We came away from Power One’s Q4 report with new reasons to expect near-term volume growth from both Power One and its German rival, SMA Solar. The following points mentioned by management especially impressed us:
– The consolidation of solar PV customers has opened up better market opportunities for the Tier 1 inverter players like SMA and Power One and made business more difficult for Tier 2 players.
– “Power One continues to expand in high growth solar markets, such as India and the United States…India has become one of the biggest in the world,” management said with some surprise. The robustness of the Indian solar market will benefit both inverter companies as both are present there.
– Unlike PV panel vendors, inverter vendors did not benefit from the surge of panel installations last December in Germany. Power One maintains that many panels installed were not equipped with inverters. SMA recently said the same, implying there will be a catch-up of inverter sales during H1 2012. If so, SMA as Germany’s dominant vendor, should have a strong start to the year.
– Prices are expected to fall a further low double digit percentage in 2012. PowerOne claims to already practice more competitive pricing. But pricing weakness may be offset again by volume growth and better mix, helping margins.
– Geographically, Asia and North America look to be the most promising parts of the world. In the Asian markets, Power One admitted to being weak – but hopeful – in China and Japan, two countries where SMA has slowly and strategically acquired a local presence. North America, where SMA has been well entrenched for many years, is regarded as a big new opportunity for Power One. It believes its American roots will give it an advantage over non-American suppliers. It feels it is only on the cusp of this giant opportunity.
– Micro-inverters are expected to remain a small part of the market. In future these solutions may be built into panels or replaced by digital optimisers.
– Utility-scale projects have the best outlook in the most critical markets, i.e. China, India and North America. Our market intelligence tells us that SMA’s utility-scale products are the most innovative, reliable, and of the highest quality. But Power One also generated a greater percentage of its FY2011 sales in the utility market, reflecting the trend of increasing ground mounted and large scale installations (versus roof-top).
– Management identified new competition to come from the industrial giants: Siemens, Schneider, ABB. These groups are taking market share in large-size projects, helped by their strong balance sheets and relationships with utilities. However, Philippe Le Borgne, developer/partner at Helioptim, says that SMA Solar’s large-scale inverters are easier and cheaper to install on site than most inverters on the market, that require heavy, expensive concrete structures.
Interestingly, Power One management considers Chinese competition still non-existent. This is critical, given the view held by Morgan Stanley (and others), who are structurally bearish on inverter manufacturers SMA Solar and Power One, awaiting the inevitable arrival of competition from Asia and subsequent margin compression to come. Protectionism in the US and elsewhere may work to delay that ‘inevitability’ and give SMA Solar and Power One time to lobby legislators for new inverter quality standards.
Power One and SMA Solar have emerged from a miserable 2011, a year fraught with sluggish demand, oversupply, and declining ASPs in their key markets (Italy, Germany), with possibly even stronger business models. Geographically they are focused on better growth markets. Both have a richer, higher margin product mix and, in SMA’s case, a more flexible cost structure.
Our favorite of the two, SMA Solar, has yet to report what it has already warned was a difficult Q4 2011. We believe early 2012 has better trends in store for the company in markets where installations were buoyant last year: Germany and the US. Our general expectation for solar is upbeat longer term as we believe demand growth in newer markets (the US, China, Japan, India) could offset the muted growth in Europe.