Solar Progress: Reminiscent of Multi-Chip Modules and Optoelectronics

Nearly every day finds another article about solar technology and startups and their progress. $1/Watt used to be the Promised Land of production cost - and certainly a huge advance over the $300/Watt costs of the early 80s - yet First Solar (FSLR) has reportedly beat that mark. And Charlie Gay of Applied Solar has reportedly said, "The Moore's Law for solar is that as time goes by, things get thinner and still absorb light." Heady talk, indeed.

The progress, competitiveness, and challenge in solar technology is eerily similar to two high tech markets of the past 20 years: multi-chip modules (MCM) and optoelectronics. They all share the following similarities:

1. A new hope for breakthrough performance- MCMs for electronic density, optoelectronics for bandwidth, and solar for energy cost and supply;

2. Extensive investment by Venture Capitalists into startup companies with technology differentiators, as well as significant entry by established and foreign firms;

3. Challenges in adopting standards, justifying initial expense, and macroeconomic conditions that put a dent in industry growth- for MCMs it was a downturn in the early 90s, for optoelectronics, the tech bust of 2000-2001, and for solar, the current global slump;

4. Skepticism regarding the ability of the technology to achieve what was being promised, especially given quoted market prices rarely matching up with guru projections (MCM participants may remember the vaunted $1/sq. inch).

In MCM and opto, what happened next was overcapacity and underperformance. In the ensuing shakeouts, the smallest companies were left scrambling for acquisitors (or auctioneers), the largest companies pulled back, and companies with low cost country capacity were left in position to pick up pieces of the technology to use their cost advantage to win significant share- avoiding losses, and implementing the technology, albeit at a lesser scale and performance than projected by the higher-tech startups.

So, what can we infer about solar from this history? First, proven revenues are critical. The "half as much in twice the time" rule certainly applies to solar projections, and profitability suffers as market participants fight for share, so limiting losses is critical. With rosy projections around every corner, startups will come and go as government funding comes and goes, and even established companies like Amkor and Lucent lost hundreds of millions or more while participating in MCM and opto.

Second, beware massive writedowns from decimated goodwill and operational disasters. High tech PCB shops were notorious for following three quarters of decent profits with overwhelming loss, and JDSU set a record with its $40B writedown. With reports of $3B of US government funding set to be partitioned out, many companies will hold off on setting reasonable values until the destinations of those funds are better set.

Third, despite the bumpy road, don't count out the technology, nor its benefit to society and ultimate participants and users. High density electronics packaging (with attendant licensing fees) enabled Apple create its iPod, and broadband internet is changing the world. The ultimate winners in solar energy utilization remain to be crowned.

Fourth, don't be surprised to see foreign firms, or firms with low cost country manufacturing capability, emerge triumphant. Protectionism seems a likely response to this threat given energy security considerations, yet the ultimate viability and implementation of solar may rely on foreign capacity in addition to our own- and all these panels can't be installed and maintained by low wage workers.

There will be some disagreement as to where we are in the current life cycle of solar- many years ahead of the shakeout, months ahead of the shakeout, or on a totally different path that will avoid a shakeout (unlikely). But while the lessons of history can't always be used to foretell the future, they can certainly inform what we should watch out for.

Disclosure: No positions

Comments

[predictorman1000]

It seems natural that if the Chinese government is making a big solar push, that Chinese solar companies will benefit from volume, and be able to extend that advantage worldwide.

2009 Jul 13 09:07 AM

[A Barrel Full]

"Protectionism seems a likely response to this threat given energy security considerations"

However, once you have bought the solar panels, they are yours, as is the energy they produce, until they stop working. If the economics are right, buying Chinese solar panels instead of Middle Eastern oil, is far better for energy security for this reason.

"High density electronics packaging (with attendant licensing fees) enabled Apple create its iPod, and broadband internet is changing the world. The ultimate winners in solar energy utilization remain to be crowned."

I think this is the key paragraph. Apple was a user of the previous boom in bandwidth, not a provider. The winners here may be those who can benefit from the new sources of energy, regardless of who sells the technology. Certainly there is a risk that today's cost leader could be tomorrow's dead end street.

Companies that fit and maintain systems may be the safest bet.

2009 Jul 13 09:19 AM

[Zenfar]

"Fourth, don't be surprised to see foreign firms, or firms with low cost country manufacturing capability, emerge triumphant."

Good article, but the thing about technology, is often the best tech wins and everybody else can go home. This doesn't happen overnight, but it happens, I am betting on the USA.

2009 Jul 13 09:59 AM

[stockdoc123]

Zenfar - I agree & it is going to take some time - what other stocks do you like?

2009 Jul 13 12:31 PM

[Zenfar]

Cloud computing, wireless everywhere, and smart "phones" are going to be a big deal. But I think smart phones may well turn out to be smart tablets and smart netbooks.

Also with regard to protectionism, the USA can be the largest solar market in the world, everybody will want in on it, look at STP opening offices here. So they will have to open their markets to our thin film and CIGS companies.

2009 Jul 13 04:26 PM

[Dirk McCoy]

Thanks for the comments.

I'm not sure what the winning technology will be (for some reason I can't quit thinking that some kind of low concentrated thin film optimized for moderate irradiant locales could emerge as a winner), but I'm sure that a lot of it will be built outside the US. The question is- will the owners of those factories be foreign-based multinationals, or US?

2009 Jul 14 12:45 AM

[Alphameister]

Helpful perspective on a very promising market. Also like the comments, especially by A Barrel Full.

2009 Jul 14 09:22 AM

[mjg1231]

Small technical correction: Charlie Gay works at Applied Materials (AMAT)

2009 Jul 14 10:17 AM

[Dirk McCoy]

Even smaller technical point: Charlie Gay works at Applied Materials as the President of their Applied Solar business (at least according to Applied Materials' website as of this morning).

Kind of confusing considering that there is also an Applied Solar, Inc.- you'd think a trademark lawyer should be scrambling, somewhere.

2009 Jul 14 01:26 PM

[jerrydd]

As panel prices drop and shipping cost increases soon favors the US. The real savings will be in those making installation easier, less costly.

And the big market here will be home, small business units so those with plug and play tech will win though lower total costs. Say a 7' 8" wide, 19' long on a frame with an inverter that can be set in a back yard or bolted to a roof and just plugged into an outdoor outlet could be more profitable at $4/wt vs now running $6-9/wt for custom installs..

2009 Jul 14 01:59 PM

[Skaterdude]

Another article mentioned private Chinese companies that do not show up on the radar. I wonder to what extent they will be able to clean up if there is a shakeout. Private companies can be more patient as they do not have public shareholders to please.

Also, what about the intermediaries: the companies that produce the inverters and power conditioners between the solar panels and the consumer. There are public and private companies in that space: Xantrex, Enphase, etc.

2009 Jul 17 10:06 AM