Bejing Should Oust Shi to Save Suntech

Doug Young

New developments have come rapidly over the past week at Suntech (NYSE: STP), leaving the former solar superstar on the brink of collapse as its founder Shi Zhengrong blocks a potential government rescue. Shi’s exit is believed to be a main condition for the government bailout, and his refusal to leave could well result in the failure of a company that is otherwise an industry leader with strong potential. To prevent such a collapse, the government should take the unusual step of forcing Shi to go so that Suntech can begin a desperately needed reorganization. Such interference should be used only rarely in a true market economy, but does make sense when it means saving important companies in crisis.

Suntech’s current woes are grounded in a 2-year-old crisis for solar panel makers, which are suffering from massive overcapacity due to a huge build-up over the last decade. Most companies are now deeply in the red, and their shares have also plummeted. Suntech’s shares have come under particular pressure and now trade at $0.70, a fraction of their nearly $50 price back in 2008.

Dr. Shi Zhengrong Suntech Founder, Chairman and CSO. Photo credit: Suntech

But Suntech’s woes go beyond the industry’s general malaise. The company came under fire last year when it disclosed a relationship that allowed it to book millions of dollars in revenue by selling panels to a company that it controlled. That relationship sparked a confidence crisis as investors feared Suntech may have engaged in other dubious business practices.

The crisis came to a head last week when more than $500 million worth of Suntech debt matured even though the company lacked cash to repay the money. Some 60 percent of Suntech’s bondholders agreed to a two-month extension of the deadline, but at least one said it would sue, further compounding Suntech’s woes. (English article) Meanwhile, media reported that Suntech could declare bankruptcy by March 20. While all this was happening, Shi was removed from his posts as CEO and chairman of the company. But he retains a place on Suntech’s board and continues to control the company through his 60 percent ownership of its stock.

Government entities in Beijing and Suntech’s hometown of Wuxi are reportedly ready to provide desperately needed funds to ensure the company’s survival, as part of a broader State-led rescue that would see the industry consolidated around about a dozen its the biggest players. Suntech would almost certainly be among those consolidators if it can reorganize without Shi’s interference.

But Shi has shown he has no intention of leaving, even if that means driving Suntech to ruin. To prevent that, Beijing and Wuxi should force Shi from the company, using their clout with government agencies and Suntech’s State-owned lenders to apply pressure through actions like withholding funds and revoking business licenses.

This kind of interference is rare in the West, but has occurred in times like the global financial crisis when governments stepped in to save companies like General Motors (NYSE: GM) and RBS (London: RBS). Without such intervention, Suntech’s downward spiral could easily continue to the point where the company fails, resulting in the loss of a major player with the potential to reorganize and regain its place as a global leader.

Bottom line: The government should move more aggressively to push Shi Zhengrong out of Suntech, or risk seeing the company fail.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.