Who Will Win if 2011 Gets Tough for Solar?

As a phenomenal first half of 2010 winds to an end for the solar industry, it's time we take a look at the landscape heading into a competitive second half of the year and 2011. With feed-in tariff cuts on the way and massive capacity building in the industry, many an analyst has voiced concerns for solar in coming years. So let's take a look at where the major manufacturers stand from a strategic and competitive standpoint.

There are three major factors I watch in solar: cost per watt, efficiency, and gross margin. Obviously, lower cost per watt is good as is higher efficiency. Gross margin tells us how those two numbers drive through to a selling price and therefore profit. Below, I have a chart of five of the major module manufacturers and my three key numbers.

 

Cost Per Watt

Max Commercial Efficiency

Gross Margin

First Solar (Nasdaq: FSLR  )

$0.76

11.1%

48.4%

Trina Solar (NYSE: TSL  )

$1.10

18.1%

32.1%

Yingli Solar (NYSE: YGE  )

$1.13

18.5%

33.5%

Solarfun (Nasdaq: SOLF  )

$1.12 (internal wafers)

$1.31 (external wafers)

17.5%

21%

SunPower (Nasdaq: SPWRA  )

$1.71

23.4%

22.9%

Source: Securities and Exchange Commission filings, company presentations. *SunPower's cost per watt is estimated end of 2010.

As usual, First Solar wins lowest cost per watt but also has the lowest efficiency. Trina Solar and Yingli are well ahead of crystalline competitor SunPower on cost but can't quite match up on efficiency. As competitors JA Solar (Nasdaq: JASO  ) and LDK Solar (NYSE: LDK  ) build up module plants, the slight differences in these competitors' cost structures will be expanded in the fight for customers.

Thin film -- First Solar
It's no secret First Solar is the most price sensitive module manufacturer. Last year, it announced discounts in the German market when silicon prices started to fall. Its low-efficiency panels have to be less expensive per watt to compensate for the higher land and development costs associated with installing its panels. Where First Solar stands above the rest and remains in the strongest position is the gross margin it achieves on low-cost panels. This gives First Solar flexibility when competitors try to undercut prices.

Crystalline silicon
Crystalline silicon solar modules have been rapidly coming down in price. Trina Solar has seen its module costs fall from $1.67 a year ago to $1.10 this quarter. This was due not only to lower silicon spot prices, but also more efficient use of silicon in its cells.

As costs have fallen, crystalline module producers have added capacity, leading to potentially more fierce competition if 2011 is as weak as some expect. Unless manufacturers can create captive demand from their own power plant developments, the only way to drum up demand will be to lower costs, leading to a price war.

Cost limits of silicon
The elephant in the room is the limited ability of silicon prices to decline. As silicon prices have fallen, crystalline silicon panel manufacturers have benefited. In the last year alone, Trina Solar reported silicon price per watt had fallen from $0.84 to $0.36, which helped module costs fall 34% in a year. But silicon can't fall to $0, so cost reductions have to come from somewhere else in coming years. Trina Solar's non-silicon cost reduction hasn't even kept pace with First Solar's overall module cost reductions. See the chart below.

 

Non-Si Cost/Watt 2Q 2009

Non-Si Cost/Watt 2Q 2010

Cost Reduction Y/Y

Trina Solar

$0.83

$0.74

10.8%

First Solar

$0.87

$0.76

12.6%

Source: Company documents.

This trend is true across crystalline silicon manufacturers. Unless it can find ways to cut costs beyond falling silicon costs, First Solar may take a wider lead in the cost battle.

Final word
In solar, it's apparent to me two things will drive results over the next few years: low cost of production per watt and the ability to create captive demand (project development) when external demand isn't there.

In my analysis, First Solar is in the strongest strategic position heading into 2011. A strong balance sheet, low costs, and a big development pipeline should cushion it through the year. After that, Trina Solar and Yingli Solar place a close second because of superior cost and better gross margins than Solarfun. I also think these three companies can break into the residential and commercial market where SunPower currently gets 50% of its sales.

Use the comments section below to tell us who you think will win the solar battle in 2011.

Fool contributor Travis Hoium has long positions in First Solar and SunPower. First Solar is a Motley Fool Rule Breakers pick. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2010, at 10:08 PM, pj1 wrote:

    How about a headline like -- "All major solar companies predict stronger 2010 and 2011"

    Which is what they did.

    This constant fear mongering by the press of late is getting tiring...

  • Report this Comment On August 31, 2010, at 1:39 AM, verbascum wrote:

    What has been missing so far for most of these companies has been a simple distribution network through lumber companies or groups like Lowes or even Walmart. The rigs for mounting can be standardized, that leaves a simple connection box and some gung ho roofing guy. Judging by Christmas lighting, no problem! The trick is incremental addition of panels instead of a massive bank loan.

  • Report this Comment On August 31, 2010, at 7:51 AM, Kepo19Taz52Lime wrote:

    If the economy dips into another recession, I would not be in solar stocks. If you have decent profits now, sell and wait for the drop to buy again.

    I like GT Solar but selling it for a 50% profit.

    Good luck to all solar investors.

  • Report this Comment On September 04, 2010, at 9:46 PM, JB3729 wrote:

    Solar demand may actually soar in the near future due to a remarkable new thin-film growth process with two immediate and compelling applications in the solar sector.

    1. It has the potential to reduce silicon usage in solar cell manufacturing by over 60% -- thereby dramatically decreasing costs, improving margins and boosting throughput.

    2. It promises to allow, for the first time, mass manufacturing of tandem solar cells with twice the efficiency of the best solar cells available today.

    From Natcore Technologies website, natcoresolar.com. Check this amazing company out. NXT.V or NTCXF are the ticker symbols.

    This thin-film technology also has many applications beyond solar.

  • Report this Comment On October 15, 2010, at 6:02 PM, whomonkyoulus wrote:

    Nice job. Do you have a list of thin film solar producers? Most are not public it seems, like NanoSolar.

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