulative installed capacity thus rose to 887 gigawatts, more than all other countries combined.

However, parallel to this quantitative growth, structural imbalances built up. Although central government subsidies officially ended in 2022, they were partially offset by regional subsidies and generous government lending. More importantly, the production capacities built up over the years grew far faster than actual demand. Polysilicon production capacity quadrupled between 2022 and 2024, reaching approximately 3.25 million tons annually, while actual utilization stagnated at an average of 55 to 70 percent of capacity. For modules, production capacity exceeded global demand by more than double, at over 800 gigawatts.

The incentive structures of decentralized implementation proved to be fundamentally flawed. Local governments were encouraged to invest in production capacity, regardless of macroeconomic rationality, because it promised jobs and tax revenue. A classic principal-agent problem arose: While the central government sought to promote the development of strategic industries, provincial and municipal governments primarily pursued short-term local development goals. The result was a fragmented industry with hundreds of manufacturers, all producing similar products with overlapping capacities.

Only when overcapacity created systemic risks for the entire supply chain and profitability became the absolute exception did the central authorities react with warnings of disorderly competition. In August 2025, the China Photovoltaic Industry Association called for an end to below-cost selling and advocated survival of the fittest competition, but without demanding capacity closures. This half-hearted intervention highlights the central government's dilemma: On the one hand, it wants to curb destructive competition, but on the other, it fears massive job losses and social instability due to plant closures.

Neijuan literally means "rolling inward" and is often translated into English as "involution." The term describes a social or economic phenomenon in which increasing effort, competition, and complexity arise—but without any real progress or increase in benefits.

The term originated in anthropology and was popularized by the American cultural researcher Clifford Geertz in the 1960s to describe stagnant development processes. In China, neijuan became a popular internet term around 2020, initially in academic contexts, then as a symbol of excessive performance pressure in schools, universities, and companies.

Today, in China, neijuan represents the state of a society trapped by excessive competition—for example, in the education system, employment, or the housing market. It describes the feeling of not making progress despite great efforts because everyone else is making the same effort. Examples include the 996 work culture (working from 9 a.m. to 9 p.m., six days a week), overwork in tech companies, and the extreme pressure to succeed academically and professionally.

As a countermovement to Neijuan, the Tángpíng ("lying flat") movement emerged in China, promoting a conscious rejection of the pressure to perform and compete. Many young people, especially Generation Z, criticize Neijuan as a "race to the bottom" that promotes burnout, anxiety, and a loss of meaning.

The mechanics of self-destruction: cost structures, market actors and the logic of permanent price decline

The current market dynamics in China's solar industry are shaped by a complex interplay of multiple factors, the interaction of which creates a self-reinforcing downward spiral. At its core is the classic economic problem of overcapacity in industries with high fixed costs and low variable costs. Solar module production requires significant investments in equipment, tools, and research, while the additional costs per additional module are relatively low. In a situation of structural overcapacity, any additional sales, as long as they exceed variable costs, become a contribution margin for fixed costs. This creates a powerful incentive for aggressive price reductions, even if this erodes the overall profitability of the industry.

The price reality is dramatic. Between the first and second quarters of 2025, Chinese export modules experienced an average FOB price decline of 28 percent. Module prices fell to between $0.07 and $0.09 per watt, a level that pushes even efficient manufacturers below their production costs. In October 2024, the China Photovoltaic Industry Association set a reference price of 0.68 yuan per watt as the absolute cost minimum for high-quality production, but even this threshold was regularly undercut in the spot market. Polysilicon prices fell from 65 yuan per kilogram to 40 yuan, wafer prices halved from 2 yuan to 1 yuan, and TOPCon solar cells slipped from 0.45 to under 0.30 yuan per watt.

The impact on corporate finances is devastating. The average net profit margin of the Chinese solar industry fell to just 4.3 percent in 2024. Key companies along the supply chain suffered an average decline in revenue of 28.8 percent and a 72.2 percent drop in profits. Days sales outstanding (DSO) increased dramatically from 69 days in 2023 to 180 days in 2024, a clear warning signal of liquidity problems across the entire value chain.

The market structure further reinforces this dynamic. At the forefront are large, vertically integrated manufacturers such as Longi, Jinko Solar, and Trina Solar, which operate complete value chains from polysilicon to the finished module. This vertical integration provides significant cost advantages: estimates indicate 30 percent lower costs compared to competitors who have to outsource components. Control over critical supplies not only reduces costs but also provides strategic flexibility in pricing and immunity from supply chain disruptions.

A second group consists of hundreds of small and medium-sized manufacturers, often producing fewer than 5,000 units per month and operating well below profitable capacity levels. Many of these players survive only because local governments support them due to their importance to regional employment and supply chains. These companies contribute substantially to overcapacity, as they lack both the size for economies of scale and the technological expertise for product differentiation.

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Concentration in the battery cell supply chain further exacerbates the competitive dynamics. CATL, the world's largest battery cell manufacturer for electric vehicles, controls approximately 38 percent of the global market. This concentration, similar to that in polysilicon production, where the four largest Chinese manufacturers control approximately 70 percent of capacity, gives vertically integrated manufacturers considerable bargaining power over pure-play module producers.

Another critical factor is the regulatory framework. After direct purchase subsidies expired in 2022, the government introduced a trade-in program in 2024 that offers buyers up to 20,000 yuan toward the purchase of new solar systems in exchange for scrapping old ones. While this program, budgeted at the equivalent of $11 billion, stimulates demand, it also increases price pressure, as manufacturers must offer additional rebates to benefit from the incentive.

The moment of truth: Quantitative indicators of an industry at a crossroads

The current state of the Chinese solar industry can be precisely captured by a series of quantitative indicators that paint a picture of extreme contrasts between macroeconomic successes and microeconomic disruptions. On the demand side, the figures are impressive. In 2024, China installed solar modules with a capacity of 277.57 gigawatts, an increase of 28.3 percent over the previous year and more than all other countries combined. The cumulative installed photovoltaic capacity reached 887 gigawatts at the end of 2024, a magnitude that seemed unthinkable just a decade ago. The share of solar and wind power in China's electricity mix exceeded the 50 percent mark for new installations for the first time.

On the production side, volumes continued to rise despite falling prices. Polysilicon production increased by 23.6 percent to 1.82 million tons, wafer production by 12.7 percent to 753 gigawatts, cell production by 10.6 percent to 654 gigawatts, and module production by 13.5 percent to 588 gigawatts. This sustained increase in production despite catastrophic margins highlights the irrationality of competition: Manufacturers continue to produce because each unit generates a marginal contribution above variable costs, even when the overall company is making losses.

But these volume figures conceal alarming profitability trends. Of the 129 electric vehicle brands active in China, analysts expect only 15 to be financially viable by 2030. A similar consolidation is forecast for the solar industry. Jinko Solar, the last major Chinese photovoltaic manufacturer listed on the US Nasdaq stock exchange, recorded a 32.63 percent decline in revenue in the first half of 2025 despite increasing sales volumes by over 50 percent. Gross profit margins shrank industrywide, while the net profit margin for the entire Chinese solar industry fell to just 4.3 percent in 2024, compared to over 10 percent for North American manufacturers.

The overcapacity situation is reflected in the hard numbers. China has production capacity for over 800 gigawatts of modules annually, while global demand is around 600 gigawatts. Installed polysilicon capacity is approximately 3.25 million tons annually, while actual demand is around 2 million tons. Capacity utilization rates are falling dramatically: polysilicon manufacturers are only producing at 55 to 70 percent of their capacity, while module manufacturers are operating at an average of 65 percent capacity.

Inventories have accumulated to critical levels. Polysilicon stockpiles reached 400,000 tons at the end of 2024, sufficient for several months of production. In the US, importers' inventories shrank to just 100 megawatts for one major supplier, an indicator of expected price increases and supply bottlenecks. This discrepancy between overflowing Chinese warehouses and depleted Western stocks illustrates the fragmentation of the global market.

The international dimension exacerbates the dilemma. China's solar exports reached new record levels in 2024, but this export offensive is increasingly encountering protectionist resistance. Since October 2024, the European Union has imposed additional countervailing tariffs of between 17.0 and 35.3 percent in addition to the regular import tariff of 10 percent. The United States has effectively excluded Chinese solar modules from the market through tariffs of 50 percent and combined levies of over 100 percent on electric vehicles. In response, China increased export tax rebates on solar products from 13 to 9 percent for August 2025 to stabilize domestic markets and counteract oversupply.

These trade barriers mean that Chinese manufacturers cannot simply reduce their excess capacity by exporting to developed markets. The remaining export markets, such as Africa, Latin America, and Southeast Asia, have growth potential, but significantly lower purchasing power and smaller market volumes. While African countries imported 60 percent more modules from China between July 2024 and June 2025, a sixfold increase since 2021, Africa as a whole has fewer than 50,000 installed electric vehicles and well below 100 gigawatts of total solar capacity.

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Divergent strategies in the face of the Neijuan: China versus the West

Reactions to the structural overcapacity crisis follow fundamentally different patterns among different actors, manifesting along geopolitical and economic systemic fault lines. China's approach combines administrative intervention with cautious market mechanisms, while Western actors vacillate between protectionism and pragmatic cooperation.

On the Chinese side, Beijing is countering the involution with a series of administrative measures. These range from stricter price monitoring to restrictions on new plants and the closure of inefficient operations to curbing the subsidy race between provinces. In silicon production, one-third of existing capacity is to be eliminated. The Ministry of Industry and Information Technology has restricted the construction of new polysilicon plants and required companies to reduce their utilization. As a result, leading manufacturers are now only producing at 55 to 70 percent of their capacity, which led to a 48 percent increase in polysilicon prices in September 2025 alone.

In December 2024, 33 leading Chinese polysilicon and solar companies agreed to cut production, following the example of the Organization of the Petroleum Exporting Countries (OPEC). The agreement assigns production quotas to participating companies based on market share, capacity, and expected demand. Industry heavyweights are also establishing a fund to buy up older production facilities and remove capacity from the market. In addition, the China Photovoltaic Industry Association is promoting price controls with minimum prices of 0.68 yuan per watt for modules.

These measures are beginning to show results. Analysts at Wood Mackenzie expect prices for solar modules and energy storage systems to rise by around 9 percent starting in the fourth quarter of 2025. The market interventions end a phase of unsustainably low prices of $0.07 to $0.09 per watt, during which manufacturers gained market share but simultaneously incurred heavy losses and halted investments.

But the sustainability of these interventions remains questionable. The extent of the production cuts has so far been insufficient to clear the high inventory levels. Polysilicon prices in China are unlikely to rise above $5 per kilogram until 2027 unless manufacturers tighten supply more drastically. Moreover, analysts warn that a complete elimination of excess capacity could pave the way for a new shortage by 2028, similar to the upheaval from 2018 to 2020, which culminated in a price peak of $39 per kilogram in 2022.

On the Western side, protectionist reflexes dominate the reactions. In October 2024, the European Union imposed punitive tariffs of between 17.0 percent for BYD, 18.8 percent for Geely, and up to 35.3 percent for SAIC on Chinese electric vehicles, in addition to the regular import tariff of 10 percent. For solar modules, the EU has been relying on countervailing duties of between 3.5 and 11.5 percent for years, depending on the manufacturer. In January 2018, the United States initially imposed import tariffs of 30 percent on solar cells and washing machines, later adding additional 50 percent tariffs on solar modules.

The reasoning follows a consistent pattern: Chinese manufacturers benefit from unfair state subsidies, which lead to distortions of competition. In a 173-page report from July 2024, the World Trade Organization accused China of a lack of transparency regarding state subsidies, including in the photovoltaic sector. Many members are skeptical about the thoroughness of Chinese subsidy notifications and fear that China's subsidies distort global markets and promote overcapacity.

China rejects these allegations, arguing that Western governments also massively subsidize their industries. The US Inflation Reduction Act provides $369 billion for climate-friendly technologies. Furthermore, China's competitive advantage is primarily based on fierce competition in its largest domestic market, which leads to pressure for innovation and efficient production. The Kiel Institute for the World Economy acknowledges that cost advantages are not solely due to subsidies, but also to consistent industrial policies, low energy and labor costs, and access to raw materials.

The consequences of protectionist policies are ambivalent. Tariffs protect domestic jobs and industrial capacity in the short term, but delay the decarbonization of the transport sector and burden consumers with higher prices. Simulations show that a prolonged transatlantic tariff war could halve EU exports to the US in the long term, with the burden being unevenly distributed among member states. Furthermore, tariffs provoke retaliatory measures that can harm other industrial sectors.

The fate of European solar module manufacturers highlights the limits of protectionist measures. Meyer Burger, once the hope of European solar manufacturing, filed for insolvency for its German subsidiaries in June 2025. According to the company, the main reasons were cheap imports from China and uncertainties regarding future support for renewable energies in the US and Europe. Attempts to relocate production from Germany to the US failed due to Donald Trump's energy policy reversal and threats of import tariffs. Furthermore, the German "traffic light" coalition failed to agree on additional financial support for domestic production in 2023 and 2024. European programs to support a solar industry independent of China have so far existed more in theory than in practice.

Solarwatt shut down its 300-megawatt module production facility in August 2024, while even Chinese manufacturers such as Jinkosolar, Longi Green Technology, Tongwei, Trina Solar, and JA Solar all reported massive losses. This development marks a fundamental shift: Even Chinese manufacturers operating in Europe are suffering from the price war, and smaller European companies no longer have a chance of survival.

An alternative approach is emerging. Individual voices are calling for a pragmatic convergence of interests between Europe and China. China could accept international transparency requirements and data localization to address security concerns. The EU and China could agree on minimum price agreements as an alternative to tariffs, while multilateral agreements on labor standards and subsidy discipline emerge. In this scenario, China would pursue regionally adapted business models, have European factories produce for Europe, and integrate local suppliers.

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Technological innovation leaps as a differentiation strategy and new competitive dimension

While the price war dominates the headlines, a fundamental technological paradigm shift is taking place in solar cell production that could reshape competitive dynamics in the medium term. The photovoltaic industry is currently experiencing a rapid transition from P-type to N-type solar cells, with the three main technologies TOPCon, HJT, and IBC.

TOPCon, short for Tunnel Oxide Passivated Contact, utilizes N-type silicon wafers and a passivation contact structure made of silicon oxide and doped polysilicon on the back of the cell. This structure improves charge carrier transport and reduces recombination losses, increasing efficiency to a practical 24.5 percent, close to the theoretical limit of 28.7 percent. The key advantage of TOPCon lies in its compatibility with existing PERC production lines, which can be upgraded to TOPCon with relatively low capital expenditure. This makes TOPCon the most cost-effective N-type technology and explains its dominant role in current capacity expansion.

HJT, Heterojunction with Intrinsic Thin Layer, combines crystalline silicon substrates with amorphous silicon thin layers to form a heterojunction structure. Unlike TOPCon, HJT requires new production lines and represents a completely independent process path. HJT cells already achieve 26 to 27 percent efficiency in the laboratory and are considered a promising medium- to long-term technology with advantages in tandem structures, building-integrated photovoltaics, and markets with high temperatures and low light. With the maturation of technologies such as silver paste replacement, copper electroplating, and thinner wafers, HJT is expected to be able to reduce costs and compete with TOPCon.

Market penetration is occurring at a remarkable pace. China has decided to completely switch to N-type technology; there is virtually no more investment in P-type. The transition is proceeding faster than predicted, with the major Tier 1 manufacturers primarily relying on TOPCon technology, while newcomers are supplementing their offerings with HJT and TOPCon. Major Chinese machine manufacturers offer turnkey factories with multi-gigawatt capacity, which manufacturers without PV experience can easily order.

However, this technological transformation carries risks. Many of the new capacities, primarily from companies with turnkey lines, will initially struggle to produce high-quality products. Only Tier 1 manufacturers, who have been researching N-type technologies for years and have experienced teams, currently know what they're doing. Buyers are well advised to initially purchase Tier 1 products, even if they are somewhat more expensive.

The theoretical efficiency limit of monocrystalline silicon cells is 29.43 percent. Since TOPCon and HJT already achieve 26 to 27 percent in the laboratory, a further breakthrough depends on tandem technologies, especially perovskite-silicon tandems. If solid-state batteries reach market maturity before 2030 and truly double energy densities while simultaneously reducing costs, this would invalidate established competitive advantages from lithium-ion battery production capacities. China is investing heavily in solid-state technology, but Japanese and European companies hold significant patent portfolios in this area.

For Western manufacturers, technological differentiation may be the only remaining competitive advantage. Traditional automakers cannot compete with vertically integrated Chinese competitors in either production costs or development speed. Their chances of survival depend on achieving differentiation through superior software integration, service quality, or brand prestige—factors that are less scalable but more difficult to imitate.

Geopolitical disruptions and strategic dependencies: The new architecture of global energy systems

Chinese dominance in the solar industry transcends purely economic dimensions and is increasingly manifesting itself as a geopolitical factor with far-reaching implications for strategic autonomy, security of supply, and international power structures. The German government's China strategy encapsulates the dilemma: China is a leader in many green technologies, yet it needs green technologies from German companies to achieve its own climate goals. Leadership in green technologies is not only economically relevant but also impacts political decision-making. One-sided dependencies in critical areas, such as photovoltaics, have already emerged from China's position.

This dependence has multiple facets. China controls over 70 percent of global production of rare earths and critical raw materials for batteries and solar cells. Over 70 percent of the cobalt mined worldwide comes from the Democratic Republic of Congo, but 80 percent of the refining takes place in China. For lithium, 80 percent comes from Australia and Chile, but over 50 percent of global refining is concentrated in Chinese facilities. This control over critical raw materials and processing capacity gives China considerable strategic leverage.

The geopolitical dimension is exacerbated by data protection and security concerns. Under China's National Intelligence Law, Chinese companies can be required to cooperate with security authorities. Modern photovoltaic inverters and smart inverters collect extensive data on power consumption, grid frequencies, and load distribution. Millions of solar systems power German households, the majority of whose components come from China. Experts warn that China could theoretically sabotage our power supply to the point of a complete blackout. Some European companies are already advising their employees against discussing professional matters in vehicles equipped with Chinese systems.

The expansion strategy of Chinese solar companies is increasingly targeting emerging markets in Africa, Latin America, and Asia. At the ninth China-Africa Summit in September 2024, President Xi Jinping announced an intensification of economic relations with a focus on green technologies. Chinese companies have already implemented several hundred solar, wind, and hydropower projects in Africa. In 2023, the installed capacity of solar power in Africa increased by 19 percent, with countries such as Egypt, Morocco, Tunisia, Niger, and Namibia announcing ambitious energy transition programs. African countries imported around 60 percent more modules from China between July 2024 and June 2025, and imports have increased sixfold since 2021.

This expansion follows a clear logic. Chinese solar panels and electric vehicles are facing significant difficulties in the American and European markets due to punitive tariffs. Africa offers alternative sales markets, while China simultaneously seeks to improve its access to raw materials such as lithium, cobalt, and copper in Botswana, Namibia, and Zimbabwe. The first major cooperation program planned is the Africa Solar Belt, which aims to supply around 50,000 African households with decentralized solar power by 2027.

Latin America is following a similar pattern. Since 2018, China has signed memoranda of understanding with 21 countries from Latin America and the Caribbean to join the new Belt and Road Initiative. China's merchandise exports have doubled over the past decade, primarily in Southeast Asia, Latin America, and the Middle East. Relations in the triangle formed by the Gulf states, China, and Central Asia are developing amid a geopolitically complex landscape, with potential implications for global energy systems.

This has far-reaching consequences for Europe and Germany. A new strategic understanding of the emerging complex network of relationships in Greater Asia is needed to ensure Europe's long-term relevance in this region. Germany and the EU risk being marginalized in energy, climate, and geopolitical terms, not only in Central Asia's renewable energy sector. While intra-Asian dynamics are gaining importance, a more consistent Central Asia strategy and a constructive approach to relations with the Arab Gulf states are needed.

From Germany's perspective, the essential international cooperation on climate protection must not be used as a means of pressure to push through interests in other areas. However, this principle is proving difficult to implement given the reality that energy security and climate protection are increasingly intertwined with geopolitical power issues.

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Future scenarios: consolidation, fragmentation or new equilibria

The future development of the global solar industry can be outlined along several plausible scenarios, each of which makes different assumptions about technological, regulatory, and geopolitical developments. These scenarios should not be understood as forecasts, but rather as analytical constructs for capturing possible development paths.

The consolidation scenario continues and intensifies current trends. In China, a brutal market shakeout will occur by 2030, with over 80 percent of current manufacturers disappearing or being absorbed. The remaining 10 to 15 suppliers, dominated by Longi, Jinko Solar, Trina Solar, JA Solar, and Canadian Solar, control 80 percent of the global market. Each of these survivors sells an average of over two million modules annually, thereby achieving critical economies of scale for profitability.

In this scenario, the largest manufacturers leverage their cost advantages and vertical integration to further gain market share. Global module production is concentrated at a few mega-sites in China, each with an annual capacity of over 50 gigawatts. Profitability recovers from 2027 onward, after weaker competitors are eliminated and price pressure eases. Module prices stabilize at $0.08 to $0.10 per watt, and polysilicon at $6 to $8 per kilogram. These prices enable the remaining manufacturers to achieve net profit margins of 8 to 12 percent, sufficient for sustainable reinvestment in research and development.

European and North American manufacturers will remain marginalized in this scenario, with the exception of a few niche players for specialized applications such as building-integrated photovoltaics or high-efficiency modules for aerospace and military applications. The global market will reach annual capacity expansion of over 900 gigawatts by 2030, driven by emerging economies in Asia, Africa, and Latin America. China exports about 40 percent of its production, equivalent to 300 to 400 gigawatts annually, despite Western trade barriers.

An alternative fragmentation scenario assumes increased protectionism and the formation of geopolitical blocs. The US and EU increase tariffs on Chinese solar products to over 100 percent or impose quantitative import restrictions. China responds with retaliatory measures against European and American exports and restrictions on critical raw materials. The global solar market is fragmenting into largely separate blocs: China and allied states such as Russia, Iran, and parts of Central Asia; the West with the US, EU, Japan, and South Korea; and a contested middle segment comprising Southeast Asia, Latin America, Africa, and the Middle East.

In this scenario, China can expand its dominance in its home and emerging markets, but remains marginalized in Western markets. Western governments massively subsidize the development of domestic production capacities, yet only achieve 20 to 30 percent of China's cost efficiency. Global photovoltaic production is splitting into two technological ecosystems with incompatible standards for inverters, mounting systems, and grid integration. This fragmentation reduces economies of scale, slows innovation, and delays the global decarbonization of the energy sector by an estimated five to ten years.

Module prices diverge between the blocs: In China and allied markets, they fall to between $0.05 and $0.06 per watt, while in the West they remain at $0.15 and $0.20 per watt. This price difference creates massive welfare losses for Western consumers and companies, who have to bear higher electricity production costs. At the same time, however, it creates new opportunities for specialized Western manufacturers that can operate profitably in protected markets.

A third coexistence scenario is based on a pragmatic convergence of interests. Western governments recognize that aggressive tariff policies jeopardize their own climate goals and burden domestic consumers with higher prices. China accepts international transparency requirements and data localization to address security concerns. The EU and China agree on minimum price agreements as an alternative to tariffs, while multilateral agreements on labor standards and subsidy discipline are emerging.

In this scenario, Chinese manufacturers operate as truly global companies with regionally adapted business models. European factories produce for Europe, integrating local suppliers, and Latin American factories produce for America. China cooperates with European and Japanese partners on battery technology and charging infrastructure, while Western manufacturers retain access to Chinese markets. The global market remains competitive, with three to four large Chinese corporations, two to three Western champions, and specialized niche players.

Module prices converge globally at between $0.08 and $0.12 per watt, but product differentiation and service models enable sufficient margins for all players. Annual global photovoltaic installations will reach over one terawatt by 2030, driven by cost-effective technology and consistent climate policy. This scenario maximizes global welfare and the speed of decarbonization, but requires significant political compromises on all sides.

Technological disruptions could fundamentally change these scenarios. If perovskite tandem cells reach commercial maturity before 2030 and achieve efficiencies above 30 percent at comparable costs, this would revolutionize the entire market. Chinese manufacturers are investing heavily in this technology, but European and North American research institutes also have leading expertise. A technological breakthrough outside of China could reshape the competitive landscape.

Demand development remains the critical uncertainty factor. The China Photovoltaic Industry Association forecasts new capacity additions of between 215 and 255 gigawatts in China in 2025, a sharp decline from 2024. Globally, SolarPower Europe expects 655 gigawatts in the medium scenario for 2025 and up to 930 gigawatts annually for 2029. If these forecasts are correct, demand could keep pace with production capacity and ease price pressure. However, if regulatory uncertainty or macroeconomic downturns dampen demand, the overcapacity crisis would intensify.

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Between market power and market destruction: The strategic lessons of the Neijuan

The analysis of the Chinese solar industry reveals fundamental insights into the limitations and risks of state-directed industrial policy when coordination between centralized objectives and decentralized implementation is inadequate. Within a decade and a half, China has established a technological and industrial dominance in photovoltaics that is unprecedented in modern economic history. This dominance was achieved through massive state subsidies, coordinated industrial policy, and consistent support for research and development. But this success carries with it the seeds of its own destruction.

Historical developments reveal a pattern of government-induced overinvestment characteristic of centrally controlled economies. The incentive structures encouraged local governments to invest in productive capacity, regardless of macroeconomic rationality, because it promised jobs and tax revenues. A classic principal-agent problem emerged, in which the goals of the central government and the incentives of local actors diverged. The result is structural overcapacity of over 50 percent, forcing destructive price competition in which even the most efficient producers can no longer operate profitably.

Three key findings emerge. First, the case of the Chinese solar industry demonstrates the limits of state-directed industrial policy in the absence of market-based capital allocation. While coordinated subsidies created impressive production capacities and accelerated technological progress, they simultaneously generated systemic overinvestment with destructive consequences for profitability. The Chinese model may be effective in mobilizing resources in the short term, but it carries risks of massive capital destruction in the medium term.

Second, the development illustrates the challenges of vertical integration in industries undergoing rapid technological change. Control over polysilicon, wafers, cells, and modules provides cost advantages and resilience to supply chain disruptions. At the same time, this strategy ties up enormous capital and reduces flexibility in the face of technological paradigm shifts. Should a new battery or solar cell technology render massive investments in existing capacities obsolete, the supposed advantage would become a burden.

Third, the fragmentation of the global solar market along geopolitical fault lines highlights a fundamental conflict between economic efficiency and strategic autonomy. From a purely economic perspective, free trade and international division of labor would be optimal, allowing Chinese manufacturers to leverage their cost advantages while Western companies focus on premium segments and software. However, geopolitical and security considerations create incentives for protectionism and regionalization, even if this sacrifices efficiency gains.

Policymakers face complex trade-offs. Aggressive tariff policies protect domestic jobs and industrial capacity in the short term, but delay decarbonization and burden consumers. A more balanced approach could be to strengthen strategic industries through innovation promotion and infrastructure investments, while simultaneously establishing international standards for subsidy discipline, labor rights, and data protection. Multilateral cooperation instead of bilateral trade wars maximizes global welfare but requires significant political compromises.

For business leaders outside China, the analysis highlights the need for fundamental business model innovations. Traditional manufacturers cannot compete with vertically integrated Chinese competitors in either production costs or development speed. Their chances of survival depend on achieving differentiation through superior software integration, service quality, technological excellence, or brand prestige—factors that are less scalable but more difficult to imitate.

The solar industry presents a paradoxical outlook for investors. Market growth remains robust, with global installations projected to triple by 2030. At the same time, massive overcapacity points to continued weak profitability, possibly for another three to five years. Investments should focus on the five to ten largest manufacturers, which have sufficient financial reserves to survive the consolidation phase. Furthermore, companies in downstream segments such as inverters, mounting systems, energy storage, and grid integration offer more attractive return profiles with less overcapacity.

The long-term significance of this topic transcends the solar industry and raises fundamental questions about the architecture of global economic relations in the 21st century. The era of unbridled globalization and international division of labor is giving way to a more fragmented world order in which strategic autonomy and security of supply are treated at least equally with economic efficiency. China has demonstrated that state-directed industrial policy, with sufficient resource mobilization, can achieve technological global market leadership in key industries. However, this strategy simultaneously creates overcapacity and destructive competition, which endangers its own industry.

The Western response to this challenge will significantly shape the global economic order in the coming decades. A relapse into protectionism and economic bloc formation would slow innovation, reduce prosperity, and delay the urgently needed global decarbonization. Pragmatic cooperation while simultaneously safeguarding strategic interests requires political courage and multilateral compromises. The outcome of this debate will determine whether the energy transition succeeds or is ground to pieces in the mills of geopolitical rivalry.

Suitable for:

• Ticking time bombs in Asia: Why China's hidden debts, among others, threaten us all
• China under pressure: Limits of the export model of the second largest economy and the challenges of the transformation

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