US Solar Industry: Up to the Challenge?

11/30/2011 8:15 am EST


Jim Trippon

Editor-in-Chief, China Stock Digest

In the wake of the Solyndra implosion, there are a lot of questions about America’s interest and commitment to growing world-class solar companies, writes James Trippon of Global Profits Alert.

"I don’t care about Solyndra," General Electric (GE) CEO Jeffrey Immelt said at Columbia University recently.

It was an unmistakable reminder, if not a declaration, that there is much more to the solar power story than the ill-fated bankruptcy of one company. A failure which set off a wave of investor negativity not only for solar stocks now, but which led to many investors questioning the future of the solar industry.

Some of the reaction by solar companies in the US was to complain loudly about China’s practices in its solar industry, a complaint which maintains China’s subsidies were out of bounds according to World Trade Organization rules, as well as the accusation that Chinese solar companies were dumping their solar panel products on the market and causing a steep decline in price. In short, these US companies were crying foul, as in unfair competition.

GE Picks Up the Gauntlet
For Immelt’s part, it was clear that GE’s response was different. GE is building a factory to produce the thin-film solar panels in Germany at a cost of $300 million, according to a Bloomberg report.

Thin film, or cadmium telluride, is considered by some in the industry to be the potentially more advanced solar technology compared to the polysilicon, or pure crystalline technology largely prevalent in the industry today. While others dispute this, and claim polysilicon is more efficient, GE and US industry leader First Solar (FSLR) are committed to thin film.

As for costs, investments, and subsidies, although Solyndra and other companies, including First Solar, have shared in the roughly $16 billion in guarantees for renewable technology, Immelt conceded in the Bloomberg piece that China’s investment in renewable energy is much greater than that of the US. But it’s clear that GE’s response to the solar competition from China is to compete, not complain.

China’s solar industry manufactures polysilicon panels, though rising prices for polysilicon have boosted costs and eroded potential profits. Last year, however, LDK Solar (LDK) and GCL Poly-Energy Holdings (3800.HK) drastically increased production, which sent the raw material prices falling by nearly 90%. Spot prices for polysilicon have plunged from $400 per kilogram to under $40 recently.

Solar stocks, including well-known Chinese solar panel producers such as Suntech Power Holdings (STP), the world’s largest solar module maker, JA Solar (JASO), and others, despite their profitable results thus far, have seen their stock prices clobbered on the fear that the spreading difficulties in the industry will be a powerful headwind to profitability.

The cost of polysilicon has fallen by nearly 90% in the last three years, so as manufacturers boosted production of panels, it’s inevitably led to a market glut. The next couple of quarters for most solar manufacturers have seen earnings estimates greatly reduced, with some companies expect to report wide losses.

NEXT: Solar Margins Hit


Solar Margins Hit
According to Bloomberg New Energy Finance, with the oversupply of panels on the market, module prices are down from more than $2 per watt a year ago to the low $1 range now. For the telluride thin-film modules, the newer technology made by First Solar, prices have also dropped nearly in half.

First Solar’s profit margins have therefore been declining, from more than 30% a few years ago to just under 20% this year, with next year’s margin expected to decline further. They’re not alone, of course. Suntech Power’s profit margins may drop from slightly over 8% into negative territory this year, though Suntech expects to rebound.

While the Chinese solar companies have denied dumping product on the global market, Trina Solar (TSL) CEO Jifan Gao elaborated on their operations in another Bloomberg article. He said that Chinese companies pay higher interest rates on their loans to state banks than failed Solyndra’s borrowing rates. He also pointed out that of the $30 billion credit available to Chinese solar companies by the Chinese government, only a "fraction" of this amount was accessed.

He bluntly added that it is better management than its competitors, not government advantages, that is putting the Chinese solar industry ahead. He cited faster reactions to market conditions as well, as part of their operational edge.

Short sellers have been living in the solar sector for a while and making out well on their bets, as many solar stocks have plummeted by half or more this year. In addition to the softening of the US and European economies, even some of the domestic Chinese companies are experiencing slackened demand.

Long term, however, there are still tremendous prospects for solar energy and whatever companies survive the current business cycle. After prices in polysilicon and demand bottoms out, perhaps in several quarters, solar’s long term secular value should assert itself.

Count GE’s Jeffrey Immelt as bullish. Immelt said that he expects GE to sell $1 billion in solar panels or more annually by 2020. And as for competition, Immelt also gave the nod to GE’s development of the thin film cadmium telluride over the polysilicon competitors.

"GE is going to win," he said. Yet China’s solar companies still expect to be at the forefront of the industry also.

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