Impact of Cap-and-Trade Bill on U.S. Manufacturing Jobs

01 July of 2010 by

resized image outsourcing01 Impact of Cap and Trade Bill on U.S. Manufacturing JobsU.S. cap-and-trade legislation, formally known as the American Power Act, will primarily increase Asian manufacturingjobs, unless the legislation specifies a sizable mandated percentage of domestic clean energy product manufacturing, or other bills are passed fostering a comprehensive domestic energy supply chain. Congress will ultimately define the country’spriorities with respect to energy and the economy. There may beregulations on greenhouse gas emissions to lessen the impact of climate change, with or without the full potential for maximumU.S. economic growth and job creation.

As the American Power Act has been reoriented to be more favorable tofossil fuels and nuclear energy over the last several months, its jobcreation numbers have been revised downwards, as a result. Acomprehensive strategy for building a clean energy economy including loan programs and business incentives for domestic manufacturing is necessary.Otherwise, the U.S. may simply have an increased "clean" energyportfolio, while Asian countries "clean" America’s clock, even more than now,with respect to high-paying domestic manufacturing jobs generated fromthe increased demand for products such as: solar panels, smart gridelements and wind turbines.

The U.S. is losing domestic manufacturing from even its flagship solarcompanies, since the country has not developed a business climateconducive to fully support the green energy revolution. Crystallinesilicon solar cell, module, and system integrator SunPower recentlyannounced that it formed a joint venture with Taiwan-based LCD-maker AUOptoelectronics (AUO) to fund and operate SunPower’s 1.4 GW fab inMalaysia, which is currently under construction. AUO will contributehalf of the capital costs; thereby reducing SunPower’s cash holding inthe plant. As a result, the company will generate long-term operatingcost-savings in this outsourcing deal, due to AUO’s lean manufacturing cost structure.

SunPower has been directly affected by major declines in solar panelprices since late 2008 and has been seeking methods for reducing itshigh cost basis, partially associated with high-price long-termcontracts for its incoming silicon raw materials that are significantly more expensive thancurrent market levels. Therefore, since SunPower is dealing with highlymature 1st generation solar technology, it is more conducive tooutsource production to lower cost environments than less common, moreadvanced thin-film solar cell2nd highest of all industrialized countries, in addition tothe added state component, which is seldomly discussed in these economicmatters. Arizona passed a bill last year to offer incentives for solar-related manufacturing including tax breaks, but only approximately three companies have taken advantage of the policy, as other states have passed legislation to match theincentives. Also, the legislature, based in Phoenix, Arizona, failed toapprove an economic stimulus package that would have offered similarincentives to a wide range of local high-tech companies.
designs. In addition, besides the lower cost of labor in Taiwan, the corporate tax rate is much lower than the U.S.,which is the
It is expected that AUO will become a powerhouse in the solarmanufacturing arena and absorb contracts from other major playersbesides SunPower. The company currently maintains thin-film siliconproduction capacity and crystalline silicon module inventory and hasshown signs of developing more in-house capability by taking a majoritystake in M. Setek in late 2009 in order to become more fully verticallyintegrated including raw materials. It is expected AUO will increaseownership of SunPower’s Fab in Taiwan for its own internal modulemanufacturing needs to increase market share in Asia and Europe. This company has the potential to ramp-up andbecome a serious player in the solar industry and possibly become thenext Taiwanese Semiconductor Manufacturing Corporation (TSMC), which is the largest microchip foundry in the world, where numerousAmerican-based semiconductor companies obtain their inventory ofproducts.

Many other U.S.-based solar panel supply chain manufacturers havealready embraced an outsourcing strategy, through either full ownershipor via contract agreements, to southeast Asia including: GeneralElectric, Evergreen, First Solar (who has a corporate office in Tempe, AZ) and Applied Materials, etc. Even BP, who is well-known as the energy(oil) company responsible for the Gulf oil spill catastrophe, decidedlast year to outsource its solar cell production, which is a smallpercentage of its overall energy portfolio, to JA Solar, headquartered in China. Thus,fabless business models are an increasing trend across the solarindustry.

Many solar cell companies are redefining themselves as systemintegrators with a well-known brand and local footprint, generatingprofits by supplying technology innovations, designing low-cost systems, and having sales and support staff on the ground in key customerlocations such as the U.S, while the actual device manufacturing is done in Southeast Asia. Congress will need to be mindful of this criticalissue when evaluating greenhouse gas emissions regulations legislationthat will essentially force the market in the direction of renewableenergy, since it will have a direct impact on jobs that are desperatelyneeded, as the nation’s unemployment rate straddles the double-digitlevel.

A follow-up article will be published soon on this topic focusing moreon the escalation of solar production in China and Taiwan, which will only be elevated at a disproportionate rate tothe U.S. in the passage of a cap-and-trade bill, based on currentstandards.

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