Shakeouts Inevitable as Solar Sector Matures

published: 2011-08-30 9:02 | editor: | category: Analysis

Moody Investors Service states in a recent report, solar manufacturers feel the affects of declining profit margins and factory oversupply. The combination of government cutbacks on subsidies in the European Union (EU) and oversupply continue to exert pressure on the profit margins of solar manufacturers.

According to a Moody press release: "Leading Chinese PV producers are well positioned to become the long-term winner, based on a low cost base, large scale, and vertical integration,"says Simon Wong, a Moody's vice president out of Singapore and the report's lead author.

Chinese manufacturers, with handsome subsidies, low-cost capital and lower manufacturing costs flood the market with low-price modules. Many American companies have a difficult time competing  with the advantages of the Chinese companies. 

Some see this as the beginning of a series of mergers and  failures in the solar industry. Furthermore, it represents a natural part of the maturation process. German manufacturer Solon announces the closing of its 60-megawatt manufacturing plant located in Tucson, Arizona. The move will cost 60 jobs for the local economy. Two companies have filed for protection under the U.S. Bankruptcy Courts --  Evergreen Solar Inc., and SpectraWatt Inc.

Evergreen Solar Inc.

The Marlborough-based maker of solar panels company specializes in production of  thin polysilicon wafers  with a proprietary technology that used less polysilicon than it competitors. Evergreen Solar received tens of millions in federal stimulus money. In addition, the Commonwealth of Massachusetts gave Evergreen Solar over $58 million in support to help it  open a manufacturing facility in Devens, Massachusetts.

However, as the output of polysilicone increased, the price of this material dropped 89 percent- from $475/ kilogram in 2008, to $50/kilogram. This price drop eliminated Evergreen Solar competitive advantage.

In February, the company released 800 of its 925 workers. By July, the company made the decision to close the Devens plant, to “better position the Company to pursue its industry standard size wafer strategy and preserve the Company's liquidity.” The company transferred a significant amount of its Devens manufacturing capacity to its plant in Wuhan, China to take advantage of lower labor costs. The moves came too late to right the ship.

The company's demise occurred because of the inability to get its business model right. Evergreen Solar relied on one technology to process uniquely shaped solar cells. The wafer required third parties to retool equipment to use the product. The company eventually changed its approach, but not before it accumulated massive amounts of debt and loss credibility in the marketplace.

As part of the bankruptcy proceeding, the company suspended operations at its high temperature filament facility in Michigan and will eliminate about 65 jobs overseas.

SpectraWatt Inc.

SpectraWatt, a spin-off from semiconductor superpower Intel, opened its doors in June of 2008. The company formed with the intent to focus on research and development of efficient solar energy generation solutions. Three other companies invested in venture -- Solon AG, Cogentrix Energy LLC, and PCG Clean Energy and Technology Fund. Intel Capital provided $50 million of initial funding to SpectraWatt. In late 2009, armed with $91 million of private funding, and enticed by $8 million in public money, the company moved its operations across country from Hillsboro, Oregon to a new manufacturing plant in IBM's Hudson Valley Research Park in New York.

By May 2010, SpectraWatt started filling orders for its solar cells. In late 2010, company CEO Andrew Wilson stated in a local newspaper interview that things were going so well that the company moved to an around-the-clock, four-shift operation --"24 by 7." The CEO said later "We have no inventory in stock. We've shipped everything we've made," he said. "We continue to ramp revenue."

However, it turned out that the firm's fortunes were not as “rosy” a picture as painted by Wilson. In just a matter of months, the solar manufacturer went from operating at full capacity 24/7 to declaring bankruptcy. In court documents, SpectraWatt pointed to production equipment and vendor-supplied silicon wafer for it demise, citing quality issues and a backlog on filling orders.

SpectraWatt's bankruptcy attorney Mark Wege says the “ideal scenario would be to find a buyer for the facility and equipment who would reopen the solar manufacturing plant.”

China's Competitive Advantage

Hefty government subsidies and financial support converges with significantly lower manufacturing costs, which results in a competitive edge for Chinese solar panel manufacturers. In no place is this more apparent than in California-- America's largest market. According to a Bloomberg Energy Finance report released earlier this year, China manufacturers went from a two percent share of the state's supplied megawatts, three years ago, to 46 percent by the end of 2010.

In 2009, China had captured 21 percent of the market. Within a year, solar panel makers more than doubled its share of the market. Yingli leads the way with 27 percent of the California market. The company expects to corner about 15 percent of the total U.S. market by the end of the year. In just a few years, U.S. manufacturers experienced a drop in market share from 43 to 16 percent.

With eight of the top ten solar manufacturers Chinese firms, and First Solar and Canadian Solar with operations in China and Malaysia, China has become the world's undisputed leader in solar panel production.

Conclusion

The glut of solar panels will continue to exert downward on prices. Lower prices create higher demand  as solar energy systems become  more affordable to end users. However, manufacturers will find it difficult to turn a profit at lower price points.

To survive,  developers and manufacturers must adapt to changing market dynamics, which  include catering to new customers drawn into the sales vortex by falling prices.

Some companies, such as Sharp and First Solar, have taken steps to strengthen their positions by incorporating a strategy of vertical integration. These firms have morphed into the solar development segment of the industry. Recently, Sharp completed a deal to buy the San Francisco-based solar developer Recurrent Energy. Last year, First Solar purchased Nightlight. Solar manufacturers will need to demonstrate flexibility, and a willingness to modify their business strategies, to navigate the current business environment successfully.

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