In our recent article we identified the 20 most capable organizations (including nine U.S.-listed Chinese companies) in the solar industry, on the basis of revenue. We have also looked at the dynamic of solar business, where various governmental interventions created periods of boom and perceived drought. We have confirmed that demand is in the cycle of migration from areas of high saturation, where feed-in-tariff (FiT) no longer acts as stimulus, to new global regions where FiT may be newly introduced, or the microeconomics of the region produce better returns on investment. We have taken a look at why potentially strong conglomerates would avoid entry or have not continued to pursue further capital expenditures, as recently illustrated by Korean conglomerates.
We have concluded that on financial data assessment, operational dynamic and growth potentials, Chinese solar companies, and those that are U.S.-listed in particular, will lead the solar industry. Against the background of the German bankruptcies of Solon (SGFRF.PK), Solar Millenium AG (SMLNF.PK), Solarhybrid AG and Q-Cells SE (QCLSF.PK), and the well-discussed failures of Solyndra, Evergreen Solar Inc. (ESLR) and Energy Conversion Devices, Inc. (ENER) in the US, the Chinese essentially look like powerhouses, able to steer the sector in a new direction. South Korea and Taiwan had been seen by popular belief as the challengers to this state of business, with Japanese companies catering to an insulated domestic market and externally to an exclusive market of high-conversion clientele, and by doing so, staying on the sidelines of this competitive struggle.
Those views no longer apply. Equipped with results from leading companies in Taiwan, we found that only the top four solar cell manufacturers are able to produce ample revenue to make the list, but all of them have experienced revenue loss versus the previous year, on top of weak margins. None of the South Korean businesses made the list, unless Hanwha SolarOne (HSOL) will be considered as such. Chemical conglomerates OCI Chem and Woongjin were not on the list, as they produce an array of products outside of polysilicon, as does Wacker Chemie AG (WKCMF.PK). In the case of polysilicon, China - with notable exemptions of 10 or so domestic manufacturers led by GCL Poly, LDK Solar (LDK) and Renesola (SOL) - had left the supply mostly to external sources. The fact that part of the value chain has been the biggest negative impact on the cost perhaps speaks aloud about old contractual agreements in the first place, and secondly, more now than before, about inefficiencies notorious to European headquartered companies - as well as some Asian ones. Nevertheless, the competitive dynamic of this segment continues to produce prices which support low cost, and for those with healthy margins in poly production, allows for more staying power. Cheap poly is the best friend of anyone on the list, contrary to the opinion of popular media.
The new FiT in Japan has brought a lot of attention this year, illustrating that tight entry rules are no longer stopping Chinese operators from moving into a larger market share in the country. Data for the last quarter shows a dramatic increase in imports, particularly in multicrystalline products. Recent announcements about a complete nuclear shutdown and public support for renewables, combined with Solar's fast and efficient deployment, had forgone past disapproval of non-Japanese products by territorially protective Japanese consumers. Sheer volume makes the Japanese market one of the most robust for the future of both domestics and the Chinese makers, but in a cost structure, translated into average selling prices, places preference in the latter. In the area of cost, Japanese conglomerates have declared losses patterned by the industry. Some of the organizations are looking to hold off expansions, reducing cost by migrating manufacturing to China, Malaysia or other Asian countries. Others outsource supply from China or Taiwan. Clearly they cannot compete with the Chinese leaders, and if the domestic consumer sees beyond the "made in" label (which utilities and commercial-size projects do), the Japanese for the first time will have to experience competition at home. Moving operations abroad is also not an adequate measure by itself. In the case of Q-Cells, the company produced the majority of its cells (700MW) in Malaysia. Bosch halted its expansion into the country, waiting for a clear winner among solar technologies before making a commitment, illustrating the point that neither location nor labor cost is everything.
In another article, we discussed the already asserted countervailing duties and the yet in waiting anti-dumping review, both of which have already been greatly neutralized either by the presence of those companies in North America or the U.S., or in the form of arrangements in the global marketplace. Further, we had suggested that an extra push towards any embargo scenarios may create a negative impact on the industry in the U.S., something which is not necessarily seen as a real threat today but must be considered by the policy makers. Bottom-line, whether the U.S. will be a small or large market may be the question at hand, but no company in the U.S. can compete on cost or volume with the Chinese. In fact, all three players: First Solar (FSLR), Sunpower (SPWR) and MEMC (WFR) are moving away from manufacturing deeper into project development to avoid losing conflicts.
On all above statements, one could conclude that U.S.-listed Chinese companies constitute the best investment option, bearing few adjustments to specific companies' size and handling of debt, market share, and operational ability. While private-sector and utility companies deliver billions of dollars in investment, public companies' market status is plagued by losses across the globe and the fear of lasting effects of misbalance between the cost and average selling price. In all our earnings reviews we had concluded that ASP is still dropping, thus eliminating potential profits, when faced with operating and financial expenses further down the income statement. Why then are leading companies, in what it has become a global graveyard of corporate competition, still in a position to lose money? Why are they engaged in a profit-destructive move despite clear global victory?
At the beginning the cause for low ASP was the competitive drive. Soon after, it became a mix of overcapacity and liquidation sales, which drove spot price below the costs. Now, having emerged victorious in the global markets, the U.S.- listed Chinese are using ASP in the critical fight with the home-based business. We have determined there are at least 300 entities in China, with around 100 being active ones with at least 16GW of ingot and wafer capacity, and around 7GW of cell and 9GW of module today. With the exception of around eight, having a scale, half operate below the 100MW threshold. This homegrown competition, rather than the cuts to German FiT, is the reason why leading companies seemingly are falling into the ASP dead spiral. Moreover, a still unclear position on consolidation by the provincial governments and central government of China is increasingly adding pressure to this situation.
China's objectives are to achieve 50GW of solar generated power by 2020. 2012, in some views, is to see as much as 7GW of demand. The potential growth of China as a market has possibly created a paradox in which more demand and a local pricing setup caused a ripple effect globally. Chinese U.S.-listed companies are just a few among many available at home. If China did not moved forward, something which many see as a saving grace for the industry, domination over global players by the Chinese would already lift the ASP and perhaps return it to profitability. What worked oversees, does not make the same impact at home. Tier one companies carry an add-on value, which is a result of relationships, brand recognition and other delicate connections made through years of global market presence. This experience plus product warranties are essential in deals in the U.S. and Europe in selling modules, but are not a differentiation factor in China. As domestic market grows, so does the risk of a new competition to gain strength and amass resources for the future. Highly competitive bids from Yingli (YGE) and Jinko (JKS), coupled with aggressive project development' plans by others are the examples where advantage of experience and business capabilities beyond manufacturing may win over small domestic producers. Developing relationships with main government-run utility companies by offering low procurement cost and thus higher profit to a buyer is something which could become yet another unique ability, while the mechanisms of the power generation, solar plant sales and the method of connection to the grid are still in a testing phase. As a plus to global Chinese solar companies, government is not really that idle either, and it seems to align its efforts by pointing to the scale to identify future winners. The governmental bodies had set rules on polysilicon production and focus on the quality of product has been the agenda for the modules and cells for the last year and a half. Perhaps this is why this described domestic capacity has only half of the number of wafers in cells and modules. In addition, tightening of banking rules also favors the likes of Trina (TSL) and Yingli , while keeping out financing for other small enterprises. And of course low ASP will facilitate operational dynamic below the cash cost, an ultimate killer to any enterprise.
In a sense of irony the ASP, the sole driver of income and current instrument of the loss, became the weapon that will, when low enough, submerge the competition. We can assume that global winners like Trina or Yingli can win at home, but it appears whomever will win at home will carry on as a global leader.