What LDK's Management Must Do - Immediately

| About: LDK Solar (LDK)

In the case of LDK Solar (NYSE:LDK), their inventory, or rather, better stated, their raw material status and costs, are key to their ability to provide products and generate positive margins. This is not unique to LDK, but the solar industry as a whole, as without one component, and that component is solar grade polysilicon, no one can produce product (nothwithstanding thin-flim manufacturing).

Also, not unique to the solar industry, is that all manufacturing. companies have critical path components, without which the sum of the pieces is just a compilation of stuff. Which is why multiple sources of key elements are often sourced by most companies. LDK is following this principle in using polysilicon from mulitple sources (virgn, scrap, recycled/reclaimed), but they have the extra added pressure of having to source these materials without knowing the extent to which they are usable.

Interestingly, though, and lost in this whole debacle of the inventory issue, is that LDK has been producing solar quality wafers for over 18 months, using mixes of virgin, scrap, and recycled polysilicon during this period as they are today. What this gives LDK is "experience" - experience at mixing the right proportions, knowing what is currently usable or not, and developing best purchasing practices for the materials they buy and put into inventory.

The other side of the experience coin is, some of the initial lots of polysilicon scrap and recycled materials may well be useless, as proven by the experience gained in trying to process this material. And while it is reasonable to hold onto those materials if your R&D indicates there is potential future value in those materials, it is not a good idea to maintain those materials on the books as "regular inventory".

At this point, it is in the best interest of LDK to simply put together a technical discussion of their use of combinations of polysilicon sources. Without giving away their cost metrics, they could provide a discussion based on "success processes" that they are using to meet current and future contract orders until such time as they are vertically integrated (producing their own virgin polysilicon). For example, if they have a historic "success" usage of 55% scrap, 20% recycled, and 25% virgin, then they should document this in a white-paper submission for public dissemination.

This paper, being a technical document, would not have to address the valuation of the inventory in-hand (that is being done by the inventory audit). However, it should address the success rates of their wafer production processes in terms of wafer quality, units shipped, and the overall percentage of inventory used to yield viable product. Much like precious metals refining, the key metric for evaluating the efficacy of LDK's processes, is to define its per unit material in vs. product out efficiency ratio (e.g. if one is mining gold from a pure gold vein, the efficiency of the process is very high; whereas, if one is mining gold from river silt, the efficiency factor is much lower).

With this information in the public domain, LDK would not be giving away trade secrets, but would greatly gain in credibility - above and beyond the rather ineffective, and functionally unheard comments made by management thus far.

Disclosure: none

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Tagged: , Semiconductor - Broad Line, China
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