Trina Solar: Still Struggling to Bring Manufacturing Costs in Line With Falling Prices

Last Updated Sep 2, 2009 8:43 PM EDT

Jifan Gao, chairman and chief executive of Trina Solar, told analysts on the solar panel maker's second-quarter earnings call that he believed market confidence was returning to the photovoltaic sector and expected gross margin to stabilize going forward. Critical to Gao's optimistic modeling, however, are certain assumptions on the vertically integrated solar company's cost structure. In particular, profitability into 2010 and beyond remains dependent on an actual turnaround in demand and management's ability to cut manufacturing costs.

Gross margin in the quarter improved 420 basis points year-over-year to 27.4 percent, due primarily to a 30 percent drop in average silicon material purchase prices. Polysilicon, currently priced at about $70 per kilogram on the spot market, is expected to bottom in 2010 between $40 and $50 per kilogram. Although 80 percent of Trina's supply agreements were originally contracted at significantly higher prices, chief financial officer Terry Wang was quick to point out on the earnings call that all of the long-term agreements have adjustment clauses stipulating that the company's purchase prices will never be above market price.

Trina captures additional cost-savings with its vertical integration structure, too. For example, gains in reducing manufacturing cost per watt are possible throughout the supply chain, such as processing efficiencies linked to reductions in silicon usage and wafer thickness. Silicon cost per watt fell from $1.88 at year-end 2008 to $0.84 per watt in the second-quarter of 2009.

The company was also able to reduce its non-silicon manufacturing cost for its multi-crystalline modules by about 12 cents year-on-year to 73 cents per watt. The cost savings were linked to improved supply chain management initiatives, such as second sourcing options), and tighter inventory controls. Trina expects multi-crystalline modules to comprise approximately 70 percent of its production in 2009. For the full year 2009, management anticipates being able to reduce its manufacturing costs by an additional 15 percent to 20 percent through a combination of technology (higher cell conversion efficiencies) and manufacturing process improvements (such as shorter production cycle times).

In the second-quarter, the total manufacturing cost per watt was $1.69, down from $2.85 in December 2008, according to a supplemental corporate filing.

Panel prices in the quarter fell year-on-year 81.6 percent to $2.32 per watt. Nonetheless, $2.32 per watt still beats gross costs of $1.69 per watt!

Wang admitted on the call that third and fourth-quarter ASP will sequentially decline an additional 10 percent to 15 percent and 10 percent to 12 percent, respectively.

In a research report, "Solar Snippet: and then there was elasticity," published on August 25, the global tech team at Credit Suisse wrote that they expected average panel prices to continue to slide due to weak demand and oversupply, stabilizing at approximately $1.50 per watt by second-quarter 2010 (at which point demand elasticity will return to global markets, as markets will be at or below grid parity-assuming poly prices around $50 per kilogram).

Credit Suisse's supply/demand rebalancing outlook, however, is conditional on three critical inputs: (1) Chinese Feed-in-Tariffs kick in to stimulate domestic demand; (2) weak European and U.S. demand is seasonal, turning positive with GDP growth; and, (3) higher energy prices longer term (ideally $8 (+)/ MMBTU for natural gas) are necessary for solar to achieve "parity" on the electricity generation curve. In my opinion, one or all of these conditions are unlikely to be met for20a sustained period of time-especially in the next 12 months. Ergo, there is substantial risk that solar demand will take longer to recover.

According to Trina's guidance, panel price declines to about $1.70 per watt in the first-quarter of 2010 would be offset by the aforementioned improvements in poly-to-panel manufacturing costs. Although the company will likely be able to maintain its gross margin into next year, the key driver to operating profitability remains demand. Given current uncertainty as to the timing of a real turnaround for solar demand, prospects for sustainable growth at Trina remain somewhat more cloudy.

  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.