As Intel Joins the Solar Sector, Is There Room for Everyone?

Ignore the bashers who say solar power is hype - they, much like the Federal Reserve and our government leaders still live in the 1970s/1980s. [Jun 7: As Energy Costs Soar, US Looks to Solar] With or without government, pure economics is going to drag the United States of Subprime into the new era, right about the same time China jumps in full scale... (note if oil falls to $40 by Halloween this post will be deleted and I'll disavow any knowledge of solar)

Granted, it would be healthier for us all if the government actually helped instead of hindered, but that's asking too much - you'll have to move to a socialist European country for such crazy ideas.

That said, as I've warned multiple times - while the trend is clear for the industry, ultimate winners and the marketplace holds many uncertainties [Jan 3: The Long Term in Solar] I wrote

Let me preface this post by saying I am a long term bull on solar, and in fact was an 'early adopter' among the investor class, that is I was invested over a year ago in my personal account. So I am not a Johnnie Come lately to this area. With that said, I do have some serious concerns in the 'mid term' (1-4 years)... my thesis is like all mfg goods, especially now heavily based in China, we will have periods of time over the next decade where capacity does not match demand, and even if this holds for a 4-6 quarter period, serious price wars can develop. I outlined this theory in detail in November in [Interesting Survey from Chinese Solar Companies - Price Concerns Already an Issue] In fact Jeffries analyst even thinks this is going to start happening next year [More Concerns about Solar ASP Pricing]. It is not a matter of if, it's just a matter of when ... but "when" is the key to investing in this space. (one can make a lot of money, before having to face the music)

We will have some great shakeouts and many of these no name companies rising 400% I expect to be delisted, acquired for pennies on the dollar in half a decade or just be gone. This will shake out much like the semiconductor industry and in the long run I believe there will be 5-7 major giants who will be quite profitable companies. But where does that leave the other 50-70-90 (and more coming each quarter online?)

The announcement by Intel (INTC) highlights these "long term" risks - as did the foray by Applied Materials (AMAT). Solar dreamers will tell you there is room for many many winners because the opportunity is so huge. I do agree the opportunity is huge, but I've never seen any business sector where there are 30 or 40 winners. In the end, this will be a high volume, low margin business - almost equivalent to the semiconductor business unless/until a different technology breakthrough comes down the road.

Price wars will be rampant. So there will be great shakeouts - and the ultimate winners in a decade could be names we haven't even heard of yet. But as we always say, the "long term" on Wall Street is next month, so we'll just keep our investing dollars focused on the next 6-12 months, while ignoring the blithe frothing at the mouth from people who believe 100+ companies are going to be ultimate winners because solar is just 0.0000001% of today's energy use.

I would say JA Solar (JASO) is a key solar cell supplier so this move by Intel, onto what appears to be their turf could be a danger sign. Now, at this point in the solar cycle - when any 1 company reports something good, they all trade together as if competitors doing well is a great thing. I've been fascinated to watch this, but over the medium term, people will begin to realize these are competitors and great news for company A means company B has more stress.

But watching this sector for 2 years now, I expect no one over at JA Solar cares about Intel potentially invading their turf - buy buy buy. One more positive? Jim Cramer can now tout Intel (INTC) as the great next solar company like he does with Applied Material (AMAT) and First Solar (FSLR) (he actually calls First Solar the Intel of Solar - so what will he now call Intel?)

• Intel (INTC) is joining the growing ranks of chipmakers with solar energy aspirations, announcing the spinoff of its key photovoltaic assets into a new standalone company Monday.
• Intel's investment arm, Intel Capital, will lead a $50 million funding round in the new company, to be called SpectraWatt. Goldman Sachs subsidiary Cogentrix Energy will also pitch in on the deal, along with a couple of other investors.
• The company is expected to begin shipping products by mid-2009, with construction of a new manufacturing facility in Oregon slated for later this year.
• Earlier Monday, IBM(IBM) announced a partnership with Japan's Tokyo Ohka Kogyo, a semiconductor manufacturing equipment firm, to develop low-cost methods for producing solar energy products.
• Applied Materials(AMAT), the world's No.1 maker of semiconductor manufacturing tools, is pouring resources into a new business group dedicated to building and maintaining solar panel factories.
• Intel said that SpectraWatt will manufacture and supply photovoltaic cells to "solar module makers," while focusing on manufacturing improvements that lower the cost of solar energy generation.

Pathetic stat of the day - the market capitalization of First Solar is higher than all the Chinese publicly traded solar companies put together. Now that's Cramer power for you. We'll see how that looks a year from now when polysilicon prices begin to really drop (which have been holding down gross margins), and these companies which have been stifled by the high prices can go head to head on product pricing. It will be interesting indeed - somehow I see that halo around First Solar being knocked off a bit, if not in 1 year, certainly within two.

Disclosure: Long none mentioned; I only own solar stocks that pull surprises at their earnings call every 90 days.

Comments

[tessant]

the last two times all of tech got into something, it produced the pc and then the internet. i think energy is such a big industry, there is room..

scott
solarfeeds

[twampus]

i think you are reading the hype wrong. IF the PV space future was going to bear gangbuster profits, they would bring existing mothballed small sites online and they would use this product line as a vehicle for growth on their fully depreciated capital equipment. this would grow production a lot faster than building a new site. seriously, if anyone could make Si based PVs, it would be intel. they're a juggernaut in Si, manufacturing, and the brand would sell itself at a premium. I see this between the lines: "yes, it could be profitable, on the order of 5-20%, which is a big step down in margins." i really could not envision intel walking away from major growth opportunity in their core competency unless they saw insufficient upside. solar will either commoditize rapidly or never meet intel margin expectations, intel makes these decisions often - just ask the memory folks that work for Numonyx.

[sunrises]

Hi Mark:

I've been looking a nice solar company. All the current companies are having incredible high runs. Intel is a possibility. Are there anymore new solar companies that are very reasonably priced?

[Jack Yetiv]

Mark, the answer to your question--whether there is enough room--all depends on whether solar reaches grid parity in average sun locations, which will depend on nat gas/coal prices staying up and carbon taxes coming in, as well as cost of solar coming down.

Since I believe that nat gas and coal WILL remain high (if not go higher) and since I believe we are not far from having to start to pay for CO2 release, I believe average sun locations will reach grid parity within 2-3 years.

Once that happens, I believe demand will increase at a compounded annual rate of well over 100%, and yes, there will be room for at least the next few years.

Beyond a "few years," it's a wild guessing game.

Jack

[TraderMark]

I actually think once China and India start to let subsidies subside we could see a serious correction in energy prices (ex - coal)
But the long term trend is up... we are just in a hysteric mode at this point... could see crude back to $100-$110 very easily.

But thats short term - I just hope when/if oil retreats to that level and gas goes to $3.25 Americans dont stop alternative energy pushes and go back to SUVs... we have such short memories.

[vitamin_j]

I have a big picture question for Jack and Mark:

Isn't "grid parity" for solar a bit of a paradox, since as companies get closer and closer to achieving it (Suntech's CEO actually threw out a cost/watt, I think around $2, at InterSolar de), global demand will increase on an exponential curve (STP CEO also indicated that China was waiting for this point to really get into solar), keeping prices higher than "grid parity"?

Put another way, will the supply chain, even expanding as it is, be able to absorb an exponential increase in demand? Will it do this smoothly or do you think there will be a series of hiccups (like the 2002-2007 spike) that will swing prices around violently?

[Diva]

Awesome news !!

[vitamin_j]

Mark, you mention how SpectraWatt will be positioned in the solar value chain, in direct competition with JA Solar (and Q-Cells, which I don't think you mention), while serving the "module makers."

Why not go one step further and say that, if SpectraWatt can successfully apply Intel manufacturing advantages, at least some significant benefits will go downstream to those module makers, and, one assumes, to system integrators/installers like Akeena? How fair an assumption do you think that is?

[TraderMark]

Certainly could be - frankly I'd be surprised if SpectraWatt is solely a cell mfg in 3-5 years - why not go the whole vertical integration route? Depends on what they want to do of course - but those with size/scale should be the ultimate winners. If INTC wanted to go this route, they have the size/scale. So we shall see how it plays out.

I would not be surprised to see other semi players especially in Taiwan get into the process as solar moves incrementally from "70s hoax" to "2010s reality"
And they can scale quite quickly based on decades of process...

Just have to keep an eye out on these "under the cover" announcements and see how far old school companies decide to infringe on this space. I do think the market opportunity could be/will be enormous hence why I believe we will see a stampede of elephants within 5 years. Destroying profit margins ;)

[TraderMark]

More polysili supply coming online in the long run - China's largest contract chip maker joins in. As I said, we should see Taiwan as well - its going to be a whole new world

www.reuters.com/articl...

Semiconductor Manufacturing International Corp, China's biggest contract chip maker, plans to become a maker of polysilicon, a key material for solar energy cells, a source familiar with the situation said on Thursday.

SMIC is in talks with a German company to obtain the necessary technology, said the source, declining to identify the German firm.

[VSD]

The bigger question is if Solar is going to win as the alternative fuel of choice. That is not a foregone conclusion yet. Solar energy replaces Natural Gas generated Electricity and Coal. It does not replace Oil. As such it is a not a alternate energy technology but a "clean feul" technology.

It would be very foolish to not use the abundant coal that we already have. Clean coal technologies are better alternatives to Solar.

Also, without utilities signing on to Solar in a big way there won't be the market that can support 36 (and counting) solar companies. The decision for utilities is always a political one. We would have to wait until after the elections to know if utilities will adopt solar. If you look at who runs utilities you will notice they have vested interest in nat gas and coal. They are not going to just abandon it and move to solar.

Today's solar market is mainly europe and mainly residential and subsidized through FITs. Without US adopting solar at the utility level, this technology is not going to take off. So to answer your question, I don't yet think there is a market there even for JUST intel.

[TraderMark]

"clean coal" is a misnomer - its a term politicians and the industry throw around - there is no such thing. There is "cleaner" coal, but "clean" no way.

Note - I am a coal bull... but I am stating the reality.

[aquaculture]

In fact, there is one "clean coal" technology.
Carbothermic Arc Reduction of silica: ultra pure carbon in, ultrapure silicon out.