Balance Sheet Wars: U.S. Solar Companies vs. Chinese Government

We all know the foot race that is going on in the solar industry - companies are trying to achieve the lowest per megawatt cost for an installed system. Until the next leapfrogging technology comes along, the most important factor to drive down cost is scale*. Here is where the US solar companies will have serious problems competing against the Chinese solar companies because the US solar companies lack cheap, indiscriminate access to capital like their Chinese cohorts.

Let's take First Solar (FSLR) for example. FSLR is funded by private money. Even though the US government is offering tax incentives for installing solar projects, they are not however involved in the funding of the company in any way. Why would they? FSLR has one plant in the US, the rest of the plants are mostly in "low cost locations" - ie. Malaysia. Have you ever heard of the "United Solar Workers"? I would guess a few hundred out of the 3,500 FSLR employees are Americans. My point is... if they closed shop tomorrow, there will be plenty of companies to fill the supply void. I wonder if the Malaysian government has the capacity or the desire to step up and lend.

The Chinese solar manufacturers are a different story. Remember, the number one goal of the Chinese government is to maintain social stability. Suntech Power (STP) employs close to 10k employees by itself, and these are "high quality" jobs that are looked upon favorably by the Chinese Government. If I include all of STP's peers in China, their upstream suppliers such as LDK Solar (LDK) and the downstream system installers, I would guess the Chinese solar industry employs probably a few hundred thousand people throughout the value chain.

Now let's look at the banking relationships. Many of these loans are unsecured and covenant lite and represent roughly on average 25% of total capital. Top 3 Chinese solar related company by market capitalization and their respective government backers are:

• Suntech Power (STP): China Construction Bank, Bank of Communication.
• Yingli Green Energy (YGE): Export-Import Bank of China, China Development Bank
• LDK Solar (LDK): China Construction Bank, China Development Bank, Bank of China, Agricultural Bank of China, Export-Import Bank of China. (wow, so many backers, this company really needs help)

I'm not going to bore you with the detailed capital expenditures budget and liquidity position for each US and Chinese solar company. But in times like these, where both US and Chinese solar companies are using their own money to set up an off-balance sheet entity to buy their own products to show "earnings" (A recent Barron's article alluded to Enron, but I think it's more like Boston Chicken), who do you think is going to win that battle? Especially when the Chinese government can, just like recently, press "the lend button" indiscriminately with little regards to the creditworthiness or the investment merit of these projects?

If scale is the most important deciding factor of cost reduction in the long run... until a new breakthrough comes along, how are US solar companies supposed to compete with their Chinese counterparts when they don't have access to cheap capital? I believe they must come up with a breakthrough in technology. I'm confident the US will be at the forefront of that leapfrogging breakthrough, but I'm not sure if the current publicly traded US names will be the companies to provide it.

* Study done by Gregory Nemet at the University of Wisconsin - Madison. On page 15 of the document, Nemet breaks down the drivers of cost reduction very nicely for us.

Click here for slides

First Solar investor day from earlier this year - the "Cost Reduction Roadmap" slides. As you can see, First Solar will want you to believe "efficiency" or their continuing technology innovation will be the leading factor for cost reduction. I'm not saying it isn't an important factor, but if you add up the rest of the "Plant size" related items, "Low cost location" and "throughput", you would come up with 22-24% or a 1.35 : 1 ratio of plant size to efficiency (23% / 17%), roughly inline with Nemet's research of 1.4 : 1 (43% / 30%). Plant size is still the biggest factor.

Disclosure: Short FSLR

Comments

[ECD Fan:]

No, scale is not the most important deciding factor of cost reduction in the long run. There are other, probably more important factors, like technology and management. First Solar's production was just 20MW in 2005, when it made about 9%-10%-efficient modules at $1.60 a Watt. Unisolar last year made over 100MWs of their 6-7%-efficient modules at about $2.00 per Watt. So 5x the scale can still result in 25% HIGHER cost.

First Solar's "problem" is that the Chinese competition is hurting their gross margin (they make somewhat more expensive product, but at a higher efficiency, which more than compensates by reducing balance-of-system costs). Unisolar's problem is more fundamental - it is their technology and management. No scale will solve Unisolar's cost problem.

ecdfan.blogspot.com/20...

Aug 31 08:54 AM

[David Lentz:]

A good point, and applicable far beyond the solar industry. So long as the bulk of our national capital is tied up attempting to preserve the existence and lifestyles of the fat cat banksters who destroyed the global economy, there is not going to be sufficient working capital for operate the rest of the US economy.

Aug 31 09:29 AM

[Hazel Hende...:]

Add that China's stimulus package was more accurately trageted than was possible in the USA .China's rapid shift toward the green economy and raising domestic consumption is possible because their approach is not limited to hyping private consumption ( e.g. cash for clunkers ) but toward targeting both the green economy and group domestic consumption : e.g. putting a national healthcare system in place , along with beefing up social security ..
And naive financial " pundits" in the USA who keep warning about the solvency of China's banks don't seem to grasp that their percentage of government ownership and China's huge reserves mean that China will never allow its banks to be in financial jeopardy.

So US -based solar companies do face an uphill climb . However, the global green economy market is so huge ( tens of trillions over the next five years ) that there will be enough for everybody ( see Climate Prosperity Funds at EthicalMarkets.com ) . Meanwhile collapsing gas prices due to new ways of accessing shale deposits means that coal is now too expensive , even for old coal utilities , who will begin substituting gas not only for peak loads , but for baseload as well. So if I owned any coal stocks which I don't I'd be shorting them . As for nukes, they are still the most expensive way humans have ever devised to boil water..

Dosclosure : holding Stirling Energy Systems, Solaria, Envision Solar,as well as Suntech

Aug 31 09:32 AM

[bzh1111:]

Solar panels - Some of China's large photovoltaic (PV) module makers have had to extend delivery time to six weeks due to booming orders from Europe, but others have lowered quotes from US$2/watt to US$1.8/watt to clear inventories because of worse-than-expected exports - Digitimes

Aug 31 10:05 AM

[darwin c:]

How about the Intellectual property (IP) side of the picture? Do any of these companies have ownership of the upcoming solar technology?

Aug 31 10:21 AM

[Zenfar:]

Is the FSLR the only solar company in the US? What about SPWRA or ENER, or the startups?

darwin c you make a great point of technology.

Aug 31 10:56 AM

[jerrydd:]

Scale is not the best factors, profitability is from low cost production which is tech, not labor.

First Solar will win because their tech is much lower cost.

Once retail hits $2/wt a huge home market opens up and those who exploit this market with plug and play panel/inverter, mountings set up at a lower price will win. Controlling this is panel cost.

Solar farm market is not viable in the long run as higher land, transmission costs and low revenue make it viable only with subsidies which will end soon. Home, small business market doesn't have the costs and it's revenue, savings is 2x's solar farms so about a 3x's better payback is very hard to beat.

Aug 31 10:58 AM

[Scott Croly:]

Thank you so much, Mr. Lentz, for bringing to the fore that which is truly ailing the real economy: nominal market bank (is a 4 letter word at this point in the cycle) obsolescence and inefficiency, as in, "The spread was bread; now, the spread is dead." Within reasonable context, certain dynamic (as opposed to static caste) applications must be made to the real economy in order to rebuild a principal leverage fulcrum, which represent true Newtonian advance, encompassing principally the first two laws of motion. Regardless of alleged static capital advantage as per (+) balance sheet overseas, since the world is mostly "banking" (society and defense) on the principal macro-jurisdiction (USA), as per reasonable balance, duty, honor, country, it makes more than enough sense that the US, among some other macro-jurisdictions, is the place to be at this point for the future; geopolitical caveats abound overseas. Balance sheets are nice, but again, more for "bank is good utility tool, not policy, as in the last cycle," than for broad corporate markets where, "the trend is your friend," as in nobody can predict the future, more art than science (context > text). Alternatives seem to be up and coming (discrete micro-logic application to macro-sphere: no time like the present, GTS, Generation, Transmission, Site). 1991 beginning recovery, business spending > consumer (though consumer discretionary US autos did beautifully during the '90s -- again, REAL ECONOMY, as in macro-Newtonian v=d/t real existential advance coming out of nominal cycle -- also, note recent 750% runup in F since Th, 11/20/2008 intra-day low of 1.01); 2009 government spending (slow growth investment return window public/private sector capital partnership (macro > micro). More ENRON bang-downs are very unlikely at this point (nobody beats Uncle Sam), though other challenges do remain.


On Aug 31 09:29 AM David Lentz wrote:

> A good point, and applicable far beyond the solar industry. So long
> as the bulk of our national capital is tied up attempting to preserve
> the existence and lifestyles of the fat cat banksters who destroyed
> the global economy, there is not going to be sufficient working capital
> for operate the rest of the US economy.

Aug 31 12:56 PM

[manuel:]

German Q Cells (Europe´s First Solar) is trading at March lows, 10 Euros, 2 times 10 Euros was support in 2009, went from 20 to 10 in the last 4 months, never got any lower in the last 4 years, I think it is a Good buY

Aug 31 12:56 PM

[nakedjaybird:]

Hippie - how can we bad mouth the Chinese, when they see Solar PV as important as our US Manhattan Project - totally Govt funded.

Aug 31 01:33 PM

[Financial H...:]

nakedjaybird... i'm not bad mouthing them... they gotta do what they gotta do... I'm just pointing out the imbalance in funding


On Aug 31 01:33 PM nakedjaybird wrote:

> Hippie - how can we bad mouth the Chinese, when they see Solar PV
> as important as our US Manhattan Project - totally Govt funded.

Aug 31 03:14 PM

[rooferguy:]

These studies miss the forest for the trees. Nobody buys just a solar cell -- they buy a complete system. Cells (and modules) have dropped in price by 50%+, and are likely to continue to decline. But installation, permitting, engineering and documentation costs have not been reduced -- hence total installed costs are still relatively high.

I'm looking forward to a time when I can buy an easy-to-install plug and play solar panel. That innovation will crack the retail market wide open and will lower the non-cell costs most dramatically.

Aug 31 06:50 PM

[Fred W:]

I know what you are saying and mostly agree, but writing shouldn't hurt the brain to read.
Unless you were writing for yourself or a very select "elite", you missed much of the SA audience.

Lower module prices will drive out the weak hands and pretenders, of which there are many...demand is going to fill the oversupply gap by the end of 2010 as TOU/AMI/prices converge to make solar grid competitive throughout the NE and even more so on the west coast.


On Aug 31 12:56 PM Scott Croly wrote:

> Thank you so much, Mr. Lentz, for bringing to the fore that which
> is truly ailing the real economy: nominal market bank (is a 4 letter
> word at this point in the cycle) obsolescence and inefficiency, as
> in, "The spread was bread; now, the spread is dead." Within reasonable
> context, certain dynamic (as opposed to static caste) applications
> must be made to the real economy in order to rebuild a principal
> leverage fulcrum, which represent true Newtonian advance, encompassing
> principally the first two laws of motion. Regardless of alleged static
> capital advantage as per (+) balance sheet overseas, since the world
> is mostly "banking" (society and defense) on the principal macro-jurisdiction
> (seekingalpha.com/symbo...), as per reasonable balance,
> duty, honor, country, it makes more than enough sense that the US,
> among some other macro-jurisdictions, is the place to be at this
> point for the future; geopolitical caveats abound overseas. Balance
> sheets are nice, but again, more for "bank is good utility tool,
> not policy, as in the last cycle," than for broad corporate markets
> where, "the trend is your friend," as in nobody can predict the future,
> more art than science (context > text). Alternatives seem to be up
> and coming (discrete micro-logic application to macro-sphere: no
> time like the present, GTS, Generation, Transmission, Site). 1991
> beginning recovery, business spending > consumer (though consumer
> discretionary US autos did beautifully during the '90s -- again,
> REAL ECONOMY, as in macro-Newtonian v=d/t real existential advance
> coming out of nominal cycle -- also, note recent 750% runup in F
> since Th, 11/20/2008 intra-day low of 1.01); 2009 government spending
> (slow growth investment return window public/private sector capital
> partnership (macro > micro). More ENRON bang-downs are very unlikely
> at this point (nobody beats Uncle Sam), though other challenges do
> remain.

Aug 31 07:33 PM

[Mad Hedge F...:]

pyuio. The solar industry is suffering some 19th century Darwinian style competition, with Chinese manufacturers Suntech (STP) and Yingli Green Energy Holding (YGE) clearly dumping panels below cost to gain market share. You may laugh, but I watched the Japanese pursue the same strategy in the seventies and eighties to devastating success. They now control half the US automobile market, and the most profitable half at that. As a solar consumer I shouldn’t care, as the 50% price drop has, with Obama’s generous tax subsidies, made new installations cheaper than obtaining electricity from my local power company (PGE) at 12 cents a kilowatt. It’s just a matter of booking the profit in China instead of Phoenix. But the predatory pricing has also kicked my beloved First Solar (FSLR) in the shins, which has dropped from 44% from $205 to $115 since May. Use the move to pick up FSLR on the cheap. The company is using advanced cadmium telluride based thin film semiconductor technology, which has enabled it to match the Chinese price cuts dollar for dollar, and the engineering will allow them to continue to do so. The Chinese, wedded to an older polysilicon product, can’t keep playing this game, unless they want to hemorrhage cash, or face US anti-dumping enforcement. To see more on the current fundamentals of solar, please click here.

Sep 09 01:21 PM