I recently had the opportunity to interview Tom Werner, CEO of solar leader SunPower (NASDAQ:SPWR). The company has had improving fundamentals this year but the industry is still highly competitive, so I was interested to find out how SunPower plans to hold off the competition in the future. Below are the highlights from the interview.
Has the industry reached a steady state?
I asked Werner if the industry has reached a steady state now that subsidies are falling away and solar power is competing with the cost of electricity from the grid in some locations. He was hesitant to call it a steady state but thinks a winning formula is starting to emerge.
Werner's view is that companies who can make the transition from selling solar panels to selling energy will be the ones who win in the future. For SunPower, that means offering solar power, monitoring solutions, and leasing services today. As the industry evolves, we'll be talking about a complete energy offering including batteries, efficiency optimization products, and a whole suite of solutions from SunPower. This could be sold to a residence or a commercial building, opening a world of possibilities for the companies who can offer complete solutions.
In short, companies who sell energy will be the ones to succeed and SunPower is guaranteeing energy production, not just selling panels.
Are European tariffs and the talk of China going "pro-market" a plus for SunPower?
China has taken over much of the solar industry on the back of billions of dollars of loans given by state-run banks. But that's led to import tariffs in the U.S. and will likely lead to tariffs in Europe starting next month. I asked Werner if these developments were positive for SunPower?
Tariffs on Chinese panels are incrementally positive for SunPower, Werner thinks, but since the business model is shifting to selling energy it isn't going to be a huge impact on the company.
What's more important for the industry is that capacity expansion in China has stopped and it appears behavior is changing. It's no longer just about adding capacity; we've now changed focus to balance sheets and systems. For an example of how important projects have become we can look at Canadian Solar's (NASDAQ:CSIQ) earnings announcement just yesterday that touted 400 MW of projects in Canada. Even Chinese companies are beginning to see the value in building and selling energy over just selling modules.
It also appears that the free flow of money to Chinese solar manufacturers has at least slowed. While Werner doesn't see tariffs as a death knell for Chinese solar, they are incrementally positive for SunPower and another positive differentiator for the company.
Is SunPower's differentiated technology a sustainable competitive advantage?
My investment thesis on SunPower centers on the company's efficiency lead over modules from China and virtually everyone else in solar. This lead should allow SunPower to install residential and commercial systems for a lower cost of energy than competitors, which will lead to higher margins. But GT Advanced Technologies (NASDAQ: GTAT) says it is releasing equipment this year that will allow for the mass production of cells comparable to SunPower's, and First Solar (NASDAQ:FSLR) recently bought TetraSun, a high-efficiency solar producer. So, can SunPower maintain it's current lead given these new technologies and any number of new entrants into the market?
This is where Werner reminded me that SunPower introduced its current cell design about a decade ago, and to this day no one has been able to build a comparable cell or module at a low enough cost to compete. So, while there is always risk when it comes to technology he is confident the company will maintain a significant lead.
Where Werner thinks SunPower's biggest lead in the future lies is in its business model, which will be a differentiator going forward. The company has the largest dealer network in the world, it can offer lease financing through these markets, and its majority owner Total will allow it to borrow at a lower cost of capital than smaller competitors.
When we look at the residential space where SunPower is in direct competition with SolarCity (NASDAQ:SCTY.DL) the company's big advantage is efficiency and cost of capital. SunPower estimates that a 1% lower cost of capital will add $0.40 per watt of residual value to its lease installations. That small difference is very significant considering SunPower estimates $1.75 per watt in residual value and SolarCity estimates $1.25. Whoever lowers borrowing costs can capture this value; it's the backing from Total that Werner thinks will help it generate more value than SolarCity.
It's the combination of these factors that no one else in the industry can compete with and that's where Werner thinks SunPower's true competitive advantage lies.
Is C7 going to be a hit?
Where SunPower doesn't have a discernible lead is in the utility space. This is where First Solar has generated a clear-cut lead over solar competitors with its thin film modules and long history of installations, which lowers capital costs. SunPower is trying to answer with a product called C7, which concentrates the sun's light seven times on each solar cell. So when will we see progress on this front?
Werner thinks it will be one to one and a half years before we see major traction for C7. What we should expect to see this year is more project signings, although these will take time to generate significant revenue. He was very excited about was a joint venture in China with Tianjin Zhonghuan Semiconductor, Inner Mongolian Power Group, and Hohhot Jinqiao City Development Company to manufacture and deploy C7 projects. This venture gives SunPower a foothold in China, a rapidly growing market that's difficult for U.S. companies to compete in.
C7 should also be ideally suited for new solar markets like Saudi Arabia and Africa, and it's likely similar joint ventures will form in these areas. This could allow SunPower to leverage cell capacity, build C7 locally (some countries have local requirements), and even lower investment necessary to expand.
In short, C7 isn't a hit yet but over the next year we should see progress.
More to come
I'll be back later this week to cover the discussion Werner and I had about leasing and the company's competition with SolarCity.