FirstSolar Foresees Pricing Pressure From Lots of New Capacity

Includes: FSLR, SPWR, TAN
by: Tiernan Ray

It was out the door and into the hallway for First Solar’s (NASDAQ:FSLR) presentation at JP Morgan’s technology conference.

“We can turn a sheet of glass into a functioning solar panel in less than two-and-a-half hours,” declared First Solar’s chief financial officer Jens Meyerhoff.

But what stood out to me was Meyerhoff’s observation that the market for solar technology is about to be hit with tons of capacity, in the form of amorphous silicon and polysilicon production.

That could spell much deeper cost competion, I imagine, though the company has sewn up a lot of existing business in long-term contracts, which it negotiated at prices below the market average. Leaving money on the table was the trade-off First Solar made to secure deals that would give the company long-term visibility, said Meyerhoff. The company has planned for there to be 6.5% declines in pricing in its industry on an annual basis.

There are barriers to entry in the fact that First Solar employ substantial trade secrets that are not revealed in patent filings, said Meyerhoff. And, too, the company owns its own custom equipment, rather than using off-the-shelf stuff.

Meyerhoff talked a bunch about the company’s cost structure. First Solar is able to deliver about 65 cents to 75 cents per kilowatt hour. Bear in mind that solar power is up against conventional energy sources with a price of about 12 cents per kilowatt hour in some cases.

The driving force in making solar more cost-effective is making conversion rates of solar energy higher. First Solar has seen its conversion rare rise from 9.5% to 10.6% in the last year, and the company is projecting an increase to 12% in the near future, though Meyerhoff noted there is a degree of uncertainty around conversion rate trajectory. Moving production to Malaysia is cutting 20 cents per kilowatt hour from First Solar’s cost, compared to its current production facility, added Meyerhoff.

The implication of all this was that the company’s ability to continue to lower costs of production hopefully means that First Solar can maintain the highest gross profit in its industry. That would help defray pricing pressure coming from the flood of new capacity.

Meyerhoff was also asked about what could expand the company’s market. He noted that First Solar has a current backlog of over $6 billion. Some areas of the Southwestern US could open up in the near future, he said, though First Solar’s projects in the US, however, remain “learning projects” at the moment.