Cash-Rich Solar Players Have Golden Opportunity

Cash is king when the competition gets fierce. Managements of Trina, SMA, Aixtron, and Veeco all alluded to this in their Q3 reports.

CEO of Trina Solar, Jifao Gao

Trina’s CEO was probably the most blunt, saying:  “Having a strong balance sheet is important when the marginal player cannot survive.”

Listening to the leaders of these rigorously managed companies discuss the measures they have adopted to survive in this cut-throat environment for PV and LED producers, one wonders just how far they’ll go. The list of tough measures includes providing financing or extending purchasing periods for select customers, writing down inventories with a plan to keep ‘cheap’  inventories on the books for favored ailing customers, pressuring suppliers (unthinkable only a week ago in the PV industry), and foregoing margin to gain market share.

 The striking realism of the message today contrasts enormously with the idealistic, peace ‘n love language only three years ago of leaders like REC.

In 2007 REC’s management promised to act for the good of the entire solar industry.  They would focus on cost cutting! Cost would drive solar demand forward. Cheap solar was their religion. They were visionaries, but for their own survival. They miscalculated Chinese competition and didn’t cut costs swiftly enough. As late as 2008 they still regarded Chinese PV as qualitatively weak, ignoring that some Chinese manufacturing was headed up by Silicon Valley Americans or Chinese MIT PhDs.  Their targets for cost reduction were too low and they soon ran behind the curve in expensive parts of the world like the EU and then Singapore.

 Approaching the Q3 earnings reporting our expectations were low. Managements had every reason to be  despondent mirroring REC management over the past few years. After all, selling prices have tumbled and there is talk that inverters may be given away for projects that are big enough to make a dent in company inventories; oversupply is resulting in capacity utilization rates of only 50 or even 20%; and share prices are down 50%. Utter pessimism was completely warranted. Trina’s CEO stated that 2/3 of solar players would disappear between now and 2015.

 So we were jolted by a sudden wake-up call. Each one of our major players demonstrated a vigorous fighting spirit and relative optimism. Cost leadership is once again mandatory – it is the key to gaining market share and staying profitable. Quality is more critical than ever before since customers have greater choice. Cash is key to staying in the game, useful for servicing old loyal customers and attracting new ones. Credit Suisse found that the net debt of 15 solar companies in Q3 increased 22% on average q/q.

 The industry is going through growing pains, eliminating the Tier 2 players. But solar is here to stay, grid parity isn’t far off, monocrystalline efficiencies are still rising and the big players will grow.

 In Q4’11 US PV business should be supported to an extent by the expiry  of cash grants anticipated for the end of the year. In 2012 utility scale projects will accelerate in many parts of the world, including the US and South Africa. IRRs in Germany of 10-13% are attracting developers. The EU is finally no longer the focus for managements, but instead it is  China, the US and places like Africa (finally!) where there is no existing energy to compete with.

The picture is not rosy but is becoming clearer as to what distinguishes the winners from the losers.

After all, solar PV installations grew 24% in 2011 to 24GW vs 19GW in 2010 (IMS).

 And what about LED’s? Well, the Chinese government’s plan to pull the plug on  incandescent lighting and  its planned subsidies for the LED light  bulb end-market will benefit LED survivors. Research firms calculate that the  penetration rate of LED lighting systems could reach 20% by 2013 (vs  3%  in 2008).

This rate of adoption of LED lights should trigger a significant wave of investment spending by manufacturers.   But only those that have the right balance sheet and product quality will survive the culling of the industry.


 



Categories: Economic Indicators, Solar

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