The solar power industry is heading for its most challenging year in half a decade, and module manufacturers will be a key piece of the supply chain to watch from both a cost and demand perspective. Third-quarter results recently released by major suppliers JinkoSolar Holding Co. (NYSE:JKS), JA Solar Holdings Co. (NASDAQ: JASO), and Canadian Solar Inc. (NASDAQ:CSIQ) give us a few clues of what's coming and how major solar panel manufacturers in the renewable energy segment will adapt.
What the quarter looked like
JinkoSolar has quietly become one of the biggest and most profitable solar panel manufacturers in the industry. Last quarter, it shipped 1,606 MW of solar modules, generated $855.3 million in revenue, and had a gross margin of 22.1%. Net income was $35 million, or 2.2 cents per watt of modules sold, which I'll come back to below.
JA Solar said its shipments were 1,240.9 MW, revenue was $624.3 million, gross margin was 13.8%, and net income was $6.6 million, or 0.5 cents per watt.
Canadian Solar shipped 1,185 MW, recognized revenue of $657.3 million, had a gross margin of 17.8%, and net income of $15.6 million, or 1.3 cents per watt shipped.
These figures provide a broad look at where the three companies have been, but they also tell us something about where the industry is headed.
The future of solar manufacturing
We know that solar module prices fell about 25% during the third quarter to $0.40 per watt, the lowest price panels have ever sold at. None of the companies would have felt the brunt of that cost reduction because module sale contracts put in place before the quarter started would have dampened the blow on prices.
The reduction also won't hit all manufacturers evenly. JA Solar had the lowest gross margin and profitability of these three manufacturers, and that's partly because it manufactures more solar cells than the others in comparison it the number of modules it makes. For many years, JA Solar was primarily a cell company, so its module business is relatively new.
JinkoSolar and Canadian Solar, on the other hand, buy more cells on the open market and simply assemble them into modules. They manufacture some cells in-house, but not the same proportion as JA Solar, which could account for a lot of the gross margin difference.
We're also seeing some mixed signals on pricing and demand. JA Solar lowered its 2016 guidance from a 5.2 GW to 5.5 GW range to the 4.9 GW to 5.0 GW range, but Canadian Solar said it is essentially sold out through Q1 2017. On the margin side, only Canadian Solar gave guidance, but it said gross margin will be 11% to 16% in the fourth quarter. Notice that's down from 17.8% last quarter, and even at the high end of the range will leave the company essentially at break-even.
How to look view solar manufacturers going forward
The challenge facing solar panel manufacturers at the end of 2016 and into 2017 will be maintaining any profitability in their massive manufacturing plants. The profit margin per watt shipped of between 0.5 cents and 2.2 cents above will almost certainly vanish because solar panel prices are down more than 10 cents per watt in the last few months. In all likelihood, that will eventually lead to losses as contracted sales at higher prices work their way through the system, to be replaced by lower priced sales.
Exacerbating the industry's problems is the potential for under-utilization at manufacturing plants. If each company has isn't running at full capacity, it'll lead to further losses and a downward spiral financially. Solar manufacturing is in for a rough year, and while the higher margins at JinkoSolar and Canadian Solar may help them stay ahead of weaker competitors, that doesn't mean they'll be good investments when losses creep into the industry's books as early as this quarter.