Sell SunTech Power (STP)
02/16/2011 1:46 pm EST
What worries me about Suntech Power Holdings (STP) in the long-term?
A new generation of investment in solar manufacturing that is likely to put Suntech even further behind on cost just when the company thinks it has caught up to competitors
At the moment Suntech has a cost problem. In the September 2010 quarter Suntech’s cost-per-watt was $1.48, according to Morningstar. That compared to $1.11 at Yingli Green Energy Holding (YGE) and $1.20 at Trina Solar (TSL).
The company decided that the way to address this cost disadvantage—created it believed because unlike those competitors it didn’t produce silicon wafers but acquired them from outside producers—by buying the wafer production operations of Glory Silicon in 2010.
That deal, though, hasn’t really fixed the cost problem—because the cost hurdle is about to get much higher. Yes, producing wafers in house will shave about 20 cents per watt off Suntech’s cost of production. All things being equal that will bring Suntech’s cost down to $1.28—that’s within striking distance of the $1.11 at Yingli and the $1.20 at Trina. Closer but still trailing.
And recent months have brought a wave of new investment by technology manufacturing powerhouses that promises to make competing on cost even tougher. For example, Taiwan Semiconductor Manufacturing (TSM), the contract silicon fab that is so good on quality and cost that Intel (INTC) has farmed out some production to it, is building its first solar cell factory in Taiwan. The company bought a 20% stake in Motech Industries, Taiwan’s biggest solar cell maker in 2009. In Malaysia AU Optronics (AUO), Taiwan’s biggest maker of flat panels, is building a $1.3 billion solar factory in a joint venture with U.S. solar manufacturer SunPower (SPWRA). Production is scheduled to start up in the fourth quarter of 2011. Samsung plans to invest $6 billion over the next decade in the solar sector.
What all these new entrants bring to the game is experience with cutting-edge, large-scale production. These are manufacturing companies that have survived generations of brutal silicon price wars in chips and screens. Their success is built on wringing out costs at every stage of production. I’m not saying that none of the current generation of solar companies will survive the competition. But I am saying that if you can’t beat the current pack, these new competitors are going to be just too tough.
And that’s why I dropped Suntech Power from my long-term Jubak Picks 50 portfolio on January 18.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Taiwan Semiconductor Manufacturing and Yingli Green Energy as of the end of December. (I will have the January portfolio holdings posted this week.) For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/