Special Report: The Rise and Fall of China's Sun King

HONG KONG (Reuters) - In a 2010 speech before a packed ballroom of university students in Sydney, Shi Zhengrong, founder of Chinese solar-panel maker Suntech Power Holdings Co Ltd, listed the people who had been important in his rise to fame and riches.

China's Suntech Chief Executive Shi Zhengrong talks to a journalist at Suntech Power Holdings' headquarters in Wuxi, Jiangsu province, June 3, 2009. Picture taken June 3, 2009. REUTERS/Stringer

Two were of particular note: Yang Weize and Wang Rong, senior Communist Party officials from the eastern Chinese city of Wuxi.

A decade earlier, Shi had been research director of a solar energy firm, a spin-off from the University of New South Wales in Sydney, where he attended graduate school. The adopted son of a poor Chinese couple, Shi had become an Australian citizen living a comfortable life. “I wasn’t really thinking seriously of leaving,” he once told Fortune magazine.

The Wuxi government had other ideas. They wanted to lure Shi back to China with promises of government support and financing if he would help build a solar energy company based in their city.

Shi bit, and within a decade, he built Suntech into one of the world’s largest solar panel makers. “I have been very lucky,” Shi told the mostly Chinese students in Sydney in his 2010 speech. “My life has been very smooth.”


Today, the life of Shi, China’s “Sun King,” is anything but smooth. Last August, Suntech’s board forced Shi to step down as CEO, and in March stripped him of the executive chairman’s title - a move Shi described as “misconceived and unlawful”.

The company, which had piled up $2.2 billion in debt, defaulted on a $541 million convertible bond on March 15. Five days later, its main operating unit in China, Wuxi Suntech, filed for bankruptcy protection.

At its peak, Suntech, nearly 60 percent owned by Shi and his family trust, was valued on the New York Stock Exchange at $16 billion. Now it has a market cap of just around $106 million, a decline emblematic of the epic capital destruction across much of the solar energy industry globally. Suntech’s demise is also intimately linked to the Chinese government’s explicit determination to make solar and other renewable energy technologies a “strategic” industry.

Speaking to a solar energy conference on May 14 in Shanghai, Shi expressed contrition for Suntech’s decline: “Twelve years ago I returned to the country in order to realize my dream. I was proud of Suntech. But unfortunately I have let you guys down.”

For Shi, 50, the fall of Suntech gets even more complicated. He is now a defendant in U.S. District Court, Northern District of California in a case brought by a Suntech shareholder. It alleges that Shi set up a company in the tax haven of the British Virgin Islands that supplies polysilicon - a key material used to make solar panels - to Suntech.

Shi, the suit alleges, set up contracts between the two companies that benefited him personally at the expense of Suntech. Neither Shi nor his representatives would comment for this story. Suntech has also declined comment.

Reuters has learned that Suntech, according to a source with direct knowledge of the matter, has launched its own internal investigation into the matter.

Shi’s rise and fall speak to the volatile nature of the renewable-energy industry. For all the environmental promise it may hold, the industry has been to date “a $25 billion mechanism to extract subsidies from Western European and North American governments,” said Michael Parker, senior analyst at Sanford C. Bernstein & Co.

The industry has made significant gains in driving down the cost of solar energy over the last five years — gains Shi himself had confidently predicted would come. Still, it remains highly dependent on subsidies at a time when governments are under pressure to slash spending.

In China, the government’s decade-long promotion of the industry - at the national level from Beijing, and in scores of provinces and cities - has left production capacity at levels that far outstrip demand.


In March 2011, Shi welcomed party secretary Yang Weize to Suntech’s splashy new headquarters in Wuxi. “Suntech,” Shi said in a speech, “is a seed sown by the Communist Party of the Wuxi government.”

For shareholders in China’s solar sector, it’s a seed gone bad. Direct government support, of the sort Wuxi gave to Suntech, has been replicated across China. Chinese solar companies, such as LDK Solar and Yingli Green Energy, relied on subsidized financing over the last decade as they, too, built out capacity.

As the industry reels, the same local governments that helped build up the biggest companies are bailing them out.

China’s aggressive support for renewables had powerful ripple effects abroad. The fierce price competition from Chinese solar makers, plagued now by overcapacity, has led to disputes with Beijing’s largest trading partners.

The United States last year slapped anti-dumping duties on solar cells imported from China. The European Commission said on May 8 it would take similar action. Europe accounts for half of the global demand for solar panels. Both Washington and Brussels accuse the Chinese of selling panels below cost.

China’s aggressive backing of the industry added pressure on other countries, including the United States, to follow suit. That has occasionally backfired, as in the case of Solyndra, a Silicon Valley solar company that the U.S. backed with large loan guarantees. “We know the country that harnesses the power of clean, renewable energy will lead the 21st century,” President Barack Obama declared in 2009.

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Solyndra filed for bankruptcy protection in September 2011.

Whatever its future, the solar industry’s present in China is, in the words of one Suntech competitor, “murderously real”: overcapacity, vicious price wars, trade conflict, bond defaults, bankruptcies. And now, government bailouts of flailing companies - something that may yet rescue Suntech, if Wuxi gets its way.


Born on a small island in the Yangtze River, Shi excelled in school. He was in the first wave of young Chinese students to study abroad when China began sponsoring students for overseas study following the opening policy of late Chinese leader Deng Xiaoping in 1978.

Shi was selected to pursue graduate studies abroad after getting a degree in optical science from Changchun University of Science and Technology in 1983 and a master’s at the Shanghai Institute of Optics and Fine Mechanics in 1986.

He thought he was going to the United States. But the Shanghai Institute instead sent him to Australia - a country, he would later joke, “I couldn’t then pick out on a map” - to pursue a Ph.D. in electrical engineering.

At the University of New South Wales in Sydney, Shi balanced a low-key affability and an obvious desire to succeed. He and a few fellow graduate students went in on a used car together. “You could always tell when Zhengrong was the last person to drive it,” said classmate Michael Taouk, “because there’d be a self-help tape like the ‘Seven Habits of Highly Successful People’ left in the tape deck.”

He blew through the Ph.D. program in just two and half years, becoming an Australian citizen along the way - one of thousands of Chinese students to be granted passports in the wake of the Tiananmen crackdown in 1989.

The most important person Shi met at the University was Martin Green, then and now one of the world’s preeminent solar energy researchers. One afternoon in 1989, Shi knocked on Green’s door. “(I was) very lucky, he was in the office,” Shi recalled later.

In 1995, Green made Shi deputy research director of a university spin-off that was developing next generation solar technology. Shi was content working with one of the top brains in the field, until the officials from Wuxi came calling. Green declined to comment for this story.


Lured by the promise of government-backed capital to start a new company, Shi returned to China in 2000. He wrote a 200-page business plan in a week’s time. “I had never written a business plan, I was so impressed with myself,” he said in 2010. He got $6 million from companies controlled by the Wuxi government, giving them 75 per cent of the company. Shi kicked in $400,000 - mainly from other Chinese backers, according to ex-colleagues - and Suntech was born.

With governments around the world alarmed by the prospect of global warming, renewable energy was heating up - solar in particular. Demand from Europe soared on the back of luxuriant subsidies, and Suntech’s sales and profits began to rise.

Shi openly acknowledges the local party secretary in Wuxi, Yang Weize, always had his back. Yang helped Suntech secure loans from state-owned banks to expand production as demand increased, according to people familiar with the matter. At the 2010 speech in Sydney, Shi called Yang one of his “saviors”, noting he was likely to be “promoted very soon”. He was right. Three months later, Yang became the party secretary of Nanjing, the provincial capital of Jiangsu.

Yang and Wang were unavailable for comment.

From the government’s standpoint, Suntech provided jobs for the local population, tax revenue for the local government - key metrics by which the Party evaluates local officials in China -and raised billions of dollars from local banks.

In the mid-2000s, Shi got into a dispute over Suntech’s strategy with some of the board members who represented government-owned companies with founding stakes in Suntech. The city’s top local officials backed Shi. Just before Suntech went public in New York, he bought the stakes of the other founding shareholders.

From that moment on, Shi later told an interviewer, “I felt free.”

For a time everyone was happy. In December of 2005, Suntech became the first privately-owned company from China to list on the New York Stock Exchange, raising $400 million in equity. In 2006, Central China Television named Shi “entrepreneur of the year,” and flew in Professor Green to present his student with the award.

By 2009, Suntech had become the world’s largest solar-panel maker, with annual capacity of 1,000 megawatts (MW), enough to power one million U.S. homes. Various celebrities came to pay homage to Shi, including former U.S. vice president, Nobel Prize winner and climate-change evangelist Al Gore.

Some former colleagues believe the attention went to Shi’s head - that with the government’s backing he thought he could do no wrong. Samuel Yang was involved in Suntech’s start-up and is now chief executive officer of solar-panel maker Haeron Solar.

“Dr. Shi,” he told Reuters, “was flattered to destruction. He’s a scientist, not an entrepreneur.”


The problem for Suntech, and the entire solar industry, was that its growth model was being replicated all over China. Beijing had cited renewable energy as a key pillar in its five-year plan going back to 2006. Local government officials immediately went to work and helped create scores of new companies - 123 Chinese solar panel makers were in business by the end of 2010.

Capacity rocketed from virtually nothing a decade ago to 45 gigawatts now. Many operators - Suntech most prominently - managed on the assumption that the global gravy train of subsidies creating demand for panels would never end.

In late 2008 the U.S. financial crisis erupted. Europe’s own debt crisis soon followed. Yet from 2009 to 2012 Shi expanded Suntech’s capacity relentlessly: from 1,000 MW to 2,400 MW. He funded it with mostly short-term debt from local banks, totaling $1.57 billion by March 2012. The company’s equity at the same point was just $803 million.

Shi had the backing of the Wuxi government headed by Yang Weize. No banker, in other words, was going to say no to the “Sun King”.

Trouble followed. By the beginning of 2012, Suntech was struggling under mounting losses in a saturated industry. Shi found himself increasingly at odds with his own board, in part over financial transactions that board members feel still have not been satisfactorily explained, industry sources said.

One of the biggest was Suntech’s partnership with GSF Capital Pte Ltd, which Suntech described in a 2012 filing with the U.S. Securities and Exchange Commission as “an entity owned by Javier Romero and his wife”. Romero was a former Suntech agent in Spain. The partnership formed a joint venture called Global Solar Fund Sicar that mainly specialized in developing solar projects in Italy that use Suntech’s panels.

Suntech owned 79 percent of the joint venture, Shi had 11 percent and GSF Capital, held the remaining 10 percent, according to the SEC filing.

The venture was financed with a 554 million euro loan from China Development Bank, which often provides money for strategic projects. The bank demanded Suntech provide collateral for the loan. Suntech, however, did not want to book the liability on its already deteriorating balance sheet. So GSF Capital stepped in - or said it did, at least - by putting up 560 million euros in German government bonds as collateral. Suntech, in turn, guaranteed the loan from China Development Bank.

Last August, Suntech announced that GSF had defrauded it by failing to post the bonds, which meant Suntech now had to make good on the loan guarantee, Suntech said in a filing with the SEC. Its stock plunged more than 37 percent in the days following the announcement, and Shi stepped down as chief executive.

In March of this year, Suntech’s board forced Shi out as chairman two weeks before its Wuxi unit filed for bankruptcy protection. Suntech also settled the dispute with GSF Capital in March. As part of the settlement, GSF Capital sold its 10 percent stake in GSF Sicar to Suntech and Shi. A source close to Suntech says Suntech is seeking to sell its stake in the fund in order to help pay down debt.

U.S. shareholders in Suntech, upset over what they allege were misleading disclosures about the joint venture with GSF, are pursuing a class action suit in the U.S. District Court, Northern District of California against Shi and several Suntech board members, according to a copy of the suit seen by Reuters,

Shi also faces an internal investigation at Suntech that began after he stepped down as executive chairman, according to a source with direct knowledge of the matter. The probe focuses on transactions between Suntech and one of its polysilcon suppliers, Asia Silicon Co. Ltd., of which Shi owns more than 90 percent. Polysilicon is a feedstock for solar cell and panel manufacturing.

That company is also the focal point of a lawsuit filed last December in the U.S. District Court, Northern District of California by a Suntech shareholder, Kent Ji. The suit, against Shi and four other current or former board members, alleges Suntech has been purchasing polysilicon at terms advantageous to Asia Silicon, which Shi co-founded in 2006.

In its regulatory filings, Suntech did not disclose the owners of the company, describing Asia Silicon as a private, independently owned company.

Ji’s suit alleges that Suntech had given Asia Silicon interest-free loans and advance payments that benefited Shi at the expense of Suntech’s minority shareholders. The suit says Suntech awarded a $1.5 billion, 16-year “take or pay” contract to Asia Silicon in January 2007, even though the company did not deliver any polysilicon to Suntech until the first half of 2009.

Ji’s attorney declined to comment. Attorneys for Shi and Suntech did not respond to inquiries.

Chinese solar-industry executives told Reuters it was common for solar module manufacturers to lock in long-term “take-or-pay” contracts in those years. Under these agreements, the buyer either takes delivery of the product or pays a certain amount not to. It seemed like a good bet: Polysilicon prices were surging on supply shortages and soaring European demand for Chinese solar modules at the time.


Whether Shi has any future with the company he created is unclear. Whether Suntech can survive China’s solar eclipse is equally uncertain. The Wuxi government that Shi was so tightly linked to is trying to maintain Suntech’s production capacity - and the thousands of local jobs it accounts for. A March 21 Suntech statement said “the primary goal” of the court-appointed administrators of the company “is to restructure Wuxi Suntech’s debt obligations while continuing production and operations.”

The central government, acknowledging the industry is overbuilt, wants capacity to be cut. Suntech’s size may enable it to survive the shakeout if it can work out debt relief from its creditors. Others in the industry believe its assets would best be sold off to companies with healthier balance sheets.

In 2010, after his speech in Sydney, a student asked Shi if he was worried about the increasing competition in China. “Any new industry will attract a lot of speculators,” he said. “When the dust settles, some of the players will be washed away, and sustainable companies will emerge.”

Additional reporting by David Lin in SHANGHAI, and Jane Wardell in SYDNEY; Editing by Bill Tarrant