For Chinese Tycoon, Solar Power Fuels Overnight Wealth

http://www.wsj.com/articles/SB11605879510428956

For Chinese Tycoon, Solar Power Fuels Overnight Wealth
Shi Zhengrong Studied Abroad, Then Founded Suntech In Partnership With State

By ANDREW BATSON
Updated Oct. 12, 2006 12:01 a.m. ET

WUXI, China — When he arrived in Australia 18 years ago as a physics student, Shi Zhengrong scraped by on a meager stipend from the Chinese government that he supplemented by working at a restaurant.

A doctorate, several patents, two solar-power companies and a $455 million initial public offering later, Dr. Shi is now one of the richest people in China.

Suntech Power Holdings Co., the company he founded in 2001 in the flat, green lands of the Yangtze River Delta, has quickly become one of the world’s largest producers of photovoltaic equipment, which converts sunlight into electricity. The company’s combination of first-world technology and developing-world prices has helped it gain market share from more-established, and expensive, producers.

Dr. Shi’s wealth, made up almost entirely of his holdings of Suntech stock, has fluctuated in value along with company’s volatile share price, from a low of about $1.3 billion to a peak of just over $3 billion; his stake currently is valued at around $1.7 billion. It is, by some estimates, the largest private fortune of anyone living in mainland China.

The story of his journey from China to Australia and back shows how important China’s growing openness has become to its people. Nearly three decades after market reforms began, the network of personal, educational and financial ties between China and the rest of the world is reaching a new level. And the Chinese government’s willingness to underwrite both advanced education abroad and technology startups at home is starting to pay dividends.

Close to 800,000 Chinese students have gone abroad since the government first started sponsoring them for overseas study in 1978. Drawn by job opportunities overseas, less than a third have come back so far, but the rate at which they are arriving is accelerating. Last year, about 35,000 students returned, three times the amount in 2000, according to official statistics that almost surely underestimate the real number.

Many of those returnees, armed with cutting-edge technical and managerial skills, have helped kick-start new technology businesses. At the same time, foreign venture capitalists are flooding the country with unprecedented amounts of money, and Chinese companies are finding they can raise money from stock offerings abroad. Combined with the heady opportunities from an economy expanding at 10% annually, the result has been the creation of private wealth on an unprecedented scale.

There are now probably 320,000 U.S.-dollar millionaires in China, according to estimates by Merrill Lynch and CapGemini, and many of them are newly minted. On a list of the 500 richest people in China, compiled by the Chinese-language New Fortune magazine, nearly one-quarter appeared on the list for first time this year — including Dr. Shi. He debuted this year at No. 1.

Good Timing
A small, intense man with a round face, Dr. Shi admits to having no real hobbies and speaks often of the importance of focus and hard work. Yet he credits good timing for many of the changes that have brought him so far from his childhood on a Chinese farm.

“I got into the solar industry, in the beginning, by accident,” says Dr. Shi. The 43-year-old came of age in China at a time when the government controlled where people worked and lived. “In our generation we didn’t have the freedom to choose. We just accept whatever we are given. So it’s hard to plan,” he says.

Yet Dr. Shi has also shown a knack for challenging the status quo. His plan to start a solar-power company in China drew skepticism from colleagues, but he managed to obtain government funding. Though trained as a scientist, he put aside technical perfection to find cheaper manufacturing techniques. Despite many years of absence from China, he has shown surprising savvy in local politics, convincing his original government backers to sell out before the IPO that made him a rich man.

Suntech’s success has come from its ability to tap into the global boom in solar power, not from the Chinese market, which remains small. Industry executives estimate that about 90% of the solar equipment produced in China is sold elsewhere, usually to countries such as Germany and Japan that offer generous incentives for solar use.

Suntech faces competition from deep-pocketed large firms such as Japan’s Sharp Corp. and Kyocera Corp., and the solar division of oil-and-gas giant BP PLC. Suntech is bulking up quickly to try to ride out any industry consolidation, and building global connections.

Dr. Shi, who switches easily between Chinese and English, keeps close ties to Australia. He sits on the international advisory board of the New York Stock Exchange, where Suntech’s stock trades.

He is living once again in his birth province of Jiangsu, on China’s prosperous eastern seaboard. His home, and Suntech’s base, is not far from his birthplace on an island in the Yangtze River called Yangzhong. As the oldest of four children, Dr. Shi was the focus of his parents’ hopes for a better life through education. Though mainly agricultural, Yangzhong was blessed with a good school system.

He headed to college in 1979, shortly after the universities had reopened after the chaos of the Cultural Revolution, and as a new leader named Deng Xiaoping had begun to break down China’s isolation. His high scores in math and physics got him slotted into the optical-science department at Jilin University, in China’s chilly northeast.

He found working in a lab preferable to working in the fields. He focused on improving his English so he could read scientific materials. He would study while standing in line at the school cafeteria, memorizing vocabulary scribbled in a notebook.

After graduating in 1983, he entered a master’s program at the Shanghai Institute of Optics and Fine Mechanics. The institute had access to a small quota of coveted government-sponsored spots for overseas study. Although he was told he could go to the U.S., that turned out to be a bureaucratic mix-up. He wound up in Australia instead. In 1988 he enrolled in the physics department of the University of New South Wales, in Sydney.

At the end of his one-year program, Dr. Shi realized he didn’t want to return to China. The year 1989 was a dark time, as the Chinese government brutally put down the demonstrations in Beijing’s Tiananmen Square. A classmate suggested he head to the engineering department, where Martin Green, a prize-winning specialist in solar power, was looking for students with a background in optics.

Though he had no experience in solar-cell research, Dr. Shi talked his way into getting funding to do a doctorate under Dr. Green. And in his first six months, Dr. Shi made some breakthroughs, often working alone well into the night. Finishing his Ph.D. in 1992, he ultimately became research director in a company founded to market some of the lab’s technologies. He gained citizenship and bought three houses with savings from a generous salary. Mr. Shi, his Chinese wife and his two Australia-born sons settled into a comfortable life — but he felt he could do more.

Then, over dim sum one day at a restaurant in a Sydney suburb, he heard of opportunity from an unexpected quarter. Samuel Yang, a businessman from his hometown of Yangzhong who regularly traveled to Australia, told Dr. Shi that the gray, regimented China he remembered had changed. It was booming, attracting billions of dollars of foreign investment, and recruiting overseas Chinese with technical skills to come back home.

In April 2000, Dr. Shi went to China to see for himself. He came back to Australia afire with ideas for a China-based solar-power company, and sat down and put together a 200-page business plan. It was the first thing he had written in Chinese for years. “That conversation was at the right time,” Dr. Shi says. “If that conversation had occurred two years or three years earlier, I don’t think it would have happened.”

Dr. Shi shopped his proposal to several Chinese cities with ambitions to attract high-tech businesses. Wuxi, a fast-growing city near Shanghai, offered $6 million as a start-up investment. Government funds and state companies would own 75% of the company, and a local official would serve as chairman. Dr. Shi would put in the technology he owned and $400,000 of his own money for a 25% stake, and get a free hand to run the company. He agreed, and Wuxi Suntech Power Co., as it was then called, was registered on Jan. 21, 2001. The company’s Chinese name, “shang de,” is a reference to a traditional saying meaning “upholding virtue.”

Tackling New Problems
Dr. Shi now found himself tackling problems outside of science: making payroll and occasionally browbeating suppliers into accepting late payments. His biggest puzzle was finding ways to grow on a shoestring budget. The company started producing in September 2002, but by April 2003, it had sold its entire inventory and needed to expand further.

It was under these pressures that Dr. Shi came up with his signature innovation, which he likes to call simply “low-cost expansion.” After having used mainly expensive imported parts to build Suntech’s first production line, he couldn’t afford to buy another one off the shelf. The only way out was to come up with a cheaper design.

“Coming from a scientist background, I always pursued high efficiency, as high as possible,” he says. Instead, Dr. Shi reorganized the manufacturing process to reduce automation, taking some processes from machines and putting them into the hands of workers, who in China were cheaper. He cobbled together parts from different suppliers, including little-known Chinese companies. He bought used gear from an Italian laboratory and new equipment from a Japanese startup.

The new line was ready in December 2003, just in time to catch a boom in the global solar-power market. Suntech’s revenue zoomed to $226 million last year, from just $14 million in 2003. First-half revenue this year was $218 million. Suntech’s cost advantages have endured: It is now selling its solar modules for $3.78 per watt, well below the average global market price of $4.30 estimated by Photon Consulting.

“His timing has worked out perfectly,” says Dr. Green, Dr. Shi’s former academic adviser.

By 2004, Suntech’s government owners had also taken note of Suntech’s improving fortunes, and wanted a more active role in the company. That put chairman Li Yanren, the government’s representative, into conflict with Dr. Shi. The internal strife consumed several months, but eventually the board threw its backing to Dr. Shi, making him chairman as well as chief executive. Mr. Li, who received a compensation package upon leaving, declined to comment.

That was a turning point. It had become clear that Suntech’s combination of government capital and private management was no longer ideal. “The Chinese shareholders couldn’t provide a lot of support. They were just having meetings,” says Zhang Weiguo, a Suntech director who previously ran a Wuxi government venture-capital fund.

Dr. Shi wanted new backers from overseas who could put Suntech on the road to becoming a public company, but it wasn’t easy to explain this to the founding shareholders. Mr. Zhang says it’s not hard to see why: “I have helped you through so many difficulties, and now that you are starting to make money you push me out?”

Dr. Shi argued that getting the state shareholders out of the company would allow Suntech to grow faster, hire more people and pay more taxes. That swayed city government officials, who helped Dr. Shi work on convincing the corporate shareholders. Here, Dr. Shi’s willingness to offer generous terms helped. Mr. Zhang says his old fund made a return of 20 times its initial investment.

After six months of negotiations, the shareholders, which included appliance maker Jiangsu Little Swan Group Co. and pharmaceutical firm Wuxi Shanhe Group, agreed to take their money and step aside. In May 2005, an $80 million sale of shares to venture capitalists, including Goldman Sachs Group Inc., financed their exit.

Once again, Dr. Shi’s timing was good. With oil prices hitting new highs and solar-panel sales booming, the buzz in the financial community over alternative energy was becoming a roar.

Suntech’s investors saw their enthusiasm for solar power validated with the October IPO of Q-Cells AG, a Suntech competitor in Germany. The rapturous market reception convinced Suntech’s bankers, Credit Suisse Group and Morgan Stanley, to rapidly push through an IPO. On Dec. 14, 2005, Suntech debuted on the New York Stock Exchange. The company was valued at more than $5 billion at its peak stock price, though that has since come down substantially.

Dr. Shi hasn’t left his academic past behind. His office is piled with technical papers and decorated, if that’s the word, with photographs of silicon crystals. He can still unconsciously switch to a professor’s chalkboard style when he has to explain technical concepts.

He has already started giving his money away, an unusual move in a country where private philanthropy is largely undeveloped. Recently his family trust gave donations to a nursing home and a school in Shanghai. For now, however, his main focus remains on the business. Having just bought a company in Japan, Dr. Shi says his goal is to turn Suntech into a true multinational.

“The time is right, the soil is rich,” he says. “Now, there’s already a lot of Chinese dreams being realized. And I think there are a lot more to come.”

—Kersten Zhang in Beijing contributed to this article.

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