Motley Fool Rule Breakers recommendation Suntech Power (NYSE: STP ) is a leader in producing photovoltaic cells for solar power. The Fool's Rich Smith recently interviewed CEO Zhengrong Shi and learned about smart business decisions, competitive advantages, and Suntech's plans for the coming year.
Rich Smith: Can you give us a thumbnail sketch of Suntech Power?
Zhengrong Shi: Suntech specializes in the design, development, manufacturing, and sale of high-quality, cost-effective, and environmentally friendly photovoltaic [PV] cells, modules, and systems. Based on production output and capacity of solar cells, we are the fourth- and third-largest solar energy company in the world. We are the largest solar energy company in the world based on solar module production output.
Our products are sold in almost every major market in the world and are used in a wide range of applications, including residential, industrial, communications, transportation, and military. Our leading [research and development] efforts, advanced technology, and low-cost, China-based manufacturing form a few of our core competitive strengths, and we are committed to becoming the lowest-cost-per-watt provider of PV solutions to customers worldwide. Our vision is to be a global energy leader, providing efficient solar solutions for a green future.
RS: Suntech was founded in 2001 and has been selling products for fewer than five years -- but in that short time, I'm guessing you've made at least one mistake you regret. What was it, and why was it a mistake?
ZS: As a trained scientist entering the fast-paced world of business, I can honestly say that the bumps along the way have only served to make this company -- and me personally -- stronger. This economy is developing so quickly, and Suntech is doing so many things that have never been done before technologically. Our ability to learn and improve from setbacks separates us from our competitors.
One example that comes to mind was in 2004, when I had an opportunity to buy land and office facilities in our high-tech science park in Wuxi, China, where the bulk of our current production and headquarters are located. I chose not to make the purchase [because of] what I thought was a high cost relative to our limited available funds. In retrospect, that purchase would have enabled us to consolidate our operations, whereas today many of our employees in Wuxi are split into various buildings as we await completion of our new office building later this year. However, our pre-IPO period was an extremely fiscally austere time, and all of our excess cash was plowed back into building production capacity, raw materials, and technology enhancements. We sacrificed early office consolidation as a result.
RS: And what was the smartest business decision you've made so far?
ZS: The business decision that has [been] the most rewarding was my personal decision to first go to Australia for my Ph.D. education as well as to do solar science research for 14 years. That, combined with my return to China to conduct operations from my home country, has enabled me with the unique skills and experience to build Suntech into what it is today.
While in Australia, I gained a strong understanding of Western management practices and conducted world-class research. Back in China, I was able to work closely with the government, gaining its support for low-cost land and facilities, while building the lowest-cost solar-production operation in the world in terms of the key expenses such as cost of goods sold, capital expenditures, and operating expenses.
We have cultivated universal support among the general business community in China and abroad and hence have many key suppliers and vendors whom we consider as partners. Suntech has competitive advantages that are difficult for any company to match. In addition, we still reap the R&D and technological benefits provided through partnerships such as our collaborative research agreement with the Centre of Excellence for Advanced Silicon Photovoltaics and Photonics at the University of New South Wales in Australia. In short, we've created a business formula that is difficult to replicate: lowest-cost production coupled with large economies of scale and the best relative technology.
RS: Why can't your competitors just set up shop in China and duplicate your business model, like Daimler, GM, and Toyota building cars in China?
ZS: As I mentioned previously, our success is due to far more than our location. We have an experienced international management team with a research-and-development group led by accomplished PV technology scientists. With one of the largest dedicated solar R&D teams in the world, we are an industry leader in solar technology innovation, and we will continue to stay ahead of the PV innovation curve. Also, because our cost structure in China cannot be replicated by overseas competitors, we are able to maintain our cost and quality advantages in our home market. We feel that we have created a virtuous cycle of success among our suppliers, vendors, and customers that would be near-impossible to replicate. The net result is that Suntech can achieve better margins than peer companies in the solar industry worldwide.
RS: Suntech was No. 9 in worldwide production of solar cells in 2005, No. 3 in capacity in 2006. Your rivals include Sharp, Sanyo, Mitsubishi, BP (NYSE: BP ) , Kyocera (NYSE: KYO ) , SunPower (Nasdaq: SPWR ) , and Evergreen Solar (Nasdaq: ESLR ) . Which of these is giving you the best run for your money, and what's it doing right that makes you admire or envy it more than the others?
ZS: The thing I admire the most from all of our competitors is that all of us are combining business with social responsibility. There are not many companies in the world that can say they are truly making a difference in preserving the earth by creating clean energy sources. Our competitors only serve to drive us in our tireless effort to produce more efficient solar cells at a smaller financial cost to the end-user. Because the PV market is rapidly improving, it is imperative that we take advantage of our lowest-cost production, largest economies of scale, and best relative technology to try and build upon our market share. With our aggressive development plan to have 1 gigawatt of PV cell production capacity by the end of 2010, we are confident we can succeed. It is extremely rewarding, as I'm sure our competitors can attest, to build a profitable business that is making a tangible contribution toward solving the world's energy problems relative to global warming and resource depletion. I often say that our competitors are not the other solar companies but rather the traditional energy companies.
RS: Although Motley Fool Rule Breakers members hail from around the globe, the vast majority of our subscribers are investors who live and work in the United States. You, too, have lived abroad and had the opportunity to see China from a "Western" point of view. Lend us the benefit of your dual perspective, if you would: What would you say is the most important misconception among Western investors about China, Chinese companies, or the Chinese economy?
ZS: One of the biggest misconceptions is that Chinese companies don't produce high-quality products or somehow have lower technology or capability. While in some aspects there might be truth to that, China's manufacturers increasingly are using international manufacturing techniques and equipment. Many, like Suntech, have stringent quality-control procedures that guarantee reliable, high-quality products that meet international standards. For example, our PV cells and modules received a broad spectrum of industry certifications ... and have passed international test standards. ... The development and improvement each year is very pronounced.
RS: The Chinese government wants to generate 15% of its electricity from renewable energy sources by 2020. China's a big country, and that's going to be a lot of energy -- how big of a share of the renewable energy market do you think solar power could reasonably supply 12 years from now? How much of that 15% would Suntech aim to claim?
ZS: We are constantly working with industry and political bodies to promote the adoption of solar energy in China, though now it is too early to tell what share solar energy will have of the renewable-energy market. Suntech has strong sales and system integration capabilities with offices in both Shanghai and Shenzhen, and we have been involved in high-profile solar projects such as the 2008 Beijing Olympic stadium and the Wuxi airport. We have the superior market intelligence and local expertise to continue to be the leading solar supplier in China.
Broadly speaking, we are extremely optimistic about solar power's potential to play a major role in total power generation worldwide. In contrast to many other means of generating energy, our basic building material, silicon, is the second most abundant mineral on the Earth's surface, and our basic source of energy, the sun, is not only free, but inexhaustible.
We feel that the solar component could be one-third, with Suntech commanding 40% of that.