PV Market Update— What Can We Learn from the Slowdown?
By Ross Young, president, Young Market Research (June 26, 2009)
From Q1’07 to Q3’08, times were good for solar cell manufacturers. Revenues were rising rapidly as shown in Figure 1, margins were healthy with profit margins in double-digits as shown in Figure 2 and prices were trending upwards as shown in Figure 3. Demand surged over this period in large part due to a lucrative uncapped, feed-in tariff scheme in Spain, which offered healthy returns for power plant operators.
Figure 1: Q1’07 – Q1’09 Revenues for 17 Publicly Traded Solar Cell Manufacturers*
*Includes Canadian Solar, China Sunergy, Energy Conversion Devices, Ersol Solar, E-Ton Solar, Evergreen Solar, First Solar, Gintech, JA Solar, Motech, Q-Cells, Solarfun, Sunpower, Suntech, Sunways, Trina Solar and Yingli. Source: YMR’s Solar Cell Supplier Financial Analysis Database and Report
Figure 2: Q1’07 – Q1’09 Margins for 17 Publicly Traded Solar Cell Manufacturers*
Figure 3: Q1’07 – Q1’09 Solar Module ASPs
With solar cell manufacturers enjoying healthy profits and strong demand and hearing about other countries attempting to boost their solar/renewable subsidy plans, existing solar cell manufacturers significantly increased their capacity and an excessive number of companies entered the market with ambitious plans. As a result, solar cell capacity jumped 93% in 2007 and 81% in 2008 as shown in Figure 4 and the number of solar cell manufacturers ballooned to over 210.
Figure 4: 2005 – 2012 Solar Cell Capacity
Source: YMR’s Solar Cell Capacity, Shipment and Company Profile Database and Report
During this time crystalline silicon (c-Si) technology was dominant, earning a 91% share of 2007 shipments and 87% share of 2008 shipments according to YMR’s Solar Cell Capacity, Shipment and Company Profile Database and Report. However, silicon costs were high due to tight supply/demand conditions. Silicon suppliers were enjoying even higher profit margins and like solar cell suppliers, existing players significantly increased capacity and numerous companies entered also with ambitious capacity plans.
Most of the new companies entering the solar market chose to focus on thin film, particularly a-Si and CIGS, which are not constrained by high silicon costs. In fact, there are now 100 different companies pursing thin film according to the database listed above. Another thin film technology, CdTe produced primarily by First Solar, became the low cost leader, was well positioned in the rapidly growing utility market and is expected to become the market leader in 2009. As a result, many a-Si and CIGS entrants were hoping to follow in First Solar’s footsteps.
The Market Turns in Q4’08
While the solar market environment looked bright in Q3’08, it darkened in Q4’08 and got even darker in Q1’09, creating a number of important challenges and lessons for solar cell manufacturers.
What happened in Q4’08?
- Perhaps the biggest change was the end of the lucrative, uncapped Spain subsidy scheme. The growth in solar installations was beyond the expectations of the Spain government, which initiated this program to boost renewables to 30% of 2010 energy requirements. As a result, they ended the uncapped program in Q3’08, replacing it with a program capped at 500MWs. Because there was already a significant amount of solar modules in Spain distribution channels at the time of this change, shipments to Spain really did come to a halt. This was critical, as Spain accounted for 45% of the global market in 2008, growing 350%.
- The rapid decline of the global economy and resulting financial crisis caused credit to tighten making it difficult to finance solar projects. Commercial and utility installations were significantly affected.
- The 10 companies reporting solar cell shipments produced a 20% Q/Q decrease in shipments in Q4’08. While demand fell sharply in Q4’08, capacity for the publicly traded manufacturers supply surged 26%. This mismatch in demand and supply resulted in significant pricing pressure causing prices to plummet. For the three top 15 companies in Figure 3, prices were down 14-21%.
The situation worsened in Q1’09 as:
- Germany, expected to be the largest region for PV in 2009, had an unusually harsh winter with lots of snow making solar installation difficult.
- Credit remained tight.
- With prices tumbling quickly, buyers waited for even lower prices in Q2’09.
- Significant stimulus efforts in the U.S. such as solar for federal buildings and loans for commercial installations, were being rolled out at a slower pace than some had expected.
- Many manufacturers did not curtail production fast enough resulting in large increases in inventory levels and the write-off of expensive inventory due to sharp reductions in silicon and wafer prices.
As a result:
- Solar cell shipments fell another 25% Q/Q and 6% Y/Y for the 10 publicly traded companies revealing their quarterly shipments.
- Prices fell at an even faster rate of 15-25% for the companies listed in Figure 3.
- The dramatic price declines in silicon and c-Si modules along with the continued prowess of First Solar have made it more difficult for the 93 producers of a-Si and CIGS suppliers to compete. These companies are expected to account for 17% of capacity, but just 9% of shipments in 2009. Consolidation has started and will likely continue in this area.
- Revenues for the 17 publicly traded cell manufacturers were down 33% Q/Q and 21% Y/Y and 12 of these 17 companies lost money in Q1’09, up from 7 in Q4’08.
Many of these companies did not see this rapid shift coming and their cash and equity values declined significantly as they reinvested their profits into capacity growth and upstream and downstream acquisitions.
- Their cash and short-term investments were down 20% from Q3’08 to Q1’09, their equity values down 4% while their debt was up 6%. Average debt/equity ratios rose from 55% to 61%.
- With prices expected to fall another 10-15% and profitability and liquidity at risk, a number of these companies decided to raise additional capital at an unfortunate time. In fact, the large drop in Q1’09 margins to -23% can largely be attributed to Q-Cells selling its stock in vertically integrated REC at a lower value than what was on its books— resulting in a >$500 million loss.
What Lessons Can We Learn?
Understanding how to succeed in a cyclical environment is critical for price elastic markets such as PV. One cyclical industry we can learn from is thin film transistor liquid crystal displays (TFT LCDs) which I observed while founding and running the leading display market research firm for 12 years. Lessons include:
- Carefully Manage Inventory: Unlike DRAMs, TFT LCDs suffer from both high capital costs and high material costs, so holding expensive components as panel prices fall is extremely painful. The faster the decline in panel/module prices, the more painful this becomes. Now that we have seen PV prices fall rapidly and many companies writing down expensive inventory, one would expect that they would learn this lesson. Fortunately, a number of companies showed that they could manage inventory well as a faster decline in silicon/wafer prices than cell/module prices in Q1’09 allowed a few companies to increase their gross and operating margins.
- Carefully Manage Cyclicality: The TFT LCD industry has had a “crystal cycle” that typically lasted 18 months but has been accelerating of late. It was caused by rising prices during periods of strong demand, which led to higher profits and large investments in capacity. However, higher prices choked off demand and the new capacity sat idle until large price reductions increased its utilization. The display industry was hurt by a capacity race among the top players which led to huge increases in capacity as the glass size and fab productivity always increased from one fab to the next. The solar industry would be wise to avoid capacity wars and build to demand. Profitable growth is more important that achieving capacity goals. Given the project-based nature of the PV industry, if it can add capacity quickly when necessary, it can build to demand rather than capacity goals avoiding the pricing cyclicality that negatively affects the TFT LCD industry.
- Becoming Vertically Integrated: Perhaps the best way to better manage inventory and manage cyclicality is through increased vertical integration. There are clear differences in inventory levels in the display industry between companies who produce their own components and sell their own end products and companies that do not. With more accurate and frequent feedback on demand, lean inventory can be achieved throughout the supply chain. It also allows for significant flexibility in procurement. For example, when times are good, a vertically integrated TV manufacturer may purchase more low-end panels externally and sell more high-end panels internally and externally. When times are bad, they may shift all production in house, weakening the competition for their panel operation. There are similar opportunities in PV. For example, during this recent downturn, leading silicon supplier REC has increased its internal silicon consumption from 64% in Q3’08 to 82% in Q1’09. Most of the leading PV suppliers have made upstream and downstream acquisitions which helps them better control inventory and we expect this trend to continue.
- Subsidized Markets Are Unpredictable: Growth is harder to predict when they governments are involved. As we saw in Spain, a program can be cancelled if it is too successful. Programs may also be slow to start due to staffing or funding issues. Furthermore, even after a program is started, delays in staffing, funding, permitting, etc. may slow down its pace. Fortunately, given the rapid cost and price reductions, the PV industry won’t need to remain dependent on subsidies for long.
Always Difficult to Unseat the Incumbent: Over the past 20 years in the flat panel display industry, there have been at least 10 different technologies that have claimed lower costs and higher performance than TFT LCDs. However, none of them have been able to stop TFT LCDs from dominating the display industry. Factors that have helped TFT LCDs dominate include:
- An early market willing to pay a premium and drive volume – notebooks
- A large infrastructure constantly innovating in terms of cost and performance
- High capital costs which once sunk will be utilized
- With c-Si benefitting from subsidized markets which drove volume and reduced costs as well as a growing infrastructure also innovating and reasonably high capital costs, they could be considered in a similar position as TFT LCDs. Thus, don’t underestimate the challenge ahead of a-Si and CIGS manufacturers.
- Cash Is Still King: Some PV companies have learned the hard way that they are better off raising funds when times are good than when times are bad. As we have seen in the stock market, the companies with stronger cash positions are typically valued higher.
The PV market hit a bump in the road in Q4’08 which should last throughout most of 2009. There have been many lessons to learn during this period, which will help the industry as it rebounds in 2010. The market will improve as costs and prices continue to fall, applications grow and a growing number of countries expand their solar stimulus programs to achieve their renewable energy goals.
YMR’s Solar Cell Capacity, Shipment and Company Profile Database and Report and Solar Cell Financial Analysis Database and Report are available from SEMI. Please click here to visit the SEMI store.
July 6, 2009