The Chinese solar industry is exploding, and thus far most U.S. companies have only been small players in the world's largest solar market. But SunPower (NASDAQ:SPWR) is trying to change that with two joint ventures that will expand its footprint rapidly in the country.
The ventures will allow SunPower to sell high efficiency solar cells into China, locally assemble their C7 concentrator product, and build massive solar farms that provide power to the utility. The market has cheered the news, pushing SunPower's shares up as much as 9%, and there's good reason why.
The nuts and bolts of SunPower's joint ventures
Before we get to today's news, it's key to understand what SunPower's first Chinese joint venture was. The company is a partnership with Tianjin Zhonghuan Semiconductor, Inner Mongolia Power Group, Hohhot Jinqiao City Development Company, and SunPower, which is a 25% owner. Its intention is to assemble the C7 concentrator product and deploy projects in Inner Mongolia, China, and so far it's built a 300 MW C7 cell receiver Manufacturing facility and is building 120 MW of C7 solar systems.
Today's joint venture is a partnership with Tianjin Zhonghuan Semiconductor, Sichuan Development Holding Co., Leshan Electric Power Co., and Tianjin Tsinlien Investment Holding Co. to build solar systems in the Sichuan Province of China and SunPower will own 4.6% of the company. This new joint venture will exclusively build solar systems and will source its C7 supply from the first joint venture.
It's worth noting that the second joint venture is initially going to build projects in the Sichuan Province, which is much sunnier than Inner Mongolia. The opportunity to build cost effective projects should be much higher there.
Why this is a big deal to SunPower today
Earlier today I talked to SunPower CEO Tom Werner about this new venture, and what surprised me is that today's venture isn't a future project that will someday hit the income statement, it's in operation today. Werner said that the first project will be completed in about two months and the 3 GW of project mentioned in today's press release is what they expect to build in the next five years.
If that's true, about 500 MW of panel equivalent solar cells will go to the joint venture, because the C7 product concentrates light at about 6x (ironic, I know). At current capacity, that's about 38% of a year's production of solar cells.
This is significant because SunPower will get benefits from these joint ventures both immediately and over the long term. The solar cell packages SunPower sends to its joint venture in Inner Mongolia will be recognized as sales immediately and according to Werner should come with higher margins than simply selling panels. Then the first joint venture will presumably book a profit when selling assembled C7 systems to the second joint venture, benefiting 25% owner SunPower. Finally, the second joint venture will generate value by owning solar systems that produce energy for decades and SunPower is a 4.6% owner of that business.
The benefit for SunPower is both immediate and long-term, which isn't common in solar these days.
SunPower slowly building its solar powerhouse
SunPower will never be the flashy operator that SolarCity is and isn't likely to sign the kind of major projects that SunEdison signed this week, but it's a steady player in the solar energy market. The company is picking and choosing the opportunities where its high efficiency cells can add value to the market and where it can generate a strong return as well. That's what I think we're seeing in China, where SunPower is leveraging superior technology to lower the cost of energy for its solar systems.
This also could be a preview of things to come for SunPower. The C7 product could effectively increase capacity by 6x if expanded, and with SunPower learning more about the product's performance every day I think there's a good possibility the product grows in importance. We have yet to see C7 garner much attention in the U.S, and places like Chile, South Africa, and Europe could be ideal markets to expand its footprint.
For now, the market is excited about the opportunity in China, and SunPower should already be seeing a financial impact from its joint ventures there. For investors, it's another sign that SunPower is making the moves necessary to play in the world's biggest solar markets.
Travis Hoium manages an account that owns shares of SunPower and is personally long shares and options of SunPower. The Motley Fool recommends shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.