Solar Progress: Reminiscent of Multi-Chip Modules and Optoelectronics

by: Dirk McCoy

Nearly every day finds another article about solar technology and startups and their progress. $1/Watt used to be the Promised Land of production cost - and certainly a huge advance over the $300/Watt costs of the early 80s - yet First Solar (NASDAQ:FSLR) has reportedly beat that mark. And Charlie Gay of Applied Solar has reportedly said, "The Moore's Law for solar is that as time goes by, things get thinner and still absorb light." Heady talk, indeed.

The progress, competitiveness, and challenge in solar technology is eerily similar to two high tech markets of the past 20 years: multi-chip modules (MCM) and optoelectronics. They all share the following similarities:

1. A new hope for breakthrough performance- MCMs for electronic density, optoelectronics for bandwidth, and solar for energy cost and supply;

2. Extensive investment by Venture Capitalists into startup companies with technology differentiators, as well as significant entry by established and foreign firms;

3. Challenges in adopting standards, justifying initial expense, and macroeconomic conditions that put a dent in industry growth- for MCMs it was a downturn in the early 90s, for optoelectronics, the tech bust of 2000-2001, and for solar, the current global slump;

4. Skepticism regarding the ability of the technology to achieve what was being promised, especially given quoted market prices rarely matching up with guru projections (MCM participants may remember the vaunted $1/sq. inch).

In MCM and opto, what happened next was overcapacity and underperformance. In the ensuing shakeouts, the smallest companies were left scrambling for acquisitors (or auctioneers), the largest companies pulled back, and companies with low cost country capacity were left in position to pick up pieces of the technology to use their cost advantage to win significant share- avoiding losses, and implementing the technology, albeit at a lesser scale and performance than projected by the higher-tech startups.

So, what can we infer about solar from this history? First, proven revenues are critical. The "half as much in twice the time" rule certainly applies to solar projections, and profitability suffers as market participants fight for share, so limiting losses is critical. With rosy projections around every corner, startups will come and go as government funding comes and goes, and even established companies like Amkor and Lucent lost hundreds of millions or more while participating in MCM and opto.

Second, beware massive writedowns from decimated goodwill and operational disasters. High tech PCB shops were notorious for following three quarters of decent profits with overwhelming loss, and JDSU set a record with its $40B writedown. With reports of $3B of US government funding set to be partitioned out, many companies will hold off on setting reasonable values until the destinations of those funds are better set.

Third, despite the bumpy road, don't count out the technology, nor its benefit to society and ultimate participants and users. High density electronics packaging (with attendant licensing fees) enabled Apple create its iPod, and broadband internet is changing the world. The ultimate winners in solar energy utilization remain to be crowned.

Fourth, don't be surprised to see foreign firms, or firms with low cost country manufacturing capability, emerge triumphant. Protectionism seems a likely response to this threat given energy security considerations, yet the ultimate viability and implementation of solar may rely on foreign capacity in addition to our own- and all these panels can't be installed and maintained by low wage workers.

There will be some disagreement as to where we are in the current life cycle of solar- many years ahead of the shakeout, months ahead of the shakeout, or on a totally different path that will avoid a shakeout (unlikely). But while the lessons of history can't always be used to foretell the future, they can certainly inform what we should watch out for.

Disclosure: No positions