Nascent industries like solar energy often go through big strategic shifts as companies determine how they're going to position themselves in the industry. One big decision companies have to make is if they're going to specialize in one segment of the market (horizontal integration) or vertically integrate and own multiple parts of the supply chain.
The solar industry's biggest players spent most of the time from 2000 to about 2017 trying to vertically integrate. Manufacturers like First Solar (NASDAQ:FSLR), SunPower (NASDAQ:SPWR), and Canadian Solar all built out panel manufacturing, bought utility-scale project developers, and even tried to get into financing solar projects long term.
However, the vertical integration model appears to be dead, and specialization in solar may be the future. The implications for investors are big from a strategic perspective.
From vertical to horizontal
I want to focus on two companies and how they've changed their strategies in just the last couple of years: First Solar and SunPower. First is First Solar, one of the world's largest solar manufacturers that makes thin-film solar panels. Three years ago, the company built solar panels, developed solar farms, performed engineering, procurement, and construction (EPC), and even financed solar farms through its yieldco, 8point3 Energy Partners. First Solar was arguably the most vertically integrated solar company or renewable energy stock in the world.
The business started to change when 8point3 Energy Partners turned out to be a disappointing move and was ultimately sold in 2018. First Solar has reduced its development business to about $1 billion worth of projects per year. In September 2019, the company announced it was further reducing the business, deciding to use third-party EPC companies. Today, First Solar is primarily a solar panel manufacturer and has all but given up the vertical integration model.
The second company, SunPower, was a solar manufacturer that tried to be both vertically and horizontally integrated in some ways. Its core was a high-efficiency solar panel that at one time was used in everything from very small-scale solar projects to some of the largest solar projects in the world. SunPower developed residential, commercial, and utility solar projects with those panels and even designed inverters and its own racking. It did almost everything in solar energy.
Changes started with SunPower's strategy about the time they did at First Solar. The two companies partnered on 8point3 Energy Partners, so when that was sold, SunPower effectively exited the utility-scale development business.
At about the same time, SunPower acquired Cogenra, whose technology ultimately became the P-Series solar panels that use commodity solar cells and assemble them in an innovative way that produces a slightly higher-efficiency solar panel than competitors. High-efficiency solar panels were no longer the core for SunPower, so it split solar panels into high-efficiency markets and markets where P-Series made more sense, such as in utility-scale and some commercial markets.
As soon as SunPower changed strategies and no longer had its high-efficiency solar panels at the core of everything it did, it made sense to undo vertical integration. The company recently announced an agreement to split into two publicly traded companies, Maxeon Solar Technologies, which will manufacture high-efficiency and P-Series solar panels, and SunPower, which will primarily develop residential and commercial solar projects. They'll be tied together through supply agreements but will be largely independent, undoing most of the company's vertical integration.
Focus is the new key
Look across the industry, and you'll see more focused companies rather than vertical integration. SolarEdge Technologies is focused on power optimizers and inverters, never trying to vertically integrate into solar system development. Sunrun and Vivint Solar, which build residential solar systems, haven't tried to move into solar manufacturing (remember Tesla's disastrous move into solar manufacturing?). That's why these companies are still among the top residential solar installers in the U.S.
Understanding how an industry is changing and where companies fit is critical for investors. In the case of solar energy, companies that were focused and not integrated have succeeded in the past few years, and now it looks like the entire industry is following suit.