Evergreen Solar mulls manufacturing outsourcing deal

Evergreen Solar’s President and CEO Rick Feldt surprised financial analysts during its fourth quarter earnings call by highlighting that the company was in various stages of talks with prospective subcontract manufacturers, mostly based in Asia. The executive noted that subcontracting production would significantly reduce the capital requirements the company would otherwise have to find, while meeting its contracted backlog that now stands at approximately 1GW over the next five years.

“Using a subcontractor would significantly reduce our need for expansion capital, while allowing us to meet our sales expansion goals,” noted Feldt. “For example, we have stated that our next factory, built in Asia, would cost about $1.50 per watt to build or about US$225 million for 150 megawatts facility. Under the subcontract manufacturing arrangement we could reduce our capital needs by about 75%, meaning we will be about US$56 million instead of US$225 million and still meet our sales goals in 2010."

Indeed, the production goals that tie in with the sales targets previously projected by the company highlight the significant capital requirements of Evergreen. However, new capital would be almost impossible to obtain at rates of return that made the expansion plans viable, considering the current severe credit crunch.

Evergreen had plans to reach 130MW in 2009, 300MW in 2010, 600MW in 2011 and 850MW in 2012, as well as US$155 million in cash at the end of the fourth quarter 2008.

Evergreen’s CFO Michael El-Hillow also noted that the company would need to spend approximately US$120 million over the next six months on capacity expansions. These include US$90 million for its Devens manufacturing plant, US$15 million for its String plant, and debt service of about US$15 million, leaving approximately US$35 million in cash and US$15 million of working capital.

Looking at Evergreen's current backlog of delivery schedules, approximately half of the projected capacity expansions through 2011 would serve existing contracts. Evergreen'ss current backlog is 79MW in 2009, 116MW in 2010, 254MW in 2011, 327MW in 2012, and 287MW in 2013.

Turning to subcontractors would seem one of the few viable strategies available to the company in the current environment, especially when EMS (Electronic Manufacture Service) companies are suffering from low order levels and severely underutilized facilities.

Feldt noted that times are so hard for EMS companies that discussions have included the idea that EMS companies would cover the cost of equipment and up-front costs.

“Some (EMS companies) have facilities that are already built and require modest capital to retrofit our cells and panel… some have volunteered to front the enormous money capital cost. So we do not have a deal yet but we are in discussions with a few subcontract manufacturers and the discussions are pretty serious and they are pretty enthusiastic so we think that offers us a real opportunity,” remarked Feldt.

Although Feldt initially said that outsourcing further capacity expansion would mean module production rather than ‘String Ribbon’ production, the executive conceded under numerous analyst questions that Evergreen had not ruled out complete outsourcing for its expansion plans, considering the keen interest for EMS companies to work with the company.