PV Supply Chain: Q2 Revenues Rebound but Margins Fall

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PV Supply Chain: Q2 Revenues Rebound but Margins Fall

Strong Outlook for Chinese Players in Q3’09

By Ross Young, president, Young Market Research (October 1, 2009)

After falling 44% from Q3’08 to Q1’09, revenues rebounded sequentially in the photovoltaic (PV) supply chain in Q2’09. Q3’09 looks promising on seasonal strength and lower costs and prices, but the gains are not shared by all segments, regions or companies. As shown in Figure 1, revenues for the publicly-traded companies that produce polysilicon, wafers, cells or modules rose 18% Q/Q to $4.7 billion, but declined 27% Y/Y.

Figure 1: Q1’07 – Q2’09 Revenues for 25 Publicly-Traded PV Supply Chain Manufacturers

    Source: YMR’s PV Supply Chain Health Report. Includes Arise Technologies, Bosch Solar, Canadian Solar, China Sunergy, DelSolar, Energy Conversion Devices, E-Ton Solar, Evergreen Solar, First Solar, Gintech, JA Solar, LDK, MEMC, Motech, Neo Solar Power, Q-Cells, REC, ReneSola, Sanyo, Sharp, Solarfun, SunPower, Suntech, Sunways, Trina Solar and Yingli Green Energy.

Cell/Module vs. Polysilicon/Wafer Manufacturers

If we segment the market into polysilicon/wafer and cell/module manufacturers as shown in Figure 2, we see that cell/module manufacturers grew much faster than the polysilicon/wafer manufacturers. This can be attributed to the large over-supply and rapid decline in polysilicon and wafer prices. Polysilicon prices were falling faster than cell/module prices and cell/module manufacturers were sitting on significant inventories of polysilicon or wafers which accounts for the disparity.

Figure 2: Q1’07 – Q2’09 Revenues by Segment

    Source: YMR’s PV Supply Chain Health Report. Silicon/wafer segment includes LDK, MEMC, REC and ReneSola. Cell/module segment includes Arise Technologies, Bosch Solar, Canadian Solar, China Sunergy, DelSolar, Energy Conversion Devices, E-Ton Solar, Evergreen Solar, First Solar, Gintech, JA Solar, Motech, Neo Solar Power, Q-Cells, Sanyo, Sharp, Solarfun, SunPower, Suntech, Sunways, Trina Solar and Yingli Green Energy.

Segmenting by Region

Another way to segment the market is by region. There has been a lot of media attention on Chinese-German competition. As shown in Figures 3 and 4, when comparing only cell/module manufacturers:

  • North American manufacturers are performing the best— thanks to First Solar’s cost leadership, rapid capacity growth and high fab utilization. Unlike all other regions, North America’s revenues actually rose from Q3’08 to Q2’09, up 11%, including growth of 25% Q/Q in Q2’09.
  • Chinese manufacturers saw the largest declines from Q3’08 to Q1’09, down 61%, but experienced the fastest growth in Q2’09, up 32%. However, their revenues are still 48% off their Q3’08 results.
  • German manufacturers fell 39% from Q3’08 to Q1’09 and rose 11% in Q2’09. They were still off 33% from their Q3’08 results, but they have lost less ground than their Chinese competitors.
  • Taiwan manufacturers’ experienced the smallest increase in Q2’09, up just 1%. Like the Chinese manufacturers, they are off 48% from Q3’08. The lack of growth from the Taiwanese manufacturers can be attributed to their focus on the cell business. As the leading manufacturers expand their vertical integration efforts into systems and installations and installers flock to better recognized brands, there is less opportunity for cell-only suppliers. Without the downstream relationships, it is likely that their margins aren’t as good either. Now let’s examine profitability.

Figure 3: Q1’07 – Q2’09 Cell/Module Revenues by Region (HQ Basis)

    Source: YMR’s PV Supply Chain Health Report. Germany includes Bosch Solar, Q-Cells, Sunways and SolarWorld. China includes Canadian Solar, China Sunergy, JA Solar, Solarfun, Suntech, Trina Solar and Yingli. Taiwan includes DelSolar, E-Ton Solar, Gintech, Motech and Neo Solar Power. North America includes Arise, Energy Conversion Devices, Evergreen Solar, First Solar and SunPower.


Figure 4: Q2’07 – Q2’09 Cell/Module Revenue Growth by Region (HQ Basis)

Source: YMR’s PV Supply Chain Health Report

Margin Performance

Margins for the PV supply chain are shown in Figure 5. As indicated, margins continued to worsen from Q1’09 to Q2’09 on lower prices and the fact that lackluster demand made it difficult for manufacturers to sell-through their high-priced polysilicon/wafer inventory. Some companies were not able to take advantage of the rapid decline in polysilicon spot prices as they were struck in long-term, fixed price contracts or reduced shipment volumes prevented them from turning over their expensive polysilicon or wafers.

Figure 4: Q1’07 – Q2’09 PV Supply Chain Margins

Source: YMR’s PV Supply Chain Health Report.

If we segment these companies into polysilicon/wafer and cell/module manufacturers, we again see cell/module manufacturers outperforming polysilicon/wafer manufacturers in Q2’09 as shown in Figure 5. Most of the disparity in gross profits can be attributed to a large inventory write down at wafer supplier LDK as it failed to sell its expensive polysilicon inventory following a large write down by ReneSola in Q1’09. Cell/module manufacturers have also written down inventory, but they are less exposed than wafer manufacturers and LDK and ReneSola are losing leverage with polysilicon manufacturers as they bring on their own internal polysilicon production. This brings up the timing of their polysilicon ramps which couldn’t be worse and in LDK’s case, they already indicated that their initial production costs will likely be above spot market prices putting a serious strain on their liquidity.

If we examine gross, operating and net profit margins by region, we can see that:

  • North American companies are performing the best, led by First Solar, which has by far the highest margins in the industry with gross margins actually improving in Q2’09.
  • German companies had the second highest gross margins at 24%, but experienced negative operating margins largely due to a number of Q-Cells write-offs including the devaluation of cell/wafer inventories. Both Q-Cells and cell supplier Bosch Solar had a surge in inventories and negative operating margins which points to the problems that cell-only suppliers are having in this market as the market favors the more vertically integrated companies due to greater visibility into end-market demand and greater control over their cost structure. German companies also had the worst net margin performance due to a ~$300M charge Q-Cells took on the sale of its stake in REC which represented the difference between its book value and sale proceeds.
  • Chinese companies improved their gross margin performance from 10% to 16% and had positive operating margins but experienced -8% net margins due to write-offs from Solarfun for inventory and pre-payments and non-cash charges to Yingli for debt repayment and loss on derivatives. Excluding the charges, all Chinese suppliers had positive operating margins.
  • Taiwan suppliers had the worst gross and operating performance in both Q1’09 and Q2’09 which is indicative of the lack of leverage cell-only manufacturers have in today’s PV market. All the Taiwan suppliers experienced negative operating margins in Q2’09 and all experienced negative operating margins in Q1’09 except Motech which was break-even.

Figure 5: Q1’07 – Q2’09 Cell/Module and Polysilicon/Wafer Gross, Operating and Net Margins

Source: YMR’s PV Supply Chain Health Report.

Table 1: Q1’07 – Q2’09 Cell/Module Manufacturers; Gross, Operating and Net Margins by Region

Source: YMR’s PV Supply Chain Health Report.

Market Outlook, Lower Costs and the Search for Higher Margins

Seasonally, Q3’09 looks to be the strongest quarter of the year although the development of the USA and China markets could potentially enable Q4’09 to be just as strong. Some manufacturers are expecting Q3’09 to be exceptionally strong as a number of projects were deferred from 1H’09 as project developers waited for prices to fall further and at the same time developers are looking to finish projects before the end of the year fearing budget reductions and lower subsidies/feed-in-tariff rates. However, the gains are not expected to be shared evenly. Chinese companies are expecting rapid growth in Q3’09 as seen in Table 2. At these growth rates, some of these manufacturers expect to achieve full utilization. On the other hand, European companies have a much different outlook and are reducing capacity utilization or taking capacity offline as shown in Table 3 due to excessive inventories.

Table 2: Chinese PV Manufacturers’ Q3’09 Shipment Guidance

Source: YMR’s PV Supply Chain Health Report.

Table 3: European Manufacturers’ Q3’09 Outlook

Source: YMR’s PV Supply Chain Health Report.

A significant reason for the difference in outlook is the Chinese companies are more vertically integrated, most have brought at least wafer capacity in-house, which along with lower labor costs, shorter polysilicon/wafer contracts and lower gross margin targets has resulted in lower costs and prices. In addition, because the wafer process is more capital intensive than the cell process, Chinese manufacturers are looking to price more aggressively to win more business and keep the wafer process operating at higher utilization levels.

Costs are also expected to fall rapidly in Q3’09 as more and more manufacturers see their polysilicon/wafer costs approach spot prices as they renegotiate medium and long-term contracts, write-off expensive inventory and/or increasingly rely on the spot market. Yingli guided to a 35-39% reduction in polysilicon costs from Q2’09 to Q3’09 and a number of other companies expect at least 20% Q/Q declines.

Where are costs today? Figure 5 reveals costs for one Chinese manufacturer, Trina Solar, which shows how the rapid drop in blended polysilicon costs (a mix of long-term, medium-term and spot market prices) has impacted total production costs. If this company’s polysilicon costs approach spot market prices of $60/kg in early 2010, this means its total costs would fall to around $1.10/W or $0.33/W above First Solar’s current costs of $0.87/W. With c-Si manufacturers claiming a $0.20-$0.30/W balance of system cost advantage depending on the installation location, etc., First Solar’s cost advantage could shrink to under $0.10 and with lower gross margin targets, one could expect some c-Si manufacturers to price below First Solar. For this reason, as well as to spur demand in a weak financing environment, First Solar implemented a rebate program in Germany which it expects to cost $40-$60M in 2H’09 as it sends a message to its competitors that it won’t surrender share easily.

Figure 6: Trina’s Cost Data and Guidance

Source: YMR’s PV Supply Chain Health Report. YMR estimates for silicon to module costs based on Trina guidance.

With margins compressing throughout the PV supply chain, PV manufacturers are rushing into the system business to potentially improve margins and demand visibility. Nearly every major PV supply chain company has created an internal systems business and many are also looking to help with project financing as margins flow downstream. It is impressive to see how nimble these companies have become.

We look forward to coming back next quarter with the Q3’09 results and Q4’09 outlook. For more details, please see YMR’s PV Supply Chain Health Report available from SEMI.

October 1, 2009