The Taiwan-based solar supply chain is likely to enter a period of consolidation. For upstream material providers, consolidation between downstream customers may create pressure on their costs. Digitimes recently sat down with Chi-jen Chen, chairman of solar materials suppliers Giga Solar and Gigastorage, to see if the two firms feel such pressure.
Q: Taiwan's solar industry has been consolidating. The industry believes consolidation can increase the economies of scale in order to increase bargaining chips during material procurement. Giga Solar and Gigastorage supply conductive pastes and solar wafers, both of which are materials for downstream firms. How is the industry consolidation affecting Giga Solar and Gigastorage?
A: Consolidation is positive for the industry, I think. It is true that the consolidation between solar cell makers will likely change the customers' procurement strategies. However, solar materials are not standard products with standard prices. It is precisely because materials do not have standard prices that prices have been depending on the quality of the products and cannot be valued by volume.
Of course, it has often been the case that when customers procure a large amount of materials, the customer will receive a discounted price. Therefore, if customers increase demand due to the consolidation, then the customers will receive different prices than before.
On the other hand, if demand from individual customers increases but the overall number of customers decreases, this means material firms will see service costs decrease. The falling operating cost will be transferred back to the customers through lower prices, and this will indirectly affect the pricing
Q: Taiwan's solar industry has begun consolidation. Do you think this trend will happen in the solar wafer segment? Currently, there are four Taiwan-based listed solar wafer firms: Green Energy Technology (GET), Sino-American Silicon (SAS), Danen and Gigastorage. Compared to others, Gigastorage has a relatively small capacity, and is believed to have higher production cost. Are smaller firms being marginalized?
A: As I mentioned before, as long as consolidation brings positive effect to the industry, then it is a good thing. Taiwan is not the country that is seeing a consolidation of the solar supply chain. China is going through the same stage. But consolidation needs to increase benefits and maximize performance for parties involved. These are the keys to successful consolidation.
I am not against consolidation for Taiwan's solar wafer industry. Of course, this still needs further observation to see if end demand does grow by 10-20% annually as most people have predicted.
In addition, the benefit from the consolidation has to be more than increased capacity. Under weak market conditions, the firms need to be sure that capacity will not become idle. Furthermore, parties involved need to ensure things such as debts and net losses will be handled before making a decision.
Back to Gigastorage, the firm has diversified product lines including compact discs, solar wafers, and new materials for emerging industries, compared to the other three solar wafer firms. Hence it is less likely for Gigastorage to be merged or acquired but the firm is open to any cooperation talks with others that wish to be consolidated.
Q: Does this mean Gigastorage is not against acquiring competitors in the solar wafer segment?
A: Yes. But before talking about consolidation, the most important key is to strengthen the firm's business to have the ability to face challenging market conditions. Or else it will create more burden by acquiring others.
Gigastorage does not exclude the possibility of expanding capacity in 2013, to be honest. Because we believe the industry reached the bottom in 2012 and will likely rebound in 2013. Currently, there are some idle solar wafer capacity in Taiwan, and adding capacity through mergers instead of buying new equipment is a relatively sound option.
Another aspect of consolidation is to decrease the number of competitors. From the point of view of a material supplier, competing with 15 solar wafer firms is very different from competing with seven solar wafer firms. With 15 firms, there will always be prices much lower than the average but this is unlikely to happen when there are only seven firms. Therefore, the number of surviving firms after industry consolidation is also very important to the development of the industry.
Q: China-based industry leading vertically integrated solar firm GCL-Poly has an annual solar wafer capacity of 8GW, which is more than the combined total annual solar wafer capacity of Taiwan. Do you think that Taiwan is unlikely to ever overcome threats from China-based firms?
A: Actually, the cost structure of solar wafer has been changing and the main thing is the polysilicon pricing. In the past when polysilicon supply was scarce, firms that could not obtain materials were the ones facing threats. Now, as polysilicon is in oversupply and prices have been falling close to variable costs, I believe that firms that are without long-term supply contracts, have the ability to secure downstream orders and can effectively control costs have the strongest competitiveness. Capacity size is not the key here.
Furthermore, in addition to the cost of polysilicon, other costs, such as oil, electricity and labor have to be considered. In fact, Taiwan-based firms' production cost is higher than their peers in China. But in the recent year, the difference of these costs has been narrowing.
I believe it all depends on polysilicon, especially on what China's government and supply chain have plans for the polysilicon industry. China's anti-dumping and anti-subsidy investigation against polysilicon firms from the EU, South Korea, and the US may bring dramatic effects.
If China decides to levy high import tax on the aforementioned polysilicon makers, the price of domestic polysilicon will increase and the amount of imported products will decrease. But, China-based downstream vertically integrated solar firms have signed long-term material supply agreements with EU-, US-, and South Korea-based firms and the contracts will not disappear due to the trade war. This will push downstream firms in China to adopt different strategies. In addition, China's possible punitive tariffs on imported materials will increase the amount of materials shipped to non-China markets, which is beneficial to Taiwan-based firms.
Overall, the development of the trade war will have major effects.
In addition, I want to emphasize this: solar wafers can be divided by conversion efficiency and quality, so despite having higher production costs, I believe Taiwan-based firms have been producing quality products that reflect the higher production costs.
Q: Giga Solar's aluminum paste accounts for 30-40% of global market share but in recent years, newcomers have been gaining grounds. This has been pushing Giga Solar to adopt new pricing and product strategies to effectively maintain the market share. But Giga Solar reported net profits of NT$98 million (US$3.38 million) for the third quarter of 2012, a sequential decrease of 55.45% compared to NT$220 million in the second quarter. Was this decrease caused by the price competition leading to shrinking gross margin?
A: The difference in net profits in the second and third quarter of 2012 was due to increasing percentage of silver aluminum paste sales by 10% in the third quarter. The gross margin of silver aluminum pastes and aluminum pastes is different, hence affecting the profitability. Also, demand for conductive pastes fell a bit in the third quarter compared to the second quarter, therefore affecting profits. I believe September 2012 was the bottom for solar cell makers and in October, demand rebounded significantly. Demand continued to be healthy in November, and this will show on Giga Solar's performance.
As for the pricing strategy, Giga Solar did not use pricing to keep out newcomers. The lower price is to allow customers to have a more competitive production cost. Every quarter, Giga Solar aims to lower cost to provide benefits for our customers.
The cost of aluminum pastes is already very low in the cost structure of solar cells. For solar cell makers, conductive pastes are no longer as important as they were in the past, and therefore the frequency of customers switching material is now lower. This means the entry barriers faced by the newcomers may not necessarily be related to price. This also means Giga Solar's performance do not have directly relations to newcomers' entry to the market.
In Taiwan, Giga Solar's aluminum pastes have 80% of the market. Giga Solar has been seeing rising market share, especially in Europe, South Korea, and Japan.
Q: During previous boom times, newcomers faced high entry barriers because solar cell makers had to deal with undersupply and did not have time to certify products. Now, most solar cell makers are operating at partial capacity, and should have time to cultivate relationships with new suppliers. They shouldn't be rejecting newcomers?
A: Your observation is correct, but this needs to be analyzed in two aspects. During boom times, solar cell makers have more control while downstream solar module firms fight for solar cells. But due to undersupply, solar cell makers do not have time to test out new material supply. During down times, the market is buyer's market where solar module firms have more control. Even if solar cell makers want to use new materials, downstream customers may not agree because they have to test and certify the solar cells with new materials all over again. This will increase cost.
Giga Solar's silver aluminum paste has a global market share around 20-25%. In Taiwan and China, the product has a market share of 50% and 20-30% respectively. Giga Solar's silver paste sales have been rising and currently it has 1% global market share. The certification and promotion of the silver paste have been slower than we expected.
Compared to aluminum pastes, silver aluminum and silver pastes have relatively higher prices and account for higher percentages in the solar cell production cost. Especially for silver pastes, as the price of the main ingredient, silver, has been fluctuating. As the current price of solar cells is low, using silver paste means a lot of pressure on the production cost.
Giga Solar began strengthening its market penetration in China in the fourth quarter because China's customers are more willing to try new materials. In addition, China has more module firms. For silver conductive pastes, the process of sampling, testing and certification with Taiwan-based customers take about one year but in China, the process can be completed in less than six months.
Q: The silver paste from DuPont and Heraeus currently accounts for 80% of global market share. The two firms have been in a patent war in recent years. As a newcomer, has Giga Solar faced any entry barrier? Is Giga Solar concerned about becoming a target of the patent war? In addition, some firms are integrating the silver paste and silver powder production to gain cost competitiveness. Will Giga Solar do the same in the future?
A: The patent war undersocres importance of patents in the industry. Material makers should secure patents before developing any new product.
Actually, competitors can still develop new materials without infringing on other firms' patents because the ingredients of conductive paste are not standardized. Emphasizing patents will make firms invest more resources into R&D and develop core competence. Therefore, the patent war can bring positive effects to the industry development.
As for silver powder, Giga Solar currently has no intention to enter that segment because it involves heavy metal recycling, which is not our expertise.
Chi-jen Chen, chairman of Giga Solar and Gigastorage
Photo: Digitimes file photo
