Featuring analysis from

  • DisplaySearch
  • Solarbuzz

Declining Margins Push Downstream Integration

Although interpreted by some competitors as malicious, the rise of Chinese cell/module manufacturing during 2012, which in large part has led to the current troubles facing the PV industry, came about because there was an opportunity to enter an industry where demand had been increasing by an average of over 50% Y/Y, with manufacturing margins that were in the double-digits. Given the expertise of many Chinese firms at refining mass production of electronics equipment it was almost inevitable that there would be a move towards new entrants attempting to compete via lower cost/pricing strategies against higher-priced ‘established’ brands.

Initially, new entrants into the solar industry were able to achieve rapid scale-up of manufacturing capacity, combined with the retention of double-digit margins on a quarterly basis. This was assisted by the rapid decline in polysilicon prices, as overcapacity in that segment meant lower costs for cell/module producers, especially for the newer entrants that were not locked into long-term contracts, unlike their more established (i.e. Western and Japanese) competitors. Positive margins were also assisted by liberal financing options available to Chinese firms. This allowed manufacturers to access cheap credit – if not direct backing – from state-owned enterprises. The combination of these factors meant that many firms could operate as pure-play component manufacturers and focus on increasing capacity and market share.

Now, however, we see a dramatic shift in industry thinking. Where previously firms were focused on becoming the largest and ‘best in class’ pure-play suppliers, many are now branching out into the downstream. The figure below clearly illustrates a large reason for this shift. Over the past six quarters, c-Si module manufacturing gross margins have been under intense pressure and, on a weighted average basis, declined into negative territory for the first time in late 2011. Meanwhile, companies that have focused primarily on downstream strategies have been able to achieve lower but steadier profitability.

Weighted Average Gross Margins

Upstream Downstream Margins

Source: Adapted from Solarbuzz Quarterly

Now major firms, ranging from poly to module companies, are seeking access into the downstream/installation segment of the PV industry. Many view this as a market access strategy, i.e. ensuring that their components have somewhere to go after they’ve been completed, while others are looking at ways to increase margins.

It remains to be seen how successful this latest group of new entrants will be in terms of downstream project development and execution. Unlike in manufacturing, the downstream segment has many “soft costs” that are not easily reduced by economies of scale, and knowledge of local markets is imperative for successful execution. Once again, government support may prove to be a deciding factor in the success of these efforts. As the Chinese government continues to increase solar PV installation targets, it impacts local manufacturers as they are able to parlay their guanxi (relationships) into large-scale project agreements.

Even this indirect policy support may not achieve the goals of increasing revenues and returning to profitability, however, as there is continuous pressure to decrease installed system prices. Overall, a shift in business segmentation will not cure the ailments plaguing the PV industry. Only a return to supply rationalization via the obsolescence of low efficiency manufacturing facilities and exit of non-profitable firms will reduce ASP pressure enough for the industry to return to financial balance.