Lesson From Vestas to First Solar: Stay Out of China

First Solar (FSLR) is looking to regain market share lost to crystalline silicon-based module makers from China. Contrary to expressed confidence by management, an ambitious strategy to stake a claim on Chinese soil -- if successful -- is unlikely to be profitable long-term.

Crystalline PV module supplier Suntech Power (STP) shipped more solar modules during second-quarter 2010 than any other manufacturer, according to the latest analysis from IMS Research. First Solar slipped behind its Chinese rival for the first time since third-quarter 2008 -- the result of capacity constraints due to component shortages for certain products (not because of weakening demand).

The company hopes to first plant its flag on 16,000 acres in the Mongolian desert, near Ordos City in Inner Mongolia, Northern China, with the build out of the world's largest solar farm: a 2 gigawatt (GW) solar generation facility. The project was to be built in multiple phases, with one GW of power to come online by 2014, and the second GW scheduled for completion by 2019, according to the "Cooperation Framework Agreement" signed last November.

The solar farm is expected to generate enough electricity to power 3 million Chinese households, according to First Solar.

The company had planned to break ground on a demo 30-megawatt plant in June 2010. Due to delays in reaching an accord with either central or provincial governments on minimum feed-in-tariffs (FiT) -- the price subsidies that China's electricity grids would need to pay for power (generated from these solar farms to make the project economically viable -- the project stalled.

Nonetheless, CEO Rob Gillette told investors on the quarterly earnings call the company expected to begin construction of the oft-delayed project early next year. Gillette and his staff might want to consider scrubbing the entire mission.
Recent data from GTM Research revealed that China's global module production, as measured in MW-dc (megawatt - direct current), grew from 30 percent of the global total in 2007 to 40 percent in 2009. China's four largest PV module producers -- Suntech Power, Yingli Green (YGE), Trina Solar (TSL), and Solarfun (SOLF) -- all rank in the top ten PV module producers globally, accounting for a total of 1.9 GW of module production in 2009.

Of more immediate concern, despite renewable initiatives supported by the central government in the last few years, more than 90 percent of the estimated 3.6 GW of solar cells produced in China last year was exported, mostly to European markets, like Germany and Italy. Promotional measures for the domestic solar industry, such as the "Golden Sun Demonstration Program," have only had the unintended effect of increasing exports -- contrary to dual wants of building an export business and the creation of a domestic solar market.

First Solar hasn't disclosed the expected rate of return necessary to ensure profitability of its first Chinese venture; in my opinion, balance of costs -- installation, transmission lines, and other grid-related connection factors -- will prove too high. Additionally, if accepted bids of 11 cents per kilowatt-hour tendered by outsiders for smaller solar power projects in China are a confirmatory signal of new FiT subsidy rates by central authorities, expected in-kind grid subsidies for First Solar's Mongolian project would make the economics of the deal untenable.

The Chinese are formidable competitors. Though diplomats can't say it, I will: Like the air in Beijing, business in Communist China is "polluted."

Does it really surprise anyone that Chinese manufacturers continue to gain traction in solar? Save for Japanese multinational Sharp, Chinese PV module manufacturers have pushed aside both Japanese and Taiwan-based makers of most everything in the PV supply chain, from ingots to solar panels -- due to easy access to financing, electrical power (at subsidized rates), and cheap labor.

Further, now come allegations from a growing number of European suppliers that their Chinese competitors are "dumping" panels -- below cost -- in EU markets.

First Solar should pull up anchor and sail out of Bohai Bay without looking back!

Doing business in China would require "sharing of technology" with its local partner(s), according to regulatory filings. First Solar's core advantage -- and competence -- is its proprietary, thin-film manufacturing process:

• Solar panel challengers use crystalline silicon (c-Si) wafers, with 180 - 230 microns of polysilicon, as the light-absorbing semiconductor of choice. C-Si wafers comprise up to 40-50% of the cost of the finished module; whereas, First Solar's production of solar cells/modules, comprised of thin-film layers of cadmium telluride, contain less than two percent of the equivalent content found in c-Si PV modules.

Even though spot prices of polysilicon are now selling for about $55 per kilogram, down almost 89 percent from August 2008 highs, First Solar still maintains more than a 30 percent cost per watt advantage over its nearest c-Si-module challengers, such as Trina ($1.10 per watt) and Yingli ($1.13 per watt).

Last April, at a PV conference in Stuttgart, Germany, managing director Stephan Hansen said First Solar could "still compete" even if silicon prices remained around $40 to $50 per kilogram.

Imitation is the sincerest form of flattery. ~ English essayist Charles Caleb Colton (1780 - 1832)

• Wind-turbine maker Vestas (VWDRY) first entered the Chinese market back in 1986, but only ramped-up its presence in late 2004, mostly through limited joint ventures (materials and technology were developed and owned by the Denmark-based company, but manufactured with Chinese labor and materials). Less than a year later, Beijing mandated new wind power projects had to be made from at least 70 percent Chinese components. Though often inferior in design, local companies assimilated Vestas' manufacturing processes and learned to make similar equipment. By 2009, three of the Top 10 wind turbine suppliers in the world were from China. Vestas has yet to see a rebound in either global or Chinese market share.

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