The solar shakeout has been underway for well over a year now, and it has taken a number of forms. Outright financial failure has sunk Energy Conversion Devices, Evergreen Solar, and Q-Cells, to name a few. Consolidation has played a smaller role, but one that will likely increase as struggling firms look for ways to avoid bankruptcy. Just last week there were even rumors that Canadian Solar was the target of a buyout, although that rumor quickly died. Right now the trend is to either rationalize or shut down high-cost supply in a low-cost market.
As manufacturers fight for sales, their capacity sits idly by, and now is the time to let the least efficient capacity go. It may be hard to say goodbye, but at this point it only makes sense.
Lowering cost down the supply chain
The polysilicon market is already going through the same kind of rationalization as equipment becomes better and more efficient. GT Advanced Technologies
According to Greentech Media, only six or seven polysilicon manufacturers are still in business of the 40 that operated not long ago. LDK Solar
Running aging solar equipment would be like owning a 20-year-old Ford Taurus that is paid off but costs $400 a month in repair bills to maintain; you may as well buy a new Fusion.
More rationalization to come
In recent quarters, we saw nearly every company write down inventory as prices fell. This was because of accounting rules, but I expect the same trend to spread across the solar industry in this quarter and the next. First Solar and SunPower have led the way, and manufacturers like Yingli, Suntech, and Trina Solar may make similar moves to reduce costs and rationalize some of their unused supply. It's not a sure bet, but watch for this trend to continue as earnings announcements begin.
The big picture
The biggest problem for solar manufacturers recently has been the immense oversupply in the market, which appeared as demand began to level out. Slowly but surely, that supply is being cut down to size, and the transition to a more sustainable market will continue. Just as it has been for the last year, it is sure to be a painful process, but the best manufacturers will be left standing.
Fool contributor Travis Hoium owns SunPower in both a managed and a personal account. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.
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