It has been a barely a week since SolarCity's much touted acquisition of Silevo. SolarCity (NASDAQ:SCTY) (see thesis) management described in superlative terms how Silevo is far ahead of the status quo and how the current technology is not attractive. Mr. Musk and Co. went on to expound on how the industry was not investing in high-efficiency modules and why it is critical for SolarCity to invest in cutting-edge capacity.
We have pointed out on our earlier article on this subject that:
"In spite of all the investments in n-type, p-type silicon efficiencies have been progressing well and we expect Chinese players to be in the 20%+ efficiency level with p-type silicon by the time Silevo ramps its capacity. Chinese n-type efficiencies will likely be comparable to Silevo efficiencies in that time frame. In other words, we do not really expect Silevo to provide much of an edge to SolarCity compared to Chinese manufacturers."
On Monday, JA Solar (NASDAQ:JASO) (see thesis) announced that it is currently in volume manufacturing with its latest cell technology that offers, on average, 20.4% efficiency cells. Its PERCIUM solar cell is the first p-type solar cell in the industry that surpasses a conversion efficiency of 20%.
Currently, the company has one PERCIUM solar cell production line, and expects to ramp to four lines before the end of 2014. The capacity of PERCIUM solar cells is expected to reach 170MW by the end of this year and 350MW next year. This compares with Silevo's stated 21% efficiency on a 32MW pilot production line.
Readers should note that JA Solar's announcement is based on the "cheap" p-type solar cell.
In other words, JA Solar, with its low-cost process, is manufacturing products comparable to Silevo's much more expensive n-type solution today! JA Solar is the first in a long list of Chinese companies that will reach the 20%+ performance with the "cheap" p-type silicon. Given the competitive dynamics of the industry, every other Chinese manufacturer of note will reach this milestone in the not-too-distant future. Since JA Solar was the 10th-largest module provider in 2013, it is safe to say that the combined volume of 20%+ efficiency modules in the next two years will be many times the numbers being presented by JA Solar.
This is just the "cheap" p-type capacity, and does not include the higher performance n-type capacity from Chinese players, as well as U.S. leaders First Solar (NASDAQ:FSLR) (see thesis) and SunPower (NASDAQ:SPWR) (see thesis).
In effect, by the time SolarCity ramps Silevo products to volume, pretty much every solar company of note will have p-type cell products well into the 20%+ range and n-type products in the 22%+ range. These products will be similar in performance to anything that SolarCity can offer in a similar time frame.
So, why is it that a Chinese company like JA Solar can upend SolarCity's plans barely a week after its announcement? Chinese companies have performed admirably on many technology vectors in the past, yet U.S. companies continue to be surprised by what Chinese can accomplish. The fundamental question here is why the U.S. companies and investors continually underestimate Chinese manufacturing?
We believe there are several reasons for this:
- Firstly, there is a major delusion that affects the commentary surrounding the Chinese companies that they lack innovation. While the Chinese past reputation as low-cost, low-quality, copycat manufacturers has a lot to do with this, one would hope that companies in the industry know better. But they do not.
- Unfortunately, many companies, investors, and analysts make the mistake of not following innovations at Chinese companies closely. Language, communication barriers, and inability of many Chinese companies to better market themselves also plays a role.
- While U.S. start-ups and small companies hype every ounce of any minute advantage they have, the innovative Chinese companies seem to be more muted and in the Sun Tzu mold of "Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win."
- Many companies also consistently underestimate the economic and innovative power of Chinese companies operating in low-cost locales. For the same amount of dollars it takes to hire an American engineer, a Chinese company may be able to hire 3 or 4 engineers to solve the same problem. Companies that underestimate this dynamic do so at their own peril.
- And then, there is just the size of the China. As Bill Gates once said, "In China, when you're one in a million, there are 1300 people just like you". The country is resource-starved, and competition is intense in every aspect of life. And, the competitive spirit shows up in various aspects of how a Chinese company performs.
With all these dynamics at play, it is easy for a newbie like SolarCity entering a new market to see things as they are, instead of imaging what the potent Chinese manufacturers could deliver in the future. And, it is not just a newbie like SolarCity that makes these mistakes. During the last solar bust, established market leaders like First Solar grossly underestimated the innovative and cost reduction capabilities of Chinese solar companies, and paid a heavy price for that mistake.
We do not doubt that Silevo can deliver some excellent technology. But we do seriously doubt if SolarCity can gain any sustainable efficiency or cost advantage against either the Chinese solar manufacturers or the U.S. solar leader, First Solar.
In this highly competitive solar industry, where Chinese manufacturers supply the whole world, what advantage does a financing company like SolarCity have when all it does is manufacture solar modules for itself? How can SolarCity meaningfully out-innovate a focused competitor like First Solar?
Some investors may not realize the answer to these questions until after the company spends hundreds of millions dollars or billions of dollars in chasing technology or cost leadership that it may never get.
Disclosure: The author is long FSLR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.