Barely a year ago, there appeared little prospect for consolidation in the global solar industry, which was enjoying a boom from strong demand from European markets such as Italy and Germany.
With new installations more than doubling last year to make solar a $60bn market, “everyone is still too busy making money for consolidation”, one analyst said at the time.
But the situation has changed over the past six months. Cuts in government subsidies combined with over-investment in capacity expansion last year, have sparked a sharp downturn. Spot market prices of solar cells and wafers have fallen by about 40 per cent since the beginning of the year and are now below cash cost for many manufacturers. Overall, the industry is expected to register almost no growth this year.
Solar industry executives and analysts say this is a watershed moment that will see weaker players forced to exit or merge, while market leaders – mainly vertically integrated Chinese manufacturers – pull away from the pack.
“We’ve seen incredible unbridled growth for about a decade, and over the next year that is going to change,” says Andrew Beebe, chief commercial officer of Suntech, one of the world’s largest panel makers. “Over the next few quarters there will be more supply than demand [for solar panels].”
With even more raw material supply coming online in the coming months, Morgan Stanley analysts say there will likely be “further inventory build over [the second half of this year], sustained pricing pressure, and eventual capacity shut-downs and consolidation among sub-scale, higher cost players . . . it is clear that major industry consolidation still needs to take place”.
One reason the solar industry is seen as ripe for consolidation is that bigger companies enjoy significant cost advantages. A doubling of production output has historically translated to costs falling by a fifth, according to a joint report by the European Photovoltaic Industry Association and Greenpeace earlier this year.
Mr Beebe believes that the oversupply will prompt a “flight to quality” and sharpen the perceived differences between brands. “This is the end of commoditisation for solar, not the beginning,” he says. In this aspect, top-tier Chinese manufacturers such as Suntech, Yingli and Trina Solar have an advantage because of their brand recognition and lower cost base.
There are already signs that smaller manufacturers are being squeezed out. Nitin Kumar, analyst at Nomura, says prices for second-hand solar equipment are now just half of what they were a year ago, suggesting that manufacturers are closing factories or going bankrupt.
During this downturn, fresh demand from China may provide some support to solar panels manufacturers, while Beijing underlined its solar ambitions by announcing a landmark feed-in tariff for Chinese solar projects on Monday.
Yet besides a $172m deal this month in which Chinese solar cell maker JA Solar acquired wafer maker Silver Age Holdings, there have been few mergers and acquisitions deals among solar manufacturers in recent months.
One executive at a large international private equity fund says he considered investing in solar manufacturers, but has not acted because “it is difficult to find the right target, who is also willing to sell”. He adds there is also the issue of there being very little difference in terms of technology between the major players.
“People are looking [at deals in the sector],” says a Taipei-based investment banker. However, he adds that activity has been sparse because many solar companies see selling a stake in their company as a last resort to raise funds. “If they could get a syndicated loan or do a listing to raise funds, why sell their equity [to one strategic or financial investor]”, the banker says.
China and Taiwan are the world’s two biggest solar manufacturers, together accounting for about 75 per cent of global production, with ample liquidity for solar producers in both markets.
Taiwanese makers, who tend to specialise in just one part of the supply chain, have been particularly hard hit by the downturn. Shares in Taiwan’s Motech, Sino-American, and Gintech have all fallen by a fifth from their peaks earlier this year.
Yet a number of Taiwanese makers have managed to raise funds via global depository receipt listings. Sino-American, a solar wafer maker, raised $200m last September, while Neo Solar, a solar cell maker, raised $132m last month.
The investment banker says that with these cash piles they can sustain themselves “even if the downturn lasts for another half a year or even a year”.
Yet Nomura’s Mr Kumar argues that only delays the inevitable. In their current situation, the Taiwanese companies “will never do capacity expansion, and so they won’t have the scale to compete” when the industry recovers.
“It just means that consolidation will be a long, drawn-out process,” he says.
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