One Simple Reason to Buy American Solar

Solar manufactures are struggling with commoditization. U.S. manufactures have been fighting to stay alive and compete with low-cost Chinese panels subsidized by Beijing. Going forward one major factor that will help U.S. manufacturers beat their competitors is R&D spending. Even with access to cheap capital, Chinese manufactures have consistently spent less than their U.S. competitors on R&D, thus stunting their long-term growth possibilities. 

Annual R&D Spending

  SunPower (U.S.) First Solar (U.S.) Yingli (China)

Suntech (China)

LDK Solar (China)
2012  63.5  132.5  30.1    17.8
2011  57.8  140.5  45.3  38.6  46.5
2009   49.1  94.8  20.7  40.2  10.8

(All numbers in millions of $)

R&D spending counts
Goldman Sachs recently looked at the correlation between R&D spending and stock returns, and the company found a very strong link. It focused on large companies in the tech, biotech, and Internet industries, and Goldman Sacks' findings are relevant for technologically advancing industries like solar manufacturing. 

The U.S. players
SunPower
(NASDAQ: SPWR  ) proudly announces that its R&D spending has allowed it to create panels that are very efficient and degrade slower than other panels. Based on studies in late 2012 and early 2013, the company estimates that with its X-Series panels customers can gain up to 75% more energy per square foot over the first 25 years of use compared to their competitors' panels. With continued investments in R&D, the company hopes to boost its X-Series' efficiency to 23% by 2015.

SunPower's investment in high-efficiency technology is paying off. Between the first and second quarter of 2013 it was able to decrease inventories by $46 million and post positive net income, thanks to strong global sales growth. SunPower's long-term future is also looking bright. As of May 2013 it had a 3.1 gigawatt pipeline in the Americas and a 1.5 gigawatt pipeline in the Middle East and Africa.

Solar panels face a trade-off between cost and efficiency. In the past First Solar (NASDAQ: FSLR  ) tried to gain market share by offering low-cost products, but Beijing's decision to create a plethora of Chinese manufacturers financed by cheap state capital put First Solar on the defensive. For First Solar to step up its game and offer products that are more competitive on the basis of total system cost, it has been heavily investing in R&D. It just signed a special partnership with General Electric specifically to improve efficiencies.

It will take time for First Solar to bring its latest R&D advances to its products, but over the next couple years its partnership with GE should improve the company's bottom line. In the long run SunPower's high-efficiency panels will continue to help it conquer the rooftop market while First Solar's lower-cost and lower-efficiency panels are better suited for traditional utilities.

Both First Solar and SunPower are interesting investments. On the surface First Solar looks less risky with its small debt load and total debt-to-equity ratio of 0.06, compared to SunPower's 0.95. It is important to remember that SunPower is majority owned by the French oil giant Total, so the company has more room to play with its balance sheet. 

The other side of the coin 
Yingli
(NYSE: YGE  ) , Suntech (NASDAQOTH: STPFQ  ) , and LDK Solar (NASDAQOTH: LDKSY  ) are all Chinese manufactures that are reaping the fruits of too much money. The Chinese industry expanded production for far too long, driving some firms like Suntech into bankruptcy. Suntech is trying to stage a comeback, but among other issues its R&D budget simply cannot compete with the spending of its bigger competitors.

Based on its latest 2013 numbers, LDK Solar is also stuck in a rough spot with huge operating losses. Yingli was not forced to declare bankruptcy like Suntech, but it is still in a tough situation. Quarter over quarter, Yingli saw its recent panel shipments increase 23.6%, but it was still stuck with an operating margin of -3.8%. 

The bottom line is that it is hard to justify increasing R&D spending while running operating losses. Low R&D spending limits a company's long-term ability to improve its products and compete. Based on recent quarterly statements available for Yingli, Suntech, and LDK Solar, every Chinese manufacturer was stuck in a situation where its R&D spending and earnings are below the standards set in the U.S.

Conclusion
Big R&D spending improves products and allows a company to gain an advantage over its competitors. While U.S. manufacturers like SunPower and First Solar don't have access to cheap capital like many Chinese manufacturers, their strong R&D budgets give them a significant advantage. A combination of improving profitability and continued R&D spending make investing in U.S. solar manufactures an attractive proposition. 

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Read/Post Comments (5) | Recommend This Article (2)

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 September 14, 2013, at 11:21 AM, speculawyer wrote:

    You know what is a much better investment? Buy Solar panels to install on your home. If you can install a 240V dryer outlet and install a roof vent then you have all the skills needed to install a solar PV system. For around $10K in parts you can install a PV system that will provide all your net electricity for the next 25+ years. Make it a little bigger and buy an electric car and you never have to pay for gasoline again.

    Oh, and after the tax-credit it is only $7K. An amazing investment.

  • Report this Comment On September 14, 2013, at 12:54 PM, rioesmarex wrote:

    Speculawyer is right on the money. If the American manufacturers would stop protecting their distributors and middle men and sell directly to the public at equal to or lower than the Chinese prices then their sales would skyrocket.

    Any fool with an ounce of handyman knowledge can install a solar system without the help of a " licensed " professional who will charge an arm and a leg for his services plus a horrendous mark-up on the component parts.

    It's all about greed and keeping prices artificially high. The solar industry is going nowhere until it lowers prices to where the average person can afford to install a whole house system large enough to go off-grid for a prices that doesn't take 10 years or more to ammortize against your electric bill.

    The entire system for a 20kVA set-up should cost less than $5K excluding the back up generator if you want one.

  • Report this Comment On September 14, 2013, at 11:35 PM, assadsaadat wrote:

    So here is Chinese business model; Don't spent a penny on R&D, infringe on patents and sell it dirt cheap to countries where there is not much of application on patent laws. Now even if US companies spent a lot on R&D that does not guarantee any solid profit unless you sue china as a country if any company of Chinese origin infringe on any patents. So what you think ?

  • Report this Comment On September 15, 2013, at 4:37 PM, i4s wrote:

    When talking about R&D spending, you forgot that the salaries in US is ~5-6 times of those in China.

  • Report this Comment On September 16, 2013, at 5:40 AM, camarodan64 wrote:

    Ldk has new 19.4 conversion panel....one of the best in china

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