Stock Story Video: Shining A Spotlight on Solar in China

Technological disruptions continue to transform global society in many ways, and emerging markets have embraced them. In certain industries, these technological innovations are driving economic growth and presenting compelling new opportunities for investors. Franklin Templeton Emerging Markets Equity Institutional Portfolio Manager Nicole Vettise shines a spotlight on one of these powerful new opportunities right above our heads—solar.

When it comes to the powerful long-term structural case for investing in Emerging Markets, we identify realities propelling these markets forwards and unleashing compelling investment opportunities.

The new reality is that EM companies have been leapfrogging established business models through innovation. And within this new reality, it is disruption in certain industries, the transformation of agile companies and the opportunity around digitization that is capturing our attention.

Today, I would like to share our thoughts around one opportunity we identify within disruption – solar.

The sun is of course a remarkable source of energy, providing enough energy every 90 minutes to meet all of humanity’s needs for an entire year.

But cost and conversion inefficiencies (the amount of power generated from a given amount of sunlight) have led to only a fraction of sunlight being effectively harnessed and distributed – that is until now.

Advancements in technology and innovation are allowing more light to be converted to energy.

But one aspect that has deterred investors in solar in the past is policy risk. This risk is falling however, and the price of solar power is increasingly determined by market forces. Furthermore, thanks to innovation, solar is now the cheapest source of energy in many countries, so there should be even less reason going forward to use environmentally harmful fossil fuels such as coal.

Indeed, the environment and concerns about global warming are top of global leaders’ agendas.

In China, President Xi has targeted for the country to be carbon-neutral by 2060, and for 25% of the energy mix to be from renewables by 2030 - this is testament to China’s long-term commitment on going green, as well as its ambitions to foster a global champion industry.

With the International Energy Agency (IEA) referring to solar as the ‘king of electricity’ and expecting it to account for 80% of the growth in global electricity generation in the next decade¹, the future does appear to look bright for solar.

China is a world leader in solar production; in 2019, 71% of solar modules were produced in China vs. 3% in the United States.²

For investors, looking to tap into the opportunities presented by this disruptive secular trend, China has the two largest players in what is a highly concentrated market.

One is a company called Flat Glass – China’s second largest global solar glass producer with a 21% global market share and 30% of its sales represented by overseas market.³ The company recently expanded capacity further, starting a new operation in Vietnam. This new location offers further advantages such as relatively cheaper wages, abundant raw materials (including silica sand), cheaper electricity and tax benefits.

So, when it comes to EM companies leapfrogging established business models through innovation, China offers a rich investment hunting ground in identifying global leaders disrupting the market.