In business, getting the strategy and timing right can often be a lot more important over the long term than having the best product or technology. In solar, many companies have failed because they took the wrong path to market or bet on the wrong product at the wrong time.
In that vein, one lesson worth looking at right now is how some solar companies had the right long-term strategy for residential solar, but abandoned it too early in a pursuit of short-term growth. Below is a look at how companies like Sunrun (NASDAQ:RUN) could have put themselves into dominant position today, but are instead now at a disadvantage. And how major players like Tesla (NASDAQ:TSLA), SunPower (NASDAQ:SPWR), and Vivint Solar (NYSE:VSLR) will fit into the market.
The shifting trends of residential solar
There's been a lot of debate over the past five years about what the best strategy is for residential solar installers. Among the notable questions: Is a large, national footprint valuable, or should companies be more focused on local or regional markets?
In general, larger companies have better technology for quoting rooftop solar system prices, and better access to self financing (leases); smaller companies tend to have lower installation costs, but less access to capital within their control.
There are a few moving pieces there, but this generally allowed large installers like Tesla and Vivint Solar to grow more quickly and gave them an incentive to get more customers signed up for leases or power purchase agreements (PPAs). Small installers didn't see the same growth because of loans, so customers could buy their system weren't readily available (until recently). This left smaller players at a disadvantage.
This dynamic led to massive market share gains for major, national installers from 2010 to 2015 as they broadened their reach, brought down their financing costs, and lowered installation costs. But in 2016, something changed. Loans became easier for smaller installers to offer, giving them a chance to leverage their lower costs. You can see below that growth shifted quite quickly from large installers to smaller installers last year, a trend that will likely continue.
This creates a couple of problems for the large solar installers. First, and most obvious, is that they won't be able to grow as quickly. And when stock prices were sky high, it meant they had a long way to fall. But the more important factor is that they have set fixed costs like warehouses, trucks, administration, sales, and installation staff that needs to be spread across a wide base. A more limited opportunity for growth will make it harder to pay for those overhead costs.
Installers shift to better solar equipment
On top of the shift toward smaller installers, customers are shifting toward better solar equipment. You can see in the chart below that mid-size and long-tail installers favor higher efficiency and quality modules from manufacturers like SunPower, SolarWorld, and LG, in contrast to the largest installers, which are choosing lower-cost commodity products from the likes of Trina Solar and REC.
When customers are making decisions about equipment, they generally have different preferences than what SolarCity or Vivint Solar might pick, but with national installers, they often don't have a choice in the matter. Some customers prefer efficiency, some want higher quality, others want U.S. manufacturing, but the decision matrix is different when it's your home. And if you can leverage the trend from left to right in the chart above it'll be good for business.
What small installers need to survive
The advantage small installers have in the solar industry is lower costs, in large part because they don't need to have the same capabilities as their larger peers. A small shop with two or three installation crews isn't going to invest the capital to build out mapping technology to price specific installations or custom designed racking components. They're going to lean on suppliers for many of those products.
Ironically, Sunrun was once a leading technology and finance supplier to medium and small installers around the country, allowing them to offer lease financing and easily quote projects on the fly -- capabilities that small shop might otherwise not have. This strategy didn't require Sunrun to build out a risky national infrastructure of installers. Similarly, Clean Power Finance, who eventually became financier Spruce, had a similar strategy in the solar industry. These are valuable offerings given trends today, but that wasn't always the case.
Five years ago, Sunrun and Spruce were betting that regional and local installers were the future of residential solar, and today, it appears they were right. But if you looked at the market in 2014 or 2015, it looked like the national companies were winning out. Sunrun decided it needed to get into the actual installation business to keep up with the SolarCitys and Vivints of the world. They were chasing growth, not allowing the market to come to them -- which was the biggest mistake, long term.
Following the pack comes back to bite Sunrun
In 2016, the home solar power market shifted away from leases to loans and from large, national installers toward smaller companies, and big residential solar stocks took a bath as a result. Where it looked like SolarCity (now owned by Tesla) and Vivint Solar had the right strategy, which Sunrun followed, their leadership advantages were just a temporary phenomenon that prevailed until more competitive market driven by small installers emerged. Sunrun could have been a leader in today's market, but now it's stuck with the infrastructure of Tesla or Vivint without the benefits of a company serving small installers.
Sometimes, companies can have the right strategy but be too early to the market. That appears to be what happened to Sunrun, which was offering the services that small and mid-size installers need today, but went off track chasing the growth its competitors had by getting into the installation business.
Today, national solar companies are struggling, and Sunrun is chasing the market with higher costs than competitors and fewer capabilities than a company like Tesla (think energy storage). If they'd stuck with their previous strategy of providing technology and financing to installers rather than trying to beat Tesla and Vivint Solar at their own games, they could have been a great stock for 2017. Now, chasing growth is coming back to bite them -- and the large residential solar installers, too.