Two quarters ago, First Solar (NASDAQ:FSLR) made several concessions to keep its customers in the game during the solar freeze. Reduced pricing was one of the key measures. The thin-film leader is now looking to get more aggressive on price as it seeks to defend one of its most prized end markets.
After announcing yet another quarter of tremendous earnings results, in which operating income jumped 130% year over year and 21% compared with the previous quarter, First Solar also unveiled a new rebate program in Germany, which will apply to panels installed in free field or commercial rooftop applications. Until it's phased out, the rebate will be adjusted over time to provide compelling systems-level cost savings over conventional crystalline silicon (c-Si) solar products.
As we've been observing for several months, raw materials prices have collapsed for low-cost crystalline photovoltaic players like Suntech Power (NYSE:STP), Trina Solar (NYSE:TSL), and Yingli Green Energy (NYSE:YGE), which has allowed them to narrow the pricing gap with First Solar. Adding fuel to the fire is an overstuffed supply chain that has prompted heavy discounting of cells and modules. Folks like Yingli have also demonstrated a willingness to cut prices to below break-even levels just to gain a toehold in promising new markets. First Solar is right to feel threatened here.
Now, as for market participants' very negative reaction to the rebate program, it's a bit surprising. Anyone paying attention at the recent investor day learned the following:
- First Solar continuously adjusts its business model to remove industry constraints and drive scale.
- Today's margins are unsustainable.
- That's OK, because higher volume can sustain economic profitability through scale effects.
First Solar sees pricing as one current constraint in its core German market, which is a major driver of the company's production volume. Viewed in that light, this rebate program doesn't mark much of a departure for the company. Given that First Solar's trailing return on net assets is nearly 10 percentage points above its long-term target of 20%, the solar shop has a good bit of leeway in this little price war.
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