Book-to-bill analysis to provide first indication of PV green shoots

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Book-to-bill ratios are often overlooked as providing nothing other than an instantaneous snapshot of historic tool shipments and order intake levels. Within a healthy industry, whether these ratios are hovering above or below parity is generally considered as a leading indicator for equipment suppliers’ manufacturing pipelines and near-term revenue-recognition.

Typically, they tend to offer the greatest insight when they decline below parity. For example, within the semiconductor industry, downturns have previously been characterized by book-to-bill ratios declining to levels of 0.7, signalling a pull on next generation tooling ahead of a technology roadmap inflection point (‘technology buys’).

PV book-to-bill collapse

However, the PV industry today is currently going through a dramatic tool-supply reset, with book-to-bill ratios consistently at levels that are almost unheard of in adjacent technology segments.

In fact, this takes the whole exercise of tracking – and forecasting – PV book-to-bill metrics into unchartered waters.

The explanation for book-to-bill ratios being at the 0.2-0.4 level through 2012 is relatively easy to understand. Exuberant investments into manufacturing capacity during 2010 and 2011 created chronic overcapacity by the middle of 2011 and effectively shut off any new capex release from PV manufacturers.

Capex for any (meaningful level of) new capacity remains on hold, and there are precious few signs today that this situation is likely to change for the next 3-6 months. In fact, recent ASP declines are merely a consequence of this excess capacity being ramped into production and flooding the market with surplus PV modules. Capex this year is at maintenance-only levels, with a significant part allocated to tooling received during 2011 but not ramped up nor paid for until 2012.

However, the PV book-to-bill ratio now offers one of the most pertinent metrics that will symbolize almost any uptick or rebound in fab capacity equipment spending – a widely accepted indicator that ‘effective’ PV capacity is approaching near-term PV market demand.

Changes in the PV book-to-bill ratios will soon provide the one of most accurate barometers on the true value of the 60-70GW of ‘nominal’ nameplate fab capacity that has been built by equipment suppliers, much of which is either incapable of meeting today’s cost/efficiency requirements or has been partially (or permanently) shuttered or driven offline due to bankruptcy proceedings. Indeed, tracking tool and technology sub-segments of the PV book-to-bill will also offer the first glimpse of what the PV technology roadmap will look like once the PV industry shakeout phase is largely complete.

In this respect, the importance of tracking PV book-to-bill ratios cannot be understated.

Benchmarking effective-capacity and end-market demand

Understanding effective (or ‘market-capable’) ramped manufacturing capacity is essential today in the PV industry. This is not merely driving the phasing of new capex release, but it is rapidly becoming a leading component in gross-margins being reported by leading PV manufacturers.

With cost-reduction being the key metric tracked today (in getting below ASP levels), the penalty of underutilization is enough to cause gross-margin levels to move from positive to negative territory. And as long as utilization rates are stalled at the 60-80% level, there is almost no prospect of capacity additions being contemplated.

Any increase in book-to-bills therefore should become a leading indicator that utilization rates have been increased to the extent that additional capacity additions are merited. However, this is not quite as straightforward as it may seem. There is the thorny issue of idled capacity that is sitting dormant either with tier 2 or 3 manufacturers that are still hanging in there, hoping that end-market demand picks up. And there is also the small issue of multi-GW levels of un-crated tools that were delivered at the end of 2011 and during the first half of 2012 that were surplus to demand.

Therefore, it is entirely feasible that book-to-bill ratios could remain somewhat static at depressed levels for the next 12 months, even if capacity levels are seen to increase during 2H’13 from the industry leaders.

These companies have various options to fall back upon, if they do need extra capacity. They may choose to acquire capacity from lower tier competitors or they may hunt down the surplus tooling in boxes with minimal capex outlay. Each of these scenarios would not filter back to PV equipment suppliers, other than a token gesture for service costs related to tool relocation, installation, and warranty transfer.

Technology-buy cycles are not yet conducive to the PV industry

Another important inflection point that may be captured by an uptick in book-to-bill ratios relates to the technology-buy cycle that typically happens in adjacent technology segments when equipment spending cycles are going through a downturn. But again, the PV industry has not yet matured to the stage that any comparisons here are entirely valid.

A technology-buy cycle depends largely upon industry-wide synergy on a common technology roadmap. And here, the PV industry has been comprised of competing voices and initiatives that have been embedded in competitive positioning within a climate of global protectionism. This has been characterized by leading PV manufacturers adopting different technology roadmaps, sometimes with unique process flows and tooling.

Today, the only common roadmap being pursued relates to corporate survival and the ability to operate profitably. And with ASPs continuing to decline on a monthly basis, the prospects for any changes here are difficult to imagine. Indeed, introducing any (high-risk) new technology process into mass production is seeing only tentative uptake.

There are other reasons why a technology-buy cycle is unlikely to become a key driver in stimulating PV book-to-bill metrics. The PV industry has no equivalence to feature-size technology-nodes and lacks the synergy needed across leading players to drive a wafer size or thickness reduction roadmap. But the biggest stumbling block right now is cash-flow, and the necessity to focus on short-term cash-generation as a means of avoiding bankruptcy.

PV book-to-bill updating

The attached graphic provides the stark reality that has been confronting the PV equipment supply-chain for the past 12 months. If negative operating margins represent the dilemma faced by their customers, then quarter-after-quarter of book-to-bill ratios in the range 0.2-0.4 offer the complementary impact of the prolonged downturn of the industry. These two metrics are inextricably linked.

It is important to point out that our analysis of PV bookings includes only those bookings that we believe are likely to happen within 12 months. This acts as a probability or ‘risk’ filter, and forms a distinction between a qualified PO and a letter-of-intent, framework supply agreement or memorandum of understanding for tool deliveries. This is substantiated by comparing the level of backlogs still sitting on some suppliers’ order books and the limited prospects of many of their customers being in a position to accept tool deliveries for some time – assuming these customers are still active within the industry when any tool deliveries would be merited.

Today, PV equipment suppliers are confronted not only by the impact of minimal order intake that stretches back several quarters, but by lack of visibility as to when this alarming situation will change. However, forecasting the timing of the rebound is one thing. Others questions include who will be adding capacity and what process flows will be adopted then.

Book-to-bill ratios are likely to crawl back to parity over the next few quarters, but this should not be taken as a sign of recovery. Rather, this will represent the point where deferred revenue backlogs have been worked through and bookings and billings are each sitting at (similar) depressed levels.

When the equipment market does start to rebound, book-to-bill ratios are likely to show rapid growth with several quarters where figures in excess of 2 or 3 may be reported before new revenues are recorded when volume tool shipments restart. At this point however, tool suppliers and equipment types may look somewhat different to the past few years.

Having the correct long-term strategy is now essential – both for legacy tool suppliers that have been able to weather the storm, but also for new capital equipment suppliers from adjacent industries that were unable to enter the PV industry as it went through its previous rounds of spending cycles.

The growth of PV book-to-bill ratios above 2 or 3 may indeed be among the first signs of green shoots within the PV industry, marking the point where effective capacity levels are insufficient to meet end-market demand, the shakeout phase has gone through its peak, and when remaining industry players are consistently reporting healthy operating margin levels.

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