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Investors told to expect US probe of solar supply chain for labor abuses

Solar companies should expect that the U.S. government will investigate their supply chains for labor abuses after S&P Global Market Intelligence published a story detailing the industry's connections to China's autonomous Xinjiang region, Paul Rosenthal, an international trade lawyer at Kelley Drye & Warren LLP, said Oct. 22 on a call with investors.

With Washington moving to confront China over alleged human rights abuses against Uighurs and other Muslim minorities in Xinjiang, Market Intelligence reported Oct. 21 on the solar industry's growing dependence on the region for polysilicon, a raw material in solar panels. The article notes that one of the world's top polysilicon makers receives low-cost electricity from a power grid in Xinjiang that is operated by a group that the U.S. Treasury Department sanctioned in July in connection with "serious rights abuses."

U.S. Customs and Border Protection "has enough information to stop imports and investigate them, just based on the S&P article," Rosenthal said on a call hosted by Roth Capital Partners LLC. "You ought to assume that you will be investigated at some point."

A spokesman for Customs and Border Protection said Oct. 23 that the agency does not comment on whether it is investigating the supply chains of specific entities for forced labor.

U.S. lawmakers and federal agencies have been ramping up efforts to prevent goods produced with forced labor in Xinjiang from entering American supply chains after staff for the Congressional-Executive Commission on China reported in March that abuses in the region are "widespread."

In September, the U.S. House of Representatives passed a bill that would ban goods made "wholly or in part" in Xinjiang unless the producers were proven not to have used forced labor. The vote came a week after Customs and Border Protection ordered officers to seize certain imports from the region, including cotton and computer parts.

The U.S. departments of State, Treasury, Commerce and Homeland Security previously warned companies about the reputational, economic and legal risks they face in Xinjiang, saying "third-party audits alone may not be a credible source of information for indicators of labor abuses."

While human rights advocates have said they are not aware of public reports directly implicating polysilicon-makers in labor abuses, without independent audits, American solar companies could find they are unable to meet U.S. requirements. Xinjiang supplied about one-third of the polysilicon that the industry used globally last year to make solar panels. And Roth analysts say a "large percentage" of the solar panels in the U.S. supply chain likely contain some polysilicon from the region.

If the U.S. government links a polysilicon company to labor abuses, Customs and Border Protection could seize shipments of solar cells and panels that contain the raw material from that producer, and under the Tariff Act of 1930, importers could face criminal investigation. Customs and Border Protection cited the law in September when it ordered the seizure of certain imports from Xinjiang and palm oil products and derivatives from a company in Malaysia.

To make a seizure, Customs and Border Protection only needs information that "reasonably" indicates the use of forced labor.

Rework supply chains

In response to questions from Market Intelligence, John Smirnow, general counsel and vice president of market strategy at the Solar Energy Industries Association, the top U.S. trade group for the industry, said the association is "strongly encouraging companies to immediately move their supply chains out of the region."

Smirnow said on the Roth investor call that he expects Congress will pass a version of the House bill in the coming months restricting imports of goods made in Xinjiang. "What we're hearing from the Hill is that this is a very important issue."

Some companies are already reconfiguring their supply chains, Smirnow said, though a full overhaul will likely take the industry three to six months to complete. While that is happening, he said that polysilicon makers in Xinjiang will "have the opportunity to establish by 'clear and convincing evidence' ... that they're not using forced labor."

"They have the opportunity to do that," Smirnow said. "But that's going to take time. It's a very, very high standard."

Faced with potentially costly disruptions, U.S.-listed solar companies saw their stock prices sink in recent days.

Ming Yang, CFO of Daqo New Energy Corp., a polysilicon maker headquartered in Xinjiang, said on the Roth investor call that the company is "looking to do" third-party audits to confirm that forced labor is not used in its factories.

However, "for companies that have large exposure or business in the U.S., I think it's likely that they may set up specific supply chains to sell and address the U.S. market," Yang said.

Daqo was drawn to Xinjiang by cheap electricity from coal-fired power plants. In recent annual reports to the U.S. SEC, the company said it receives "additional advantages in the costs of electricity" because the regional power grid is operated by a division of Xinjiang Production and Construction Corps, or XPCC, which the U.S. government describes as a paramilitary organization.

The U.S. Treasury Department sanctioned the XPCC in July in connection with "serious rights abuses." Before that, the XPCC was added to a U.S. Commerce Department "entity list" in 2019 after the government determined that the group was "acting contrary to the foreign policy interests of the United States." The U.S. departments of State, Treasury, Commerce and Homeland Security warned businesses in July that engaging with companies on the Commerce Department's entity list could trigger law enforcement action.

Rosenthal said it is unclear whether the U.S. government would target Daqo over its connection to the XPCC.

"I think an argument could be made that if you relied on subsidies from this agency or subsidized electricity or subsidized construction, that the product ... that benefits from that entity might be seen as being produced with forced labor," Rosenthal said.

Daqo said it "does not tolerate any use of forced labor under any circumstances."

The U.S. government has also provided companies with a list of "potential indicators of forced labor or labor abuses." They include "any mention of internment terminology" such as education training centers "coupled with poverty alleviation efforts, ethnic minority graduates, or involvement in reskilling," according to an advisory from the departments of State, Treasury, Commerce and Homeland Security.

In an annual report published earlier this year, GCL-Poly Energy Holdings Ltd., another top polysilicon producer, said it began a "staff localization plan" in Xinjiang in 2019 in cooperation with vocational schools in the area. At the end of 2019, the company said it employed about 120 people from "ethnic minority groups."

GCL-Poly told Market Intelligence that its Uighur employees are provided with special benefits, including holidays and access to a halal restaurant.

Phillip Dembowski, chief commercial officer at U.S. polysilicon maker Hemlock Semiconductor Group, said the U.S. government has asked the company for information about the polysilicon market.

"I think we're already fairly convinced that an investigation will go forward ... and that the government's going to take action just to ensure the supply chain for solar is clean," Dembowski told investors Oct. 22.