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Updated: A severe cost-cutting exercise and manufacturing realignment is underway at First Solar as it plans to axe around 30% of its workforce, permanently close its German manufacturing operations and idle four lines at its facilities in Malaysia. Management blamed the move on the market conditions in Europe and the rapidly changing market demand dynamics within the industry for the restructuring. The restructuring and other related charges are expected to be between US$245-370 million, of which US$80-120 million was said to be in cash expenditures. In a conference call hastily arranged with financial analysts to discuss the restructuring, First Solar’s CFO, Mark Widmar said that it could temporarily idle all 24 lines in Malaysia to enable equipment and line upgrades and also address weak demand issues. A definitive decision has yet to be made.
"After a thorough analysis, it is clear the European market has deteriorated to the extent that our operations there are no longer economically sustainable and maintaining those operations is not in the best long-term interest of our stakeholders," said Mike Ahearn, chairman and interim CEO of First Solar. "Decisions like this are not easy, especially given how important the European markets and our associates in Europe have been to the development of our company and the solar industry as a whole. We are committed to treating all affected associates fairly and to building our relationships with European business partners that are aligned with our strategy of pursuing utility-scale solar opportunities in sustainable markets around the world."
"The solar market has fundamentally changed and we are quickly adapting our market approach and operations to maintain and build upon our competitive advantage," said Ahearn. "After a period of robust growth, First Solar is scaled to operate at higher volumes than currently exist following the reduction of subsidies in key legacy markets. As a result, it is essential that we reduce production and decrease expenses to reflect the smaller volume of high-probability demand we forecast. These actions will enable us to focus our resources on developing the markets where we expect to generate significant growth in coming years."
First Solar said that its CdTe thin film production lines in Frankfurt (Oder), Germany, would permanently close in the fourth quarter of 2012. In relation to its Kulim, Malaysia operations, currently the largest of its manufacturing sites, First Solar said it would indefinitely idle four production lines to begin on May 1, 2012.
In February, 2012 First Solar announced it would cut production at its German plant in half and place its 1,200 employees on a part-time contract. At that time the company expected the reduction would last for approximately six months as weak demand was thought to have eased by then. The company had also backtracked on plans for its first plant in Vietnam and on equiping its new massive facility in Arizona.
Overall, approximately 30% of First Solar’s workforce will be affected by the restructuring, around 2,000 associates.
The restructuring efforts are expected to reduce First Solar's costs by US$30-60 million in 2012 but by as much as US$100-120 million annually afterwards.
Average manufacturing costs are expected to improve to US$0.70-US$0.72 per watt in 2012 as a result of the changes, which is lower that prior guidance and planned operational improvements to achieve a cost of US$0.74 per watt. In 2013 costs are expected to range from US$0.60 to US$0.64 per watt, according to First Solar.
“Changes in market dynamics in Europe have been driven by severe alterations to government incentives, all made to try and control the growth of the market and limit spending in tight economic times,” commented Sam Wilkinson, senior market analyst, PV Group, IMS Research . “All of these changes have also been made in such a way as to particularly limit the growth of large ground-mount projects. This is of course further bad news to First Solar, as this is predominantly its target market.”
According to an investor note from Deutsche Bank financial analyst, Vishal Shah the restructuring by First Solar of manufacturing operations "mitigates the risk of large under-absorption charges as well as a significant potential increase in manufacturing costs - which in turn should enable the company to preserve the "theoretical" valuation of existing captive project pipeline."