The Solar Market Has Been Experiencing Large Turbulences in 2011

The solar market has been experiencing large turbulences in 2011. No one is optimistic about the industry in the short run. However, the exit of unfit firms has become the main drive for the market to return to normal. In fact, the oversupply problem has been plaguing the industry for years as a result of numerous firms' ambitious expansions. But it does not mean that all efforts and invesments have been wasted. On the contrary, the solar industry is simply rooting and going through a phase of growth. Growing Pains When an industry is growing, the industry may face many transitions that include opportunities and risks. When profits can be made in an industry, it would be difficult to prevent newcomers to join. This is especially apparent in the solar industry since some segments do not have high entry barriers. For firms with long-term goals, the changes in the economy and the market are unavoidable tests. These tests can also show which players have survival skills and long-term competitive advantages. The oversupply condition is unlikely to be solved in the short run. Industry observers have pointed out the total global demand of solar installations should be around 20GW. However, currently there are around 50GW of supply. The rapid price drop and lack of orders are foreseeable results. For the ex-factory prices from solar cell firms in the Greater China region, the quotes were around US$1.2/watt in the beginning of 2011. At the beginning of the fourth quarter, the quotes came to only around US$0.5-0.6/watt, showing the severe price competition in the market. The pessimistic view on the global financial market is another reason for the demand to be less than expected. In the fourth quarter, many firms have realized that price drops have been insufficient to stimulate demand. Solar firms around the world have been lowering or suspending productions, laying off workers and trying to find financial capitals. This wave of firms exiting the market means no more free-riders who previously could simply obtain turnkey technology for production and reap the profits within a short period of time. The transition will likely leave the market with solid firms and return to healthy growth. No Money, More Problems The financial industry has not been helping to fund the solar firms due to the debt crisis in Europe and the US. In the early days, solar firms without strong financial support were seen as the weaker link of the industry as they were less likely to lower production costs effectively. With limited capacity, these firms have higher possibilities to exit the market once solar prices begin to fall. Comparing with large-size firms, small- and medium-size firms have been experiencing difficulties in obtaining loans because the financial institutions have been pessimistic about the industry. The pessimism has been causing banks around the world to become more conservative when it comes to providing loans to solar firms. For many international large-size firms, profits were good in the past and therefore obtaining loans was easy. The loans were then used for aggressive expansions and vertical integrations. In order for these plans to work, solar firms entered supply agreements with upstream suppliers. The amounts of capital invested were significant. As it becomes harder and harder to secure financial capital due to the pessimism, some firms will have to pull the plug on production to prevent growing debts. The price of solar products has been dropping significantly. Not only the small- and medium-size solar firms that are quoting low prices, some international firms have been doing so as well. Some solar firms have been selling equipment in exchange of cash. Once the loans dry up and losses continue due to such low prices, the firms will be forced to exit the market or let the banks take over. Technology Holds the Key With the product prices falling and financial capital drying up, the solar firms also have to face increasing demand for higher conversion efficiency. Upgrading technology has become a must for the firms to survive. The increasing demand for solar products with higher conversion efficiency will push firms with weaker capabilities to exit the market faster. For many solar firms, upgrading technology and production process means investing more capital, but the source of the capital has been drying up. Such demand is likely to continue in 2012 when the threshold of conversion efficiency will likely be 17% instead of the current 16.8%. The room for solar products with lower conversion efficiency has been shrinking and will be labeled as "ineffective capacity." To successfully increase conversion efficiency of products, firms not only need to increase capital expenditure on equipment but hire more capable engineers as well. The firms that have been marginalized have less and less chance to get back into the market. The Blame Game Firms such as US-based Evergreen, Solyndra and Spectrawatt declared bankruptcies in the third quarter. Germany-based Solarworld and UK-based BP Solar have been shutting down plants around the world. Even China-based solar firms, which have been considered as the most cost competitive in the world, have begun to lay off workers. The next wave of production suspension is predicted to move to Asia. Some solar firms may not survive the traditional low season in fourth-quarter 2011 and first-quarter 2012. Solar firms from Europe and the US that have trouble in keeping production going have been placing the blame on China-based competitors. The Europe and US firms have claimed that China-based firms have been supported heavily by the government causing unfair competition. The effect of the China-based solar firms is visible through Italy's "Made in EU" policy announced in second half of 2011. Also, Evergreen owns many important solar patents, and therefore the US government is paying close attention to prevent these patents from being taken over by China-based solar firms. The US government has been protecting the competitive advantages of its domestic solar firms quite publicly. In Europe, only Italy has actually established rules to fight against the unfairness in trade caused by China-based solar firms. Other countries such as Germany, the Czech Republic, the UK, and Spain have been cutting incentives rapidly to prevent the the market from overheating and taxpayers' money from ending up in the pockets of China-based solar firms. Getting Back on Track The solar industry has predicted dramatic rises in the number of firms exiting the market in the first half of 2012. This also means the industry will come to a new phase. Source: www.digitimes.com