Just as SunPower Corp. (NASDAQ:SPWR) was starting to think it had a strategy built for the modern solar industry, President Trump may throw a wrench in the works. Sometime early in 2018, he will decide whether or not to impose tariffs and other trade restrictions on imported solar panels. If he does, it could impact SunPower in a big way.
There are a number of potential outcomes on the tariffs question, and with SunPower's stock trading near multiyear lows, it's worth exploring whether the company's future is as dim as investors currently seem to believe.
The best-case scenario (assuming tariffs are imposed)
In his testimony before the International Trade Commission, SunPower CEO Tom Werner asked for the company's back contact solar cells to be excluded from the trade remedies being considered. The logic makes sense since rival First Solar's thin-film is excluded, and no other U.S. company uses similar technology, but I think this is a low-probability outcome. Still, if SunPower was excluded, tariffs could actually be a windfall for it because most of its competitors would be subject to them.
It's also possible that SunPower could also avoid some tariffs on the products of its Mexico plant, thanks to NAFTA. Mexican imports were found to have caused "injury" to U.S. solar manufacturers under the initial ITC finding, but it may not be worth it to start a trade war with our neighbor over the relatively small amount of solar panels the U.S. gets from there. SunPower only assembles panels at the plant; it doesn't make solar cells there. Still, it does offer a potential benefit.
A "small" tariff would be complicated
Then there's the possibility that the U.S. might impose a "small" per watt tariff of $0.05 or $0.10 per watt. And I'm calling that tariff level "small" because Suniva -- one of the plaintiffs in the trade complaint -- has proposed a $0.32 per watt tariff and a price floor of $0.78 per watt, double the current market price of a solar panel.
A small tariff could actually be mildly beneficial to SunPower by making its higher-efficiency panels more cost effective for customers. For example, if a 16% efficient commodity panel sells for $0.35 per watt today and a 23% efficient SunPower panel sells for $0.55 per watt there's a 57% premium. If you add a $0.10 tariff to both, the difference becomes $0.45 vs. $0.65 per watt -- a 44% premium. That could make high efficiency a little more compelling for some customers.
The same goes for utility-scale solar panels. SunPower is producing a panel called P-19 that's more efficient than competing panels, but slightly more expensive. A tariff on all panels would make that premium (as a percentage of total cost) a little smaller.
I think a small tariff is the most likely scenario given what we know today. But which countries the tariffs might apply to and what size it will be are the big questions.
The worst-case scenario
If Suniva's request for a $0.32 per watt tariff is accepted and SolarWorld's request for a 5.7 GW import quota is put in place, it would deal a huge blow to all U.S. solar companies. Higher costs would shrink the solar market overall, and there could be an actual cap on installations.
SunPower's two most important markets are U.S. residential and commercial customers, for whom the company's high efficiency pays off most. Tariffs would potentially make solar systems uneconomic for customers.
It's possible SunPower could shift sales of some of its panels to international markets, but with about 600 MW of panels annually going into the commercial and residential markets overall, there are hundreds of millions of dollars in revenue on the line.
SunPower would have to make a transition
As long as tariffs aren't too punitive -- which would cripple the solar industry as we know it -- I don't think SunPower's business will be impacted too negatively for the long term. The company may miss out on some sales between now and when the final trade decision comes down from the White House, but those could be made up for in 2018, and it's likely that manufacturing plants will be running at full speed at least through the end of the year.
That's not to say that SunPower is hoping for tariffs on solar imports. It would rather have the visibility to plan its business without that threat looming. But it's also better prepared for tariffs than most manufacturers, and its position as a high-efficiency supplier will likely help it adapt to whatever future import rules are.