Over the last two weeks we've begun to see just how the solar industry handled a hectic end of 2011 and how they view the market in 2012. Some manufacturers, like SunPower
Leading the disappointment is the company that was once the crown jewel of the industry. First Solar
Winners and losers emerge
If you look at the edges of the solar market, you can see there are low-cost manufacturers who create lower-efficiency modules and high-cost manufacturers who make higher-efficiency modules. When the solar market was beginning to grow, cost was the focus, and so First Solar took the lead because of its cost advantage.
In recent quarter, however, the tide has turned and efficiency has become the most important strategic factor. Strong earnings from efficiency leader SunPower and gains from one of China's more innovative manufacturers, Canadian Solar, have solidified this thesis. Despite its higher costs, SunPower was able to generate gross margins comparable to Chinese manufacturers, showing the power that efficiency has.
I expect the focus on efficiency to continue because module prices have fallen so far that the balance of system costs now exceed module costs, so the focus will turn to maximizing power output in space available.
This indicates a couple of things to investors: First, suppliers also took part in strong sales in the fourth quarter; and second, top-tier suppliers weren't able to leverage their positions in the market to squeeze out lower-tier manufacturers as some thought may happen.
When the company releases earnings later in March, we'll see if the increased shipments were able to pull the company into a positive gross margin.
Picking winners in China
One of the challenges for investors right now is trying to choose winners in the Chinese market. The manufacturers in China have so little to differentiate them that it's like picking the winner of a fight between twins. Costs are the same, efficiency is the same, and end markets are the same for all of these manufacturers. In reading earnings reports, outside of a blip from Yingli Green Energy
Consolidation is expected to occur in the industry, and as the market tightens, I would expect some companies to emerge as stronger than others. What we've seen with earnings and guidance from Canadian Solar, Trina Solar, Suntech, Yingli, and JA Solar is that the rising tide lifted most boats, but no one missed out completely. Until we see a few companies unable to compete or falter under heavy debt loads, it's hard to see who emerges as a winner or loser in potential consolidation.
Foolish bottom line
We'll continue to get more information about these solar manufacturers in coming weeks, but right now indications are that efficiency is winning and that China remains tough to read for investors. I'm keeping my outperform rating for SunPower on My CAPS and I'm looking for an exit point from my shares in First Solar. I think that's the best way to play the solar market trends right now.