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Despite Troubles, China's LDK Solar to Keep Humming
November 6, 2012, 11:47 a.m. ET

By WAYNE MA

BEIJING—It's no surprise that U.S. and European solar-equipment companies are struggling, undermined, they say, by competition from China. But China's LDK Solar Co. LDK +9.71% has had many of the same problems: heavy debt, deepening losses and a sinking stock.

The difference: LDK's factories are widely expected to keep on humming.

Despite debt of more than $2 billion and a second-quarter loss of about $254 million, LDK has won help from optimistic investors, sympathetic lenders and local-government officials looking to support a major employer. On Monday the company appointed five new directors, most of whom have ties to local government or companies.

Such support could keep LDK's operations afloat amid a global shakeout that could move a greater share of the world's capacity for making solar panels to China, industry watchers said.

"LDK Solar could serve as a bellwether for future cases," Shyam Mehta, an analyst at clean-energy market-research firm GTM Research, wrote in a research note. LDK could be acquired by another company that could bolster its operations, he said.

The support also is central to a global fight over solar subsidies between Beijing and Washington and Brussels. Europe accuses China of dumping at unfairly low prices some of the $21.48 billion in solar panels it exported to the European Union last year, in possibly the bloc's largest trade dispute ever. China accuses the U.S. and the EU of offering their own unfair subsidies and on Monday filed a complaint with the World Trade Organization citing subsidies in Germany and Italy.

LDK offers a look at how local officials and others in China foster excess capacity in industries ranging from solar panels to cars to steel—and how that overcapacity can ripple across borders. The Chinese government has acknowledged that overcapacity in an industry hurts the country's broader economy, which is growing at its slowest rate since the global financial crisis.

Unless Chinese solar companies are allowed to fail and reduce capacity, the solar-panel market will remain oversupplied at least into 2014, Mr. Mehta wrote. "China's support of even uncompetitive companies is badly damaging [Chinese] producers that would otherwise be well-positioned for success."

That support helps companies that already enjoy considerably lower costs than they would in other countries. Of 49 major solar companies world-wide that GTM studied, the firm forecast that only 18 were likely to survive to next year—and 12 of those would be in China.

Germany-based Q-Cells SE, QCE.FF 0.00% once the world's largest solar-cell maker by capacity, filed for bankruptcy protection in April. Abound Solar, a U.S. solar-panel maker, filed for bankruptcy protection in June, and German conglomerate Siemens AG SIE.XE +0.93% last month said it planned to pull out of the solar business.

LDK Solar produces solar wafers—a key component in solar panels—and is based in the southeastern city of Xinyu, which has a population of 1.2 million. LDK is one of the city's largest employers, with a workforce of more than 20,000. On Monday it promoted Chief Operating Officer Xingxue Tong to chief executive, succeeding Xiaofeng Peng, who will remain chairman. The company said the move was intended to separate the chairman and CEO roles. LDK didn't respond to requests for comment for this article.

LDK once was a reliable growth engine for Xinyu. In 2010 the company recorded a net profit of $297 million, added 9,000 employees and planned to boost production by 40% to 4.2 gigawatts. LDK contributed 1.3 billion yuan ($208.2 million) a year in tax revenue for Xinyu last year, according to the state-run Xinhua news agency. Local officials referred questions about their relationship with LDK to the Xinhua article.

But LDK's fortunes changed amid an industry price slump last year. The manufacturer swung to a $609 million loss, slowed its expansion plans and created just 2,000 jobs. The company's American depositary shares have dropped 79% this year, closing Monday at 87 cents a share.

LDK has been able to call on a wealth of resources to keep it running.

Mr. Peng said in a September conference call that its lenders were "renewing current loans," a common practice among lenders in China to keep loans from coming due. The Xinyu government in July stepped in to act as a guarantor for a 500 million yuan loan that LDK owed to state-controlled Huarong International Trust and Investment Corp., Xinhua reported. And LDK said that to raise cash, it sold several real-estate properties and land-use rights to the local government for an undisclosed sum. Last month, LDK sold three small solar plants to one of its component suppliers, Henan Xindaxin Materials Co., for 140 million yuan to cover bad debts.

And investment fund Heng Rui Xin Energy Co., which is backed by the Xinyu government, bought 19.9% of LDK for $22.9 million, a 21% premium over its share price. LDK's Mr. Tong told Xinhua said the Heng Rui investment would help LDK deal with "tight cash flow."

On Tuesday LDK said it agreed to terminate an agreement to supply silicon wafers to Japan's Sumitomo Corp., 8053.TO -1.31% and would receive a $33.4 million settlement. LDK didn't explain the move.

Meanwhile, other local businesses have taken an interest in LDK. Sinoma International Engineering Co., 600970.SH -0.57% a state-controlled machinery company, agreed to work with LDK to "explore the solar business," Xinhua said, without elaborating. Calls to Huarong and Sinoma weren't answered.

Analysts said LDK could fall into the arms of a larger, healthier company.

"LDK may be a much different company or part of another company in a matter of a few months," said Aaron Chew, a clean-energy analyst at Maxim Group.