First Solar's Rapidly Expanding Economies of Scale

I've recently been reading a book titled Solar Revolution written by Travis Bedford, a fund manager and corporate buyout specialist. He has an interesting perspective on economies of scale among solar panel manufacturers. We all know the price of PV is falling by 5-6% annually. The author deals with it in a different way. He considers that each time PV doubles the volume it's manufactured price goes down 18%.

Looking at economies of scale in this way, I'm more bullish on First Solar (FSLR) than ever. Winners keep winning because they're able to grow economies of scale and therefore cut costs faster. Losers like China Sunergy (CSUN) and Trina Solar (TSL) keep falling behind. People consider FSLR 2-3 years ahead in technology. This means it would take Suntech Power (STP) 2-3 years to produce at FSLR costs. For example, in 2010 STP will probably have utility scale installations of over 1 MegaWatt at $4 watt, which is what FSLR costs now. By then FSLR will probably cost $3 watt, which may take STP until 2015 to reach. FSLR is lowering costs much faster than the industry standard of 5-6%, since cdte has a steeper "learning curve."

There's no way to really put a price tag on a 2-3 year lead, but the market is valuing it as nearly the sum of the market caps of STP and SunPower (SPWR) combined. This may in fact be too low.

FSLR has three huge cost advantages.

1) It's the lowest cost producer right now

2) It's reducing costs fastest among publicly traded companies due to technological breakthroughs

3) It's reducing costs fastest with increased economies of scale due to the fastest revenue growth rates.

Of course, the various CIGS companies such as Nanosolar and Miasole promise an even steeper learning curve with prices below $1/watt. But without any track record to speak of, my money is on FSLR.

Disclosure: Author has a long position in FSLR

Comments

[Mark Anthony]

I must point out to readers of this article that there can NOT be any growth and expansion of FSLR, despite of its aggressive plan of building new factories and signing new sales contracts. Please read this Seeking Alpha article, which is rated the No. 1 short idea article on Seeking Alpha:

Cadmium Telluride Cast Shadow (of Death) on First Solar
seekingalpha.com/artic...

There are good reasons that article was rated the top shorting ideas by the readers, and why it was censored on other financial sites so you could only see it here on Seeking Alpha. For example Yahoo Finance ignored it. Just go read it and you will know the real reason for censorship.

In short, both cadmium and tellurium can kill FSLR in a few short years, or even in a few months.

[Mark Anthony]

This is the worst of hot air empty pumping article on Seeking Alpha. It does not qualify for Seeking Alpha publication standard. There is no citation of any information source to support the view point. There is NO logical reasoning or explanation of why increased scale will necessarily reduce FSLR cost. It's hot air pumping without any convincing argument.

The only truth in the article is FSLR indeed is rapidly building new factories and production lines to increase production. But it will NOT bring down per unit cost at all. All the production lines are replicated exactly the same, factories are built the same, and requires the same number of workers to operate. They build factories in Malaysia, which helps to reduce labor cost. But the reduction is very limited, and it has nothing to do with scale of production.

Look at this way: The numebr of workers, amount of raw material, machinery depreciation and every cost, are all linear proportional to number of production lines they have, because all production lines are the same, so there really is no cost saving in scale of production.

Further, as I point out, the world will not be able to supply the amount of tellurium the new factories required, at the low cost that allows FSLR to make a profit. The more they scale up production, the more they bid up global tellurium price, and the more it costs them per unit of product. They will squeeze out their profit margin as they expand and it eventually will kill themselves:

seekingalpha.com/artic...

[TLD2]

You obviously didn't read my reply to yesterday's comment you made. Well here it is again... read this link: firstsolar.com/pdf/Bro... Is the world going to stop mining? Don't think so... CT is a bi-product...it's being recycled etc...you are trying to mislead people into believing FSLR is going down the tubes...up 4% today and up more tomorrow I'd bet. You'd better cover your shorts or you'll loose them! LOL Try reading the link provided above and you'll see how Mr. Ling is "right on the money". Or maybe you won't...I forgot your "bearish" stance. :)

[floridadon]

TLD2, thanks for the link. It gives a very good overview of raw material sourcing and use. Once one realizes the minimal amount of material deposited and researches current prices it is evident why this company has generated the excitment it has.

[fxtrader07]

that document keeps tellingly silent about te-supply and costs.
Te is a buy-product in copper mining, yes, but it's not to be found in every copper mine! quite to the contrary!
the paper you have linked discusses potential environmental damage caused by FSLR's technology, broken panels etc. And btw, imho it downplays these risks considerably.

[TLD2]

You are a very wise man Mr. Ling. Here's a link for you too: firstsolar.com/pdf/Bro... (Same one as Mark Anthony's but I'm sure you'll appreciate it more!) I got in FSLR at $24.84, the first day. They are local for me, Toledo Ohio, and they are an all around top knotch group of people. I know they won't keep rising forever at such a pace as they have so far, but I believe it will keep advancing at least until 2010-2011. Maybe I'm wrong and they will keep shooting the stars...It's all good anyway!

[Mark Anthony]

TLD2:
You are embarrassing yourself. I don't see what's your point citing that NREL paper? It's totally irrelevant. The paper discussed cadmium environmental impact during the whole production cycle. The paper contains NOT a single number regarding global tellurium production. The paper also contains NOT a single meantioning of RoHS, the Enropean environmental regulation that could kill FSLR.

[solar jim]

Actually, if you are need pure Te then yes, it will cost money. FSLR DOES NOT use pure Te, hence their price is not a problem. They get it as a byproduct of a mining process to obtain other metals. Additionally, FSLR has stated that the current amount of material from mining byproducts is enough for them to manufacture tens of gigawatts per year. Again, the price of Cd and Te is not an issue in their production. You should realize they are using a micron thickness of material and that in the end the cost of that component is minimal.

[Mark Anthony]

Solar Jim:

FSLR uses CdTe, cadmium telluride. tellurium is about 53% of CdTe, ther other 47% is cadmium. The CdTe layer is about 3 to 4 microns thick. But it is a big area of 2 feet x 4 feet per panel. So that's about 7 grams of cadmium and 8 grams of tellurium. The 7 grams of cadmium is quoted from FSLR's own web site. One panel currently can produce 70 watts. That's 114 kilogram per MW, or 114 tons per GW.

The global production of Te is about 170 tons to 200 tons:
www.mmta.co.uk/economi...

Don't expect FSLR to be able to obtain a big chunk of the 200 ton per year production. Lots of other industry users need to use tellurium. The price jumped from $25 per kilogram at beginning of 2004 to $175/kg in late 2005, primarily driven by OTHER industry demands, because at that time there is virtually no demand from FSLR yet.

Tellurium is extremely price inflexible. Typical industry users only use a trace amount in their product. FSLR uses far more than any other industry user, per unit of product. So demand destruction will force FSLR to stop using tellurium before the price is high enough to force other users to give up. On the supply side it is equally price inflexible. Unless it reaches the price level of gold, there is no incentive for copper producers to spend money on technology to produce more tellurium, because the quantity is too small to be worth the effort.

At $100 a pound, the tellurium cost amounts to $1.76 per panel, or 3 cents per watt. That does cut quite a bit into the profit margin. In Q1, Q2 of 2007, the operating profit was only 7 cents per watt. So 3 cents is a big deal. If tellurium price increase 3 times, it will cut 10 cents per watt in the profit margin, that will really put future profitability into question.

The economy of supply/demand is price must keep going up until demand is suppressed down to the level of supply. FSLR demand will be the first to be supressed, because it is the most sensitive to tellurium price!

Read more here:

stockology.blogspot.co...

[Andrew Ling]

Mark, you really think 3 cents/watt is significant? Polysilicon costs are currently $2/watt. FSLR has reduced costs by over $1/watt in the last 3 years alone. The Malaysian plants being built further reduce costs an additional 15 cents/watt due to location alone although the actual cost reductions will probably be 30-45 cents/watt when considering increased efficiencies and throughput.

Within about 4 years FSLR's costs may be so low that it's cheaper than monocrystaline PV even if companies such as STP got their polysilicon for free!

[fxtrader07]

well, if you produce 1GW, 3 cents will mean 30 million $ after all - if you can get the Te in these amounts at all. But anyway, that's not the point i want to make.
Have you even noticed that FSLR has to recycle each and every panel made by them? And that the costs for doing so might be substantially higher than projected and allowed for by the company? have you noticed that just one broken panel could cost the company huge amounts in litigations when the cadmium gets dispersed? Do you have an idea what such an event would mean for its future business? yep, it would fall off a cliff! contracts will be cancelled en masse. nobody would by it anymore, becuase nobody would risk to face asbestos-like claims. If i were ceo of a homebuilder offering homes with solar-panels inclueded, i certainly would not buy FSLR's panels. Which might explain why they have ZERO customers in the U.S. Well, Europe might be shut soon to them as well, precisely because of the Cd involved.
Slice it as you want - the risks to a major and potentially deadly hit to FSLR's business are enormous.

[GeorgeJurgensen]

Andrew,

your points are well taken. There are some risks. Honda Soltec is publishing modules of their CIGS products at 125 and 115 W, while FSLR is around 70. Sunpower, the market pv efficiency leader, publishes 220W plus with their silicon based product, so installations require less space even if at a higher cost per watt in the modules, saving some installation costs. Honda and other Japanese CIGS producers may prove to have the low cost technology. US CIGS including Daystar seem behind the curve. I don't yet have a good read of Honda's costs, but Honda indicates their cost will be well below polysilicon costs. Higher than expected efficiencies in manufacturing or in pv efficiency will boost their cost advantage.

Another analyst (Mark Anthony) at Seeking Alpha is publishing comments about risk at FSLR due to escalating Tellurium costs and shortages used in FSLR's CDTE product. I have been trying to evaluate this risk, but so far believe it is manageable, though the SA analyst brings up sharp risks if he is correct...I cannot confirm his 7-8/gm per module and suspect this is high, nor do I know FSLR's inventory. I believe price sensitive competing uses and additional supplies to the market of TE, FSLR's inventory and purchase contracts, and increasing manufacturing efficiency limiting TE requirements mitigate FSLR's risk in TE pricing, but we'll see.

Disclosure: I am currently long on FSLR in a Bull spread position and own Honda stock.

[Andrew Ling]

George, I'm aware of all these competing CIGS technologies. They were the main reason I was hesitant to buy FSLR back when it was $33. At the time many analysts were saying to wait and see who the winner will be. Well, they aren't saying that anymore as it's pretty obvious FSLR will be one of if not the sole winner. Even if some CIGS company manages to reach an economy of scale in which they can compete with FSLR in price, it'll probably be about 5 years down the road since none of them presently have the experience or the billions in cash necessary presently. By then FSLR will probably be trading much higher, and you'll have plenty of opportunities to sell.

"Mark Anthony's" points are also irrelevant and there is more than enough tellurium for the foreseeable future. Once again the only supply risk would be 5-10 years down the road if FSLR continues it's pace of hypergrowth upon which the stock will be trading much higher.

As for SPWR's high efficiency panels, this may come into play 10 to 15 down the road when PV becomes so cheap that people will want to maximize the amount of electricity they can generate. As of now it's negligible since few people even fully cover usable rooftop space.

FSLR is well positioned for the next 3 years and the industry is well positioned for the next 40. If a better opportunity presents itself within the industry, such as a nanosolar IPO for example, there will be plenty of time to rotate out.

[Andrew Ling]

BTW, "Mark Anthony" known as ii2000426 on the Yahoo message boards had repeatedly made up facts, accused FSLR management of lying, and called for SEC investigations. I wouldn't take what he has to say seriously. Nobody in the yahoo boards does anymore.

[elprospector]

Well said Mr. Ling. From my on-the-ground perspective, "Mark Anthony" is full hot air regarding Te.