Industry rationalization – the process by which capacity and demand can become roughly aligned – remains a highly debated topic within the PV industry today. Currently, theoretical PV cell/module capacity is approximately twice that of the expected 2012 demand of 30 GW. As such there is a large amount of industry rebalancing needed.
The past two years have seen moves towards supply rationalization with some legacy (mostly European and US-based) manufacturers exiting the solar manufacturing arena. However, the majority of capacity that contributed to the industry imbalance present during 2012 still remains in some state of existence – albeit often shuttered, idled, or under-utilized – within China.
The rise of Chinese manufacturing was most pronounced in 2010, as significant manufacturing capacity expansions came online. This also overlapped with polysilicon price declines as overcapacity issues simply moved upstream. As a result, many of the new cell and module entrants (with no technology or product differentiation) could secure raw material prices at similar levels to more established (Western and Japanese) PV manufacturers. In fact, many of the new c-Si entrants in China found themselves able to access attractive spot market pricing at a time when existing market leaders were bound by much higher long-term polysilicon prices, previously set into contract when polysilicon was in short supply.
The growth in manufacturing capacity was also assisted by generous financing available to many of these firms in the form of low interest rates from national banks or direct support from state-owned enterprises. New facilities added during 2011 and 2012 fueled cell/module capacity increases and have prolonged oversupply and competitive pricing issues. ASP declines and gross margin erosion across the industry as a whole are the most visible consequences within the industry as 2012 draws to a close.
While corporate pressure on margins is helping to rebalance the supply side, overcapacity continues to plague the industry and rationalization is occurring much slower than many observers had expected. Now, additional concerns are arising as banks and government entities in China again play a pivotal role.
LDK and Suntech are two of the highest-profile examples of loan repayment and debt refinancing, but there are many other similar examples within China. With PV companies in China now representing major forms of provincial employment, the cost of doing nothing may be too great – both economically and politically. Other Chinese companies have made drastic moves such as cutting back on costs through headcount reductions, or through share buy-backs in order to maintain trading status. How long struggling manufacturers will continue to be supported, and whether bailouts will be limited to a select few or more widely implemented across tier 2 and tier 3 manufacturers, are still open issues.
Ultimately, unless significant amounts of capacity comes offline (or is in some way rendered ineffective) it is going to remain challenging for PV manufacturers to adapt PV business models quickly enough to operate in a low-ASP end-market environment. Therefore, all eyes will surely turn to overall end-market demand volume during 2013, with the ability to operate production facilities above 90% utilization rates and pick up market share in emerging regions offering a short-term salvation, allowing more time to address costs and repair margins.