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 existential 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 undergone an unprecedented rise to become the undisputed global superpower 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. However, behind the impressive production figures lies a fundamental systemic crisis that exemplifies the limitations of centrally controlled capital allocation.

The Chinese phenomenon of Neijuan, originally described as agricultural involution, refers to a destructive form of competition without productive progress. In the solar industry, this term manifests itself today as a senseless price war in which manufacturers systematically sell below cost, thereby not only jeopardizing their own existence but also 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 US$1.54 billion) in the first half of 2025 alone, representing a 150 percent increase compared to the previous year. Jinko Solar experienced a 32.63 percent decline in revenue coupled with exploding losses, while Longi suffered a profit slump of over 14 percent despite revenues of 32.8 billion yuan.

This development has far-reaching implications that extend well beyond China's borders. European and American manufacturers have been almost completely driven out of the market, and the German solar industry, once a global leader with companies like Q-Cells, Solarworld, and Centrotherm, has practically ceased to exist. With Meyer Burger's closure in September 2025, the last major European producer shut down its German plants in Bitterfeld-Wolfen and Hohenstein-Ernstthal, resulting in the loss of 600 jobs. The West's strategic dependence on Chinese supply chains for a key technology of the energy transition confronts policymakers 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 state-induced overcapacities, current market dynamics and consolidation processes, the international impact on competitors and trade relations, and technological innovation flows. Finally, it discusses strategic implications for various stakeholders and potential development scenarios for the coming years.

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

The roots of the current overcapacity crisis reach back to 2010, when the Chinese central government made the development of renewable energies a strategic priority. This decision was based on the sobering realization that China lagged behind Western and Japanese manufacturers in conventional combustion engines, but could close this gap through a technological leap to electric vehicles and solar energy. What followed was one of the most comprehensive and coordinated industrial promotion campaigns in modern economic history.

Between 2010 and 2023, an estimated $200 billion flowed into the photovoltaic sector in the form of direct purchase incentives, tax breaks, infrastructure funding, and research subsidies. This support manifested itself in several ways. 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 reduced prices. At the same time, provincial and local governments invested billions in establishing production facilities, often without regard for actual demand or long-term profitability. The Kiel Institute for the World Economy calculated subsidies of over €2 billion for BYD in the automotive sector alone in 2022, although the actual aid was likely significantly higher. Similar figures are likely to have been involved in the solar industry.

This policy initially yielded spectacular results. 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 and, by 2023, controlled approximately 75 percent of global solar module manufacturing capacity, as well as more than half of the processing of critical raw materials such as lithium, cobalt, and graphite. Domestic photovoltaic installations reached a new record of 277.57 gigawatts in 2024, representing a 28.3 percent increase compared to the previous year. The cumulative installed capacity thus rose to 887 gigawatts, more than all other countries combined.

However, alongside this quantitative growth, structural imbalances developed. 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 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, at over 800 gigawatts, exceeded global demand by more than double.

The incentive structures of decentralized implementation proved to be fundamentally flawed. Local governments were encouraged to invest in production capacity regardless of macroeconomic rationale 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 city governments primarily pursued short-term local development goals. The result was industrial fragmentation 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 exception did central authorities react with warnings about disorderly competition. In August 2025, the China Photovoltaic Industry Association called for an end to selling below cost and promoted a "survival of the fittest" approach, without, however, demanding capacity closures. This half-hearted intervention illustrates the central government's dilemma: On the one hand, it wants to curb destructive competition; on the other hand, it fears massive job losses and social instability due to plant closures.

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

The term originally comes from 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 pressure to perform in schools, universities, and companies.

Today in China, Neijuan refers to the state of a society trapped in excessive competition – for example, in the education system, working life, or the housing market. It describes the feeling of not getting ahead despite great effort 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, or the extreme pressure to succeed academically and professionally.

As a counter-movement to Neijuan, the Tángpíng ("lying flat") movement arose in China, which promotes the conscious rejection of the pressure to perform and compete. Many young people, especially those of 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 players, and the logic of permanent price decline

The current market dynamics in China's solar industry are characterized by a complex interplay of several factors, the interaction of which creates a self-reinforcing downward spiral. At its core lies the classic economic problem of overcapacity in industries with high fixed costs and low variable costs. Solar module production requires substantial investments in equipment, tools, and research, while the additional costs per module are relatively low. In a situation of structural overcapacity, every additional sale, as long as it exceeds the variable costs, contributes to covering fixed costs. This creates a powerful incentive for aggressive price reductions, even if it erodes the overall profitability of the industry.

The pricing reality is dramatic. Between the first and second quarters of 2025, Chinese export modules experienced an average FOB price drop of 28 percent. Module prices fell to as low as US$0.07 to US$0.09 per watt, a level that pushes even efficient manufacturers below their production costs. The China Photovoltaic Industry Association identified a reference price of 0.68 yuan per watt in October 2024 as the absolute minimum cost 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 to 1 yuan, and TOPCon solar cells slid from 0.45 to below 0.30 yuan per watt.

The impact on corporate finances is devastating. The average net profit margin in the Chinese solar industry fell to just 4.3 percent in 2024. Key companies along the supply chain suffered an average revenue decline of 28.8 percent and a profit collapse of 72.2 percent. Accounts receivable days increased dramatically from 69 days in 2023 to 180 days in 2024, a clear warning sign of liquidity problems throughout the entire value chain.

The market structure further reinforces this dynamic. At the forefront are large, vertically integrated manufacturers like Longi, Jinko Solar, and Trina Solar, which possess complete value chains from polysilicon to the finished module. This vertical integration provides significant cost advantages: estimates suggest costs are 30 percent lower compared to competitors who have to source components externally. Control over critical supplies not only reduces costs but also provides strategic flexibility in pricing and immunity to 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 far below profitable capacity utilization. Many of these players survive only because local governments support them due to their importance for regional employment and supply chains. These companies contribute substantially to overcapacity, as they lack both the scale for economies of scale and the technological expertise for product differentiation.

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The concentration in the battery cell supply chain is further intensifying competitive dynamics. CATL, the world's largest battery cell manufacturer for electric vehicles, controls approximately 38 percent of the global market. A similar concentration exists in polysilicon production, where the four largest Chinese manufacturers control about 70 percent of the capacity, giving vertically integrated manufacturers considerable bargaining power vis-à-vis pure 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, granting buyers up to 20,000 yuan when purchasing new solar systems in exchange for scrapping old ones. While this program, budgeted at the equivalent of US$11 billion, stimulates demand, it also intensifies price pressure, as manufacturers must offer additional discounts to benefit from the premium.

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

The current state of China's solar industry can be precisely assessed using a range 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 compared to the previous year and more than all other countries combined. The cumulative installed photovoltaic capacity reached 887 gigawatts at the end of 2024, a figure that would have seemed unimaginable just a decade ago. For the first time, the share of solar and wind power in China's electricity mix exceeded 50 percent in terms of new installations.

On the production side, volumes continued to rise despite the price slump. 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 production increase despite disastrous margins illustrates the irrationality of competition: manufacturers continue to produce because each unit contributes a marginal profit above variable costs, even if the company as a whole is incurring losses.

But behind these volume figures lie 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 predicted for the solar industry. Jinko Solar, the last major Chinese photovoltaic manufacturer listed on the US Nasdaq stock exchange, recorded a 32.63 percent drop in revenue in the first half of 2025 despite a more than 50 percent increase in sales volume. Gross profit margins shrank across the industry, while the net profit margin of 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 manifested in hard figures. China has production capacity for over 800 gigawatts of modules annually, while global demand is around 600 gigawatts. For polysilicon, the installed capacity is approximately 3.25 million tons annually, while actual demand is around 2 million tons. 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 piled up to critical levels. Polysilicon stockpiles reached 400,000 tons at the end of 2024, enough for several months of production. In the US, importers' inventories shrank to just 100 megawatts at one major supplier, an indicator of anticipated price increases and supply bottlenecks. This discrepancy between overflowing Chinese warehouses and depleted Western stockpiles illustrates the fragmentation of the global market.

The international dimension exacerbates the dilemma. China's solar exports reached new record highs in 2024, but this export offensive is increasingly encountering protectionist resistance. Since October 2024, the European Union has imposed additional countervailing duties of between 17.0 and 35.3 percent on top of the regular 10 percent import duty. 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 in August 2025 to stabilize domestic markets and counteract oversupply.

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

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

The responses to the structural overcapacity crisis follow fundamentally different patterns among various actors, patterns that manifest themselves along geopolitical and economic fault lines. China's approach combines administrative intervention with cautious market mechanisms, while Western actors oscillate between protectionism and pragmatic cooperation.

On the Chinese side, Beijing is addressing involution with a range of administrative measures. These range from stricter price controls and restrictions on new plants and the closure of inefficient facilities to curbing subsidy competition between provinces. In silicon production, a third of existing capacity is to be reduced. The Ministry of Industry and Information Technology has restricted the construction of new polysilicon plants and required companies to reduce their utilization. Leading manufacturers are therefore only producing at 55 to 70 percent of their capacity, which led to a 48 percent price increase for polysilicon in September 2025 alone.

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

These measures are beginning to have an effect. 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 are ending a period 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.

However, the sustainability of these interventions remains questionable. The extent of the production cuts has so far been insufficient to reduce the high stockpiles. Polysilicon prices in China are expected to barely rise above US$5 per kilogram until 2027, unless manufacturers drastically reduce supply. Furthermore, analysts warn that completely eliminating overcapacity could pave the way for a new shortage by 2028, similar to the upheaval of 2018–2020, which culminated in a price peak of US$39 per kilogram in 2022.

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

The reasoning follows a consistent pattern: Chinese manufacturers benefit from unfair state subsidies, leading 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 were skeptical about the thoroughness of Chinese subsidy notifications and feared that China's subsidies distorted global markets and promoted overcapacity.

China rejects these accusations, arguing that Western governments also heavily subsidize their industries. The US Inflation Reduction Act, for example, provides $369 billion for climate-friendly technologies. Furthermore, China maintains that its competitive advantage is primarily based on fierce competition in its largest domestic market, which drives innovation and efficient production. The Kiel Institute for the World Economy acknowledges that cost advantages are not solely attributable to subsidies, but also to consistent industrial policies, favorable 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 trade war could halve EU exports to the US in the long term, with an unequal distribution of the burden among member states. Furthermore, tariffs provoke retaliatory measures that can harm other industrial sectors.

The fate of European solar module manufacturers illustrates the limitations of protectionist measures. Meyer Burger, once a beacon of hope for 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 subsidies 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 shift and threats of import tariffs. Furthermore, the German governing 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 currently exist more in theory than in practice.

Solarwatt shut down its 300-megawatt module production in August 2024, while even Chinese manufacturers like Jinkosolar, Longi Green Technology, Tongwei, Trina Solar, and JA Solar all suffered 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 beginning to emerge. Some 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 are developed. In this scenario, China would pursue regionally adapted business models, have European factories produce for Europe, and involve local suppliers.

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Technological leaps in innovation as a differentiation strategy and a new dimension of competition

While price wars dominate the headlines, a fundamental technological paradigm shift is taking place in solar cell production, which could reshape the competitive landscape in the medium term. The photovoltaic industry is currently undergoing a rapid transformation from P-type to N-type solar cells, driven by 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, thereby increasing the 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 little capital investment. 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 films to form a heterostructure. Unlike TOPCon, HJT requires new production lines and represents a completely independent process. HJT cells have already achieved efficiencies of 26 to 27 percent in laboratory tests 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 conditions. With the maturation of technologies such as silver paste replacement, copper electroplating, and thinner wafers, HJT is expected to reduce costs and compete with TOPCon.

Market penetration is proceeding at a remarkable pace. China has decided to switch completely to N-type technology; there is virtually no further investment in P-type. The transition is happening faster than predicted, with major Tier 1 manufacturers primarily relying on TOPCon technology, while newcomers are supplementing their offerings with HJT and TOPCon. Large Chinese machinery manufacturers are offering turnkey factories with multi-gigawatt capacities that manufacturers without prior PV experience can easily order.

This technological transformation, however, carries risks. Many of the new capacities, primarily those of 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 are doing. Buyers are well advised to purchase Tier 1 products initially, even if they are somewhat more expensive.

The theoretical efficiency limit of monocrystalline silicon cells is 29.43 percent. Since TOPCon and HJT are already achieving 26 to 27 percent in the lab, further breakthroughs depend on tandem technologies, particularly perovskite-silicon tandems. Should solid-state batteries reach market maturity before 2030 and actually double energy densities while simultaneously reducing costs, this would erode established competitive advantages from production capacities in lithium-ion batteries. China is investing heavily in solid-state technology, but Japanese and European companies possess significant patent portfolios in this field.

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

Geopolitical upheavals 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 succinctly captures this dilemma: China is a leader in many green technologies, yet simultaneously 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. From China's perspective, one-sided dependencies have already arisen in critical sectors, such as photovoltaics.

This dependency has multiple facets. China controls over 70 percent of the world's production of rare earth elements and critical raw materials for batteries and solar cells. Over 70 percent of the world's mined cobalt comes from the Democratic Republic of Congo, yet 80 percent of its refining takes place in China. Similarly, 80 percent of lithium 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 capacities gives China considerable strategic leverage.

The geopolitical dimension is compounded by data privacy and security concerns. Under China's National Intelligence Law, Chinese companies can be compelled to cooperate with security agencies. Modern photovoltaic inverters and smart inverters collect extensive data on electricity consumption, grid frequencies, and load distribution. Millions of solar power systems supply German households, and the majority of their components originate in China. Experts warn that China could theoretically sabotage our power supply, potentially leading to a complete blackout. Some European companies are already advising their employees against discussing work-related topics 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, installed solar power capacity in Africa increased by 19 percent, with countries such as Egypt, Morocco, Tunisia, Niger, and Namibia announcing ambitious energy transition programs. African states imported approximately 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 face significant challenges in American and European markets due to imposed 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 provide decentralized solar power to approximately 50,000 African households by 2027.

Latin America follows a similar pattern. Since 2018, China has signed memoranda of understanding with 21 Latin American and Caribbean countries on joining the Belt and Road Initiative. China's merchandise exports have doubled over the past decade, primarily to Southeast Asia, Latin America, and the Middle East. Relations in the triangle of Gulf states, China, and Central Asia are developing amidst 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 web of relationships in Greater Asia is needed to ensure Europe's long-term relevance in this region. Germany and the EU risk becoming marginalized in energy, climate, and geopolitical matters, not only in Central Asia's renewable energy sector. As intra-Asian dynamics gain importance, a more consistent Central Asia strategy is needed, along with a constructive approach to relations with the Arab Gulf states.

From a German perspective, essential international cooperation on climate protection must not be used as leverage to advance interests in other areas. However, this principle proves difficult to implement given the reality that energy security and climate protection are increasingly intertwined with geopolitical power struggles.

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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 making different assumptions about technological, regulatory, and geopolitical developments. These scenarios should not be understood as forecasts, but rather as analytical constructs for identifying possible development paths.

The consolidation scenario continues and intensifies current trends. In China, a brutal market shakeout will take place 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, will 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 increase their market share. Global module production is concentrated in a few mega-sites in China, each with an annual capacity exceeding 50 gigawatts. Profitability recovers from 2027 onward, after weaker competitors have exited the market and price pressure eases. Module prices stabilize at US$0.08 to US$0.10 per watt, and polysilicon at US$6 to US$8 per kilogram. These prices allow the remaining manufacturers net profit margins of 8 to 12 percent, sufficient for sustainable reinvestment in research and development.

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

An alternative fragmentation scenario envisions increased protectionism and geopolitical bloc formation. The US and EU raise 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 fragments into largely separate blocs: China and allied states such as Russia, Iran, and parts of Central Asia; the West, including the US, EU, Japan, and South Korea; and a fiercely contested middle segment comprising Southeast Asia, Latin America, Africa, and the Middle East.

In this scenario, China can expand its dominance in domestic and emerging markets but remains marginalized in Western markets. Western governments are massively subsidizing the development of domestic production capacity, yet achieve only 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 5 to 10 years.

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

A third coexistence scenario is based on 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 developed.

In this scenario, Chinese manufacturers operate as truly global companies with regionally adapted business models. European plants produce for Europe, utilizing local suppliers, while Latin American plants produce for the Americas. China collaborates 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 providers.

Module prices are converging globally at $0.08 to $0.12 per watt, but product differentiation and service models allow for sufficient margins for all players. Annual global photovoltaic installations will exceed one terawatt by 2030, driven by cost-effective technology and consistent climate policies. This scenario maximizes global prosperity and the pace of decarbonization, but requires significant policy compromises on all sides.

Technological disruptions could fundamentally alter these scenarios. Should perovskite tandem cells reach commercial maturity before 2030 and achieve efficiencies exceeding 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 institutions also possess leading expertise. A technological breakthrough outside of China could reshape the competitive landscape.

The development of demand remains the critical uncertainty factor. The China Photovoltaic Industry Association forecasts new installations of between 215 and 255 gigawatts in China for 2025, a sharp decline compared to 2024. Globally, SolarPower Europe expects 655 gigawatts in 2025 in its medium scenario, and up to 930 gigawatts annually by 2029. If these forecasts prove accurate, demand could keep pace with production capacity and alleviate price pressures. However, if regulatory uncertainties or macroeconomic downturns dampen demand, the overcapacity crisis would intensify.

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Between market power and market destruction: The strategic lessons of 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 insufficient. 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. However, this success carries within it the seeds of its own destruction.

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

Three key insights emerge. First, the case of the Chinese solar industry demonstrates the limitations 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 in the medium term, it carries the risk of massive capital destruction.

Secondly, this development illustrates the challenges of vertical integration in industries with 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 turn into 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 involve strengthening strategic industries through innovation promotion and infrastructure investment, while simultaneously establishing international standards for subsidy discipline, labor rights, and data protection. Multilateral cooperation, rather than 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 innovation. Traditional manufacturers cannot compete with vertically integrated Chinese rivals in either production costs or development speed. Their chances of survival depend on whether they can differentiate themselves through superior software integration, service quality, technological excellence, or brand prestige—factors that are less scalable but more difficult to imitate.

For investors, the solar industry presents a paradoxical outlook. Market growth remains robust, with global installations projected to triple by 2030. At the same time, massive overcapacity suggests continued weak profitability, potentially for another three to five years. Investments should focus on the five to ten largest manufacturers, which have sufficient financial reserves to weather 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 issue 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 as at least equal to economic efficiency. China has demonstrated that, with sufficient resource mobilization, state-directed industrial policy can achieve global technological leadership in key industries. However, this strategy simultaneously generates overcapacity and destructive competition that threatens its own industry.

The Western response to this challenge will decisively shape the global economic order of 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 down in the gears of geopolitical rivalry.

Related to this:

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

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