The solar shakeout has been underway for well over a year now, and it has taken a number of forms. Outright financial failure has sunk Energy Conversion Devices, Evergreen Solar, and Q-Cells, to name a few. Consolidation has played a smaller role, but one that will likely increase as struggling firms look for ways to avoid bankruptcy. Just last week there were even rumors that Canadian Solar was the target of a buyout, although that rumor quickly died. Right now the trend is to either rationalize or shut down high-cost supply in a low-cost market.
First Solar (Nasdaq: FSLR ) announced last week that it is closing a manufacturing plant in Frankfurt, Germany, and indefinitely idling four production lines in Malaysia. The changes are expected to bring cost per watt to between $0.70 and $0.72 from a previous estimate of $0.74. In 2013, the cost per watt could drop to an incredible $0.60 to $0.64.
SunPower (Nasdaq: SPWR ) announced that it would shut down its Fab 1 plant and consolidate its manufacturing improvements into Fab 2 and Fab 3. The move is expected to reduce nameplate capacity by 125 MW and result in a charge of $51 million to $69 million, but it's expected to help reduce per-watt cost and capital expenditures.
As manufacturers fight for sales, their capacity sits idly by, and now is the time to let the least efficient capacity go. It may be hard to say goodbye, but at this point it only makes sense.
Lowering cost down the supply chain
The polysilicon market is already going through the same kind of rationalization as equipment becomes better and more efficient. GT Advanced Technologies (Nasdaq: GTAT ) is constantly introducing better equipment that makes more efficient materials at a lower cost than the polysilicon equipment currently in production.
According to Greentech Media, only six or seven polysilicon manufacturers are still in business of the 40 that operated not long ago. LDK Solar (NYSE: LDK ) and Renesola (NYSE: SOL ) are two of them, but their financial positions seem to be getting worse by the day. Replacing old supply that is more costly is the only option at this point and will help reduce supply in an oversupplied market.
Running aging solar equipment would be like owning a 20-year-old Ford Taurus that is paid off but costs $400 a month in repair bills to maintain; you may as well buy a new Fusion.
More rationalization to come
In recent quarters, we saw nearly every company write down inventory as prices fell. This was because of accounting rules, but I expect the same trend to spread across the solar industry in this quarter and the next. First Solar and SunPower have led the way, and manufacturers like Yingli, Suntech, and Trina Solar may make similar moves to reduce costs and rationalize some of their unused supply. It's not a sure bet, but watch for this trend to continue as earnings announcements begin.
The big picture
The biggest problem for solar manufacturers recently has been the immense oversupply in the market, which appeared as demand began to level out. Slowly but surely, that supply is being cut down to size, and the transition to a more sustainable market will continue. Just as it has been for the last year, it is sure to be a painful process, but the best manufacturers will be left standing.