The mantle of largest solar panel manufacture is a curse these days. Not long ago, Suntech Power was the largest solar manufacturer in the world, but it became insolvent a year and a half ago after a series of financial missteps. The title was then handed to Yingli Green Energy (NYSE:YGE), which was more than happy to tout its size as a competitive advantage.
But the debt that Yingli Green Energy used to build the world's largest solar manufacturing company appears to be more than it can pay back, and a recent filing with the SEC brought up the fact that there was risk of it being a "going concern", a terrible sign for any company.
Just how did we get here? Well, don't say we didn't warn you that this was coming.
Built on a house of cards
Yingli Green Energy's latest filing shows just how bad it's gotten for the company. $2.4 billion in debt is offset by just $387 million in cash, and the company lost $205.9 million, or $1.21 per share, last year.
Spending lavishly on events like the World Cup didn't help expenses, but a $163.7 million interest expense is what really sunk the company.
One of the problems Yingli Green Energy had is that it was one of many companies built with funding from Chinese state-run banks. Along with Suntech Power and LDK Solar, which both went insolvent, the company got billions in funding and used that money to build large factories with off-the-shelf equipment, which led to scale the solar industry had never seen.
Scale is great because it helped drive solar panel costs dramatically lower than we saw a decade ago, but when you're buying the same equipment as your neighbor it's inevitable that you'll all make the same product. That's essentially what's happened in China, and costs fell -- but so did overall margins, and that's led to the financial mess we see today.
This is what happens when we all make the same thing
The problem with China's strategy in solar is that it builds a series of commodity manufacturers. Even companies that are doing well today, like Canadian Solar (NASDAQ:CSIQ), Trina Solar (NYSE:TSL), and JinkoSolar (NYSE:JKS), are making essentially the same solar panels. They just had better balance sheets than their failed rivals, and were smart getting into the project development business as well.
The core problem is that everyone making solar panels in China was making a commodity. It was a race to the bottom. That's no way to build a long-term, profitable business.
Why I'm buying differentiation and innovation
This is why I've long stuck with technology leaders like SunPower (NASDAQ:SPWR), which has a quantifiable advantage over commodity solar products. Sunpower doesn't put up the best growth numbers in the industry, but it does post strong margins because it can sell what it makes for a profit.
The lesson here for investors is that you want to find companies that are different than competitors and can use that to generate more sales or higher margins long-term. Using leverage to build the exact same product as everyone else is a recipe for disaster.
Good luck to the new top solar manufacturer in the world making a commodity product: Trina Solar.
Travis Hoium owns shares of SunPower. The Motley Fool has no position in any of the stocks mentioned. 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.