The European Commission began an investigation last week into whether Chinese manufacturers have been exporting solar panels to the EU at prices that are below their production costs. The investigation follows a complaint filed in July by a consortium of 25 European companies from countries including Italy, Germany and Spain, alleging anti-competitive practices by Chinese manufacturers. The investigation is expected to take 15 months.
Suntech Power (NYSE:STP), China’s largest producer of solar panels, is likely to be impacted the most by the investigation. Around 45% of Suntech’s revenues in 2011 came from Europe. 
We currently have a price estimate of $1.17 for Suntech Power which represents a 39% upside from its market price.
Europe, The Principal Market for Chinese Solar Exports
China is the world’s largest producer of solar panels, accounting for almost two thirds of overall global shipments. Europe on the other hand, has been the primary driver of demand in the solar industry. In 2011, Europe imported about $26.5 Billion worth of Chinese solar products or 80% of China’s solar exports .
Chinese manufacturers have invested heavily in building their manufacturing capacity, supported by bank borrowing and lines of credit provided by the Chinese government. They compete primarily on price, acting as panel assemblers, unlike their European counterparts who position themselves based on technology and product differentiation.
Implications Of Tariffs On The Chinese Solar Industry
Given the global supply glut of PV modules, depressed prices and middling manufacturing capacity utilization, the European investigation couldn’t have come at a worse time for Chinese manufacturers.
The EU’s move comes on the heels of a similar investigation in the United States. In May, the US Department of Commerce, in a preliminary ruling, imposed an anti dumping tariff of 31% to 250% on Chinese solar products.
If the EU finds manufacturers guilty of predatory pricing practices, Chinese solar products would attract significant tariffs. We believe that an imposition of tariffs will have a severe impact on Chinese manufacturer’s profit margins and capacity of modules sold, further impacting their already precarious cash flow situation. Moreover, given the high levels of debt that most Chinese Solar manufacturers carry, their ability to service debt will be affected. In this scenario, we could see bankruptcies of smaller companies providing scope for consolidation within the Chinese Solar energy space.Notes: