Forecasting new order intake from PV capacity expansions and technology inflection points remains a challenge for the PV equipment supply-chain. As many of the leading, public-listed, tool suppliers prepare to report results for Q3 2011, the focus will be firmly on guidance for 2012 and the revenues that may emerge for new products recently launched.
Having to fully understand PV investment and technology cycles may be of secondary importance when new order intake and tool backlogs are increasing Q/Q. However, any misalignment with industry requirements can be exposed during a spending downturn; with the next priority to accurately anticipate an upturn in spending, such an understanding becomes critical.
Recent PV equipment supplier announcements have flagged up various issues related to the challenging environment that confronts them today: cuts in end-market incentives, customer order cancellations (attempted), delivery push-outs and revisions to customer’s bullish expansion plans (announcements) from 2H’10 and 1H’11.
But, why was there such a mismatch between equipment suppliers’ expectations in 1H’11 and the order intake reality unfolding in 2H’11? Why has this come as any great surprise?
In fact, much depends on which industry metrics are being used by each equipment manufacturer to benchmark and forecast the level of new order intake from one quarter to another.
A conclusion often tabled when order intake declines rapidly is to relate changes in new equipment orders with solar incentive cutbacks in Europe. This can prove an acceptable rationale to put to investors and shareholders, but it does divert attention from the root cause of company-specific PV book-to-bill ratios.
In fact, quarterly changes in end-market demand are not the dominant factors driving near-term changes in PV equipment order intake: downstream demand has typically played a minor role in cell manufacturers’ aspirations for capacity growth or technology change.
This article explains the background to these issues and explains why PV equipment suppliers should stop monitoring short-term (often domestic) end-market volatility and pay close attention to investment (bookings) cycles specific to their product portfolios.
The revenue reset
It is well documented that companies across every segment of the PV value-chain are assessing the scale of declining revenues and margins expected in 2012. One of the largest resets is likely to occur down through the equipment supply-chain after record CAGRs between 2009 and 2011.
The scale of the Y/Y revenue declines for the equipment supply-chain is now projected to be in the range of 40 - 50%. However, this estimate could yet turn out to be conservative if the cut-backs in CapEx allocated for 2012 are larger than originally feared.
Some of the reasons for the lack of equipment order activity are clearly visible. For example, factors such as overcapacity and oversupply are not particularly conducive to short term investments into new capacity. But it is worth noting that, historically, such issues have not necessarily prevented many PV manufacturers from investing in more capacity in an attempt to either gain market-entry or market-share.
Furthermore, end-market demand of approximately 21GW for 2011 may not be at the 30 GW level many manufacturers had hoped and planned for. But again, this demand level for 2011 has been forecast consistently during the past 18 months and does not come as any great surprise either.
GW’s of PV capacity destined to stay in good-inwards loading bays
There is another element that has yet to be factored into future capacity expansion activity that could well impact further on new order intake levels during 1H’12 – the multi-GW surplus of c-Si production equipment already being shipped during Q4 2011 with no timetabled installation dates.
The origins behind this alarming proposition can be traced back to the exuberance of APAC-based tier 2 and tier 3 c-Si manufacturers during 2H’10 and 1H’11. In their haste to add capacity, many of these manufacturers pushed the equipment supply-chain into volume tool commitments for delivery throughout 2011. With minimal trading history, ordering was often done at the expense of large upfront payments or with steep cancellation charges.
Furthermore, much of the equipment was ordered from European tool suppliers operating on fiscal calendars ending December 31. As a result, Q4 2011 will represent a period during which a significant amount of PV equipment is still shipped, but will remain in “crates” - awaiting a justification to be installed.
Exactly what is done with this equipment remains an open question. Market oversupply during 2H’11 has impacted most on tier 2 and tier 3 manufacturers that lack downstream project pipelines. Aside from ASP declines, cell and module efficiency thresholds have increased to levels that potentially render a considerable portion of standard production line yields unsellable.
Some equipment ordered 12 months ago is likely to remain idle unless incremental funding is obtained to provide the potential for enhanced efficiencies – representing the rather bizarre situation of upgrading a production line prior to any equipment being installed. Either way, the prospects for any meaningful new order intake from this (not inconsiderable) group of PV manufacturers are particularly bleak.
Market-demand dynamics are not correlated with new order intake
However, it remains almost inevitable that declining new order intake and backlogs reported by PV equipment manufacturers over the next few weeks will be attributed to policy uncertainty within Europe and softness in downstream demand throughout 2011.
Therefore, it is worth examining what link there is between Q/Q changes in end-market demand and PV equipment supplier order intake and how these metrics have been correlated in the past. Figure 1 (left, upper graph) provides such a comparison.
A quick glance at the analysis here reveals that there has been minimal value in comparing short-term Q/Q changes in PV market-demand with changes in new order intake by PV equipment suppliers: at least, within a 12 - 18 month time window.
Order intake depends on the motives driving investment into PV manufacturing
Implicit to understanding PV CapEx is the realization that any cyclical trends in PV capacity expansion are different to those observed in downstream installation levels. Clearly, a different analysis is required, other than looking at demand and policy changes. In order to do this, it is important to consider the various drivers that have historically influenced investments into PV capacity.
Providing measurable inputs that can be used to forecast order intake in the future would be extremely valuable for the PV equipment supply-chain. Preliminary analysis towards this goal is shown in Figure 2 (left, lower graph).
This graph compares the Q/Q change in PV equipment order intake against two different measureable parameters. First, the Q/Q change in midstream cell/module production is shown for reference. Then a second form of analysis is undertaken to factor in Q/Q changes in upstream inventory levels, utilization of effective ramped (not year-end nameplate) capacities, tier 3 thin-film investment cycles and downstream demand. Weightings are assigned to each of these secondary influences that are considered important to decision-making when adding incremental capacity.
To date, by far the dominant factor driving capacity expansion sign-off has been the Q/Q change in fab productivity – almost regardless of market demand levels or whether shipped panels were merely swelling downstream inventory warehouses.
Typically, the enthusiasm derived from increasing fab production has been sufficient to stimulate new investments and new participants to the industry. This in turn has resulted in strong – and closely correlated – Q/Q increases in PV equipment supplier order intakes.
Therefore, while equipment suppliers may seek solace from any spike in downstream installations reported during Q4 2011, it remains unlikely that this will translate into an upturn in fab expansion commitments and new order intakes.
As 2012 unfolds, it will become increasingly important to focus on the key factors that are driving equipment spending cycles within the industry. This will include strong contributions from the push towards higher cell efficiencies (irrespective of excess capacity) and the continuing industry consolidation toward low cost manufacturing centres.