Can LDK Solar Deliver As Promised?

| About: LDK Solar (LDK)

I have been doing some research and I have a problem with the solar companies, especially those coming out of China.

This sent out alarm bells:

SunPower Terminates Supply Deal Due to Problem With Polysilicon Quality

A Solar Holdings Co., a manufacturer of solar cells used to convert light to electricity, said Friday its JingAo Solar Co. unit has terminated a solar cell supply agreement with SunPower Corp. because of quality control and pricing issues.

What does that mean? I will tell you shortly.

I think SunTech (NYSE:STP) is the best of the best at the moment with actually spending money on R&D Research and Development, excellent management. They have also locked into long-term contracts with a key ingredient the supply of silicon at favorite prices. At the moment it is a bottleneck and a key ingredient to make the wafers for production.

LDK Solar (NYSE:LDK) is a relatively and young company with no track record. Manufacturing silicon with existing processes is a capital and energy intensive business.

Building a new plant can take two years, or even three year when you include planning.

The Chinese have an advantage when it comes to labor (a lot of sorting and testing is done by hand) but they are getting away ewith environmental pollution. I can't see them building these type of plants in eco friendly Europe or with strict North American environmental regulations. The Chinese are getting away with flushing toxic wafer polishing materials into the environment, and also spending less on research and development.

LDK has stated they are going to get into the business of producing the polysilicon and I just don't think they can deliver on this promise.

There are two main types of solar cell - crystalline and thin film. Tokuyana has 16 percent of the global polysilicon supply. They are very suspicious of these capacity announcements, especially Greenfield plants by companies with no prior polysilicon expertise.

If you read carefully between the lines in the article above, you see that they couldn't supply the product because of quality issues.

More severe issues confront all these newcomers like LDK who claim they can get a new plant constructed and ramped up in two years when experienced makers with decades of experience need three to four years.

Let''s put this in context: can you imagine someone coming along and saying they are going to compete with Intel (NASDAQ:INTC) and build a new semi-conductor plant in less than two years without quality problems with the product? It is just ludicrous. Before anyone says its not rocket science, it is rocket science to make quality wafers.

Just finding and training the people with the skills to run theses plants is a challenge. Thee execution risks are high and many will probably fail.

The manufacturing process is somewhat tedious and still requires manual labor. Additionally, a lot of relatively expensive silicon is wasted when slicing wafers (some 40 percent).

I think that is why there is uncertainty with LDK. I think LDK is a hold. I hate to say that but I think it is going to have trouble with its grandiose expansion plans. Then we have the small problem with management cooking the books. The inventory issue doesn't have me worried. It is the expansion plans to build a polysilicon plant with no prior experience.

I prefer Suntech Power Holdings (STP) and will watch LDK Solar (LDK) closely.

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Tagged: , Semiconductor - Broad Line, China
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