Solar Collapse Before The Dawn

Aug.21.12 | About: Dow Chemical (DOW)

Trina Solar (NYSE:TSL), one of the Chinese companies commenters here like to assume will win the solar market, now says it will record a big loss for the quarter, that its costs are rising, and that it will be cutting shipments.

The pain is being felt industry-wide. Canadian Solar (NASDAQ:CSIQ) is talking about its balance sheet because you don't want to know about its earnings. JA Solar (NASDAQ:JASO), another Chinese company, is down near the corporate "Mendoza Line" of $1 a share. A wave of consolidation is expected throughout the Chinese industry as smaller suppliers are pushed to the wall. The Chinese business press, which covers the solar industry extensively, remains obsessed with the prices of silicon, wafers, and cells.

It's worse here, of course. Companies are dropping like flies in both the U.S. and Europe. Companies that based their business models on "me too" silicon wafer technology are being crushed. Solar bears will tell you this means the industry is circling the drain, or that China has won its game of "chicken" with American suppliers and is poised to dominate the solar industry long term -- so we better start digging coal.

But these bears miss the point. Change is accelerating in the sector, and bigger players always have a harder time adapting to change than smaller ones. Especially when the change is basic.

That's very true in solar, where solar shingles made of "Earth-abundant materials" like copper and zinc were described at the recently American Chemical Society meeting in Philadelphia. And if you're looking for a play in this game, look no further than Dow Chemical (NYSE:DOW), which has been leading the materials research effort.

Europe, meanwhile, is focusing on getting more value from the solar panels it already has, with Smart PV systems that turn panels into "intelligent systems" able to adjust automatically to the available solar radiation.

The more important point about all these developments is that they will bring the per-watt cost of solar well below the 50 cents per watt figure that is said to be required in order to beat grid energy in the marketplace. As solar energy becomes the cheap energy, margins will compress and the advantage will only then start moving from the "buy" side (the re-seller side) to the "sell" side (actual panel manufacturers). This echoes what happened in the computer industry, where margins compressed in the transition from mainframes to PCs, but sales exploded and profits moved from the salesmen to the producers.

In any market facing rapid, even accelerating, change, the advantage goes to the businesses -- and countries -- that can adapt most speedily to that change and which can lead that charge through research expenditure. For the most part, these will be American companies that don't exist yet, or aren't yet publicly traded. But companies that are acting as "arms merchants" to these newcomers, in terms of both supplies and technology -- like Dow -- will also benefit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.