July 25, 2017
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How Wall Street Once Killed the U.S. Solar Industry

… and how it could happen again.

By Robinson Meyer


Why is the American solar-power industry so small?

It’s less obvious than it may seem. The global industry is a $65-billion business, and the United States has been involved in it from the beginning. NASA first improved and perfected panels for early satellite and Apollo missions. American firms have been manufacturing and selling solar panels for 40 years.

Yet North American firms produce only about 3 percent of the world’s solar panels. China and Taiwan, meanwhile, make more than 60 percent of them.

Labor in East Asia is often cheaper than it is in the United States, but that’s not the only factor. Consider the global semiconductor industry. Both computer chips and solar panels emerged from the Cold War research-and-development boom. Both were commercialized before 1980, as American-invented products sold by American-owned firms. And both markets were essentially controlled by the United States before the rise of Asian firms in the mid-1980s and ’90s.

But chips, which first went to market a decade earlier than solar panels, did not suffer the same catastrophe that solar panels did. Today, the United States still leads the computer-chip industry, holding more than half of global market share for 20 years. Why hasn’t solar followed suit?

A new paper in Science Advances argues that enormous changes transformed the structure of the U.S. economy in the 1970s and 1980s, making it impossible for American firms to develop new industries and markets. They specifically gutted the solar industry, depriving the technology of funding at a critical moment in its development.

Max Jerneck, the paper’s author and a researcher at the Stockholm School of Economics, says that these dynamics still exist. Unless they are also addressed, they will likely limit the effectiveness of a carbon tax or cap-and-trade program, he says.

I spoke to Jerneck about his paper and the larger fate of the industry. Our conversation has been edited for clarity and length.


Robinson Meyer: The first question that we need to get to: What is financialization? Why is it important to this period?

Max Jerneck: It’s a shift in focus from producing real, material wealth to focusing on the value of paper assets. In this case, instead of focusing on investing in long-term technological development, the main focus is on the stock price. Firms were more interested in seeing financial assets going up than actually creating new wealth for the long term.

Meyer:  When did financialization begin?

Jerneck: In this story, it started within the corporation. In the late ’60s, corporations became financialized. They became managed by financial managers, who thought that they could run any kind of business just by looking at the numbers—and not by having engineers calling the shots who actually knew a lot about the technology. They worked by buying up other businesses, just as you would buy stocks in the portfolio. They would buy them up; they would hold them for a while to see if they took off; and, if not, they would just sell them again.

So financialization started within the corporations and, later on, the corporations became controlled from the outside, by Wall Street.

Meyer: So that’s what’s happening across American business at this moment. What was the solar industry like? You describe that there were two groups of people, each with a different philosophy.

Jerneck: First, in the 1960s, the space program developed photovoltaic solar panels. And then in the ’60s and early ’70s, there were a handful of entrepreneurs—most of whom had been working in the early space program—and they had this vision of bringing solar power down to Earth and creating markets for this technology. Their view was always that solar was too immature to compete with conventional power. The first markets they would focus on were off-grid markets—faraway radio stations, railroad crossings, African villages that weren’t on the grid. They wanted to build on those uses slowly, and slowly approach the bigger and bigger markets closer to the grid.

The energy-policy establishment, meanwhile, wanted to develop solar in the image of nuclear. They wanted to bring it up to scale really fast, building these huge power plants as soon as possible. Large corporations also wanted to scale [solar] up really fast, and invest massive amounts in advanced R&D and mass-production scale. For them, this technology had to pay off in a really huge ways. It had to become a mainstream technology for them to make these bets. If they were just selling solar panels to African villages, or building smaller consumer electronics, they weren’t really interested.

Meyer: It sounds like there’s a vision there, too, that corporations always want to bring more people in their system. If you’re thinking like a corporation, the problem isn’t that there are people off the grid, the problem is that the grid isn’t big enough yet.

Jerneck: Yes, that’s right. And at the time, these large corporations dominated the energy-policy establishment, because they were financial conglomerates. This made it hard for these small entrepreneurs to compete, because these small conglomerates were in competition with them and the large conglomerates received most of the subsidies. [So the larger conglomerates bought up many of the smaller solar firms.] By the end of the ’70s, most of the solar industry in the U.S. was controlled by these conglomerates.

Meyer: Your case study seems to find that venture capital was not interested in touching the independent companies at all. And there’s some economic theory there that venture capital just is not going to be able to bring vastly new innovations to market, because it can’t provide the same shelter that bigger corporations can.

Jerneck: Venture capital—usually they have a time frame of three-to-five years. This technology would take a lot longer than that to develop. Venture capital usually comes into a market when it’s on the brink of becoming mainstream. There have been time periods when venture capital has invested in solar—just before the financial crisis, in the mid 2000s, they invested a lot of money, for example. But then they lost a lot of money when the crisis came. Venture capital is not really a suitable model for this type of technology. There’s a new report from MIT about this very fact, that venture capital doesn’t work for clean tech.

And the experience of all these solar entrepreneurs from the ’70s was that venture capital wasn’t interested. I should also add that these large conglomerates, in the ’70s, also poured a lot of money into it. It wasn’t a purely bad thing that they invested in this technology; they invested huge sums of money.

The problem then came in the ’80s, when they divested again from these technologies.

Meyer: How comparable was the situation to early microchip manufacturing and development?

Jerneck: There are quite a few differences. In the ’50s and ’60s—when you had the Minuteman missile program and the space program—first of all, there was a lot more money involved. The government invested a lot more money.

In the 1970s, the government did try to have a program modeled on what they did in the ’50s and ’60s, for semiconductors. But first of all, it didn’t have a lot of funding. Second, it was not in the hands of the Department of Defense, which is a really powerful bureaucracy. The Department of Energy—it was just created in 1977, Republicans immediately wanted to dismantle it altogether—it was always contested from the start.

That program also had a different goal. The goal of the microchip program was to increase quality, no matter the price. But the goal of the federal solar program was to lower cost. They didn’t have a quality goal; they had a cost goal. That means that if you could bring down costs, you could also bring down profits for the solar firms—and that’s part of the reason it didn’t work. Then, when Reagan came in, he dismantled that program.

In the microchip industry, you also had a lot of segmentation between different firms of different sizes. You had AT&T at the top. You had several firms in the middle. And then you had these small upstarts at the bottom. And they weren’t in direct competition with each other—they had different roles. There was a vigorous antitrust policy keeping the small firms from being in competition with the large firms. So you had a different ecosystem in the microchip industry.

Meyer: Let’s return to 1980. As we move from Carter to Reagan, a lot of these photovoltaic companies are owned by large conglomerates. What happens next?

Jerneck: Around 1982, the U.S. changed the law [around corporate transactions]. So it allows junk bonds, and hostile takeovers, and share buybacks. The United States had deregulated the financial system all through the ’60s and ’70s, but it really took off in the ’80s. After that, you have this huge corporate-takeover wave. You have corporate raiders attacking other firms, and this affected the solar industry greatly.

So General Electric had a solar division, and it had plans to expand. But when [the new CEO] Jack Welch came in, he said that GE was only going to be in the businesses where it was number one or number two. He said: We’re going to get rid of everything else, and then we’re going to attack other companies and try to take them over.

So General Electric shut down their solar division, and then they attacked RCA—which also had a solar division at this time. RCA was one of the most innovative companies in terms of developing technology. They developed the thin-film solar cell, but they couldn’t commercialize it. The Japanese wind up commercializing it instead.

Meanwhile, you have a lot of corporate raiders attacking the oil companies—T. Boone Pickens, Carl Icahn. All of these oil companies had to shed their unrelated businesses, and they had to spend a lot of money buying back their own shares to increase share price to defend themselves from corporate raiders.

Meyer: You list six or seven oil companies who had to offload solar companies at this time, including Exxon and BP. Did those corporate changes also lead to a change in managing philosophy?

Jerneck: The main difference is, in the U.S., up until 1970, you had the managerial era, when managers were in control of corporations. There was no pressure from shareholders for them to generate short-term returns. Managers could invest in what they wanted for the long-term. After the managerial era, you kind of have this financial era, or the maximization-of-shareholder-value era. The broad story is the end of the managerial era was bad for the solar-energy industry.

Meyer: How did you wind up putting together this business history of early renewables?

Jerneck: My dissertation was a historical comparative study of the U.S. and Japan’s solar industries. And I wanted to explain why the Japanese history eventually got a lot bigger than the American, even though the U.S. was where the technology originated and the U.S. was the leader in the early stage.

I originally started looking at this issue because I thought that government policy was the important factor. So I wanted to study the industrial-policy differences between the US and Japan. Because I knew that Japan, in this era, was very famous for having a good industrial policy. They could pick winners, and they could strategically upgrade industries. I thought the solar industry was an example of that.

But I found that—though that was a part of it—what was more important was the difference between how the Japanese corporations and the American corporations were organized and who controlled the corporations. In Japan, they were kind of controlled by the big banks and by managers. They weren’t controlled by financial markets. And in the 1980s, when the U.S. allowed hostile takeovers and leveraged buyouts, and all these kind of new debt instruments—those things didn’t happen in Japan. So in Japan, even though they financialized some way with the big real-estate bubble, it didn’t affect Japanese business in the same way it affected American business. The big difference was in the organization of private businesses, not so much the states.

Meyer: The shift we’re talking about—to deregulation, to corporate raiding, to elevating markets out of the political sphere—that’s a shift that happens in the U.S. and across Europe as well. Why did Japan evade that round of financialization?

Jerneck: What happened in World War II, in Japan, was that the old financial conglomerates that they had—the zaibatsu—they were dismantled.

What came instead was a new generation of firms that were not dominated by financial interests. They were dominated by engineers, and the idea was they would build technology to catch up to the West. The Japanese structures that were in place in the 1980s was a legacy of the restructuring after the war. The Japanese model worked very well, or so they thought, until the 1990s. What happened in Japan was that they had a huge real-estate bubble, which caused stagnation and a lot of problems a decade later. Japan remained closed off to financialization in the corporate sphere until the late ’90s—their big bubble burst in the early ’90s, and they lost confidence in the Japanese model, and they started to bring a lot of Western thinking into their corporate governance.

Japan has changed a lot, of course, but they managed to shield their corporations from financialization in the 1970s and ’80s.

Meyer: Is that still true today—is the Japanese solar industry still bigger?

Jerneck: No. The Japanese solar industry kind of plateaued around 2005, which is where I ended my study. Since then, of course, the Chinese have taken over. And I’m thinking that possibly the relative decline of the Japanese solar industry was a result of the Chinese moving in and taking their market share—but I’m not sure about that. Since 2005, China is the biggest player by far.

Meyer: How do we experience the effects of this today? Do you think in a different scenario, where conglomerates stick around in the ’80s, there’s a more vigorous photovoltaic industry in the U.S. now?

Jerneck: Well, what happened in the 1980s—the corporate raiding and takeover raid—that was a reaction to what happened in the ’70s. And what happened in the ’70s was that they grew too large, these firms. Conglomerates had all these businesses that they didn’t know about; they just managed them by spreadsheet. So I would go back further, to the ’60s, if the move to conglomeration didn’t occur.

If the conglomerates had survived in the ’80s, maybe they could have built a more competitive solar industry in the U.S. if you hadn’t deregulated Wall Street. But that was a reaction, too. And it was fraught in the ’70s as well. It’s hard to build a counterfactual.

I think if you had had a different industrial policy in the U.S.—one that looked more like the microchip policy in the ’50s and ’60s—where you kind of, shielded small firms from competition and you didn’t give direct subsidies to these large firms. That you helped entrepreneurs, who knew what they were doing and knew the technology. Then I think you could have had a different industry: If you let these smaller businesses decide the policy, so you don’t have huge subsidies for mass production at such an early stage; and if you kind of built up these small off-grid markets more slowly.

Meyer: You say that the sum of this history convinces you that carbon pricing won’t work by itself. Why is that?

Jerneck: In order to make solar energy a mainstream technology, there’s still a lot more innovation that needs to happen. Solar is still intermittent; it doesn’t work when the sun doesn’t shine, so you have to find ways of storing it and transmitting it. If you just keep feeding solar into the grid now, it won’t work—the grid is not designed for feeding in more solar.

We need a lot more innovation. If it’s the case that corporations aren’t designed to innovate—if they’re just designed to pump up their own value with share buyback, and things like that—then a carbon price won’t induce innovation. In order to innovate, you really have to invest in the long-term in the future—which is something that, by definition, can’t be known. Innovation is uncertain; there’s no way to know what to invest in. For corporations, if there’s an easier way to make money by buying back their own shares or speculating, there’s no reason for them to take these very risky bets on new technologies.

So, in order for carbon pricing to work, there still has to be some kind of focus on building innovative enterprises and making sure that innovative enterprises have the means of investing for the longterm.

Because, as of now, too, venture capital has lost so much money on solar that it’s not a viable model. Solar’s too long-term; it’s in direct competition with fossil fuels; and it’s very capital-intensive. There has to be some kind of corporate restructuring for innovation to occur. There has to be some kind of policy that makes a break with the way it is now, that large corporations are mainly focused on their quarterly earnings and stock price.


- Originally appeared at theatlantic.com