Effective Tier 1 capacity aligning with 2012 PV demand expectations

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“How much capacity is really in the PV industry today?” This question has probably been asked more often than any other question in the past six months. The question is not founded simply upon curiosity. Capacity levels are implicitly linked to supply and inventory levels, module ASPs, planned fab utilization rates and long-term expansion/CapEx plans.

Understanding capacity levels is not as straightforward as adding up capacity based upon fab equipment that has been shipped. There is no shortage of misleading statistics using this approach. Pick your number when doing this academic exercise: 50GW, 60GW or even 70GW?

Now compare these headline figures against a PV demand benchmark for 2012 at the 30GW level. It is clear why the capacity question is so topical. And indeed – why so confusing.

Market requirements dictate effective levels

Capacity definitions have traditionally been used somewhat ‘liberally’ within the PV industry. Typically, they have encompassed ‘any’ capacity, regardless of whether this capacity was market-capable or not: or indeed, if the manufacturer claiming the capacity even had any downstream business to justify operating the equipment.

Pulling out the ‘effective’ capacity provides some welcome relief and helps overcome many of these issues. Effective-capacity is defined as ramped-manufacturing capacity that is capable of providing cells/modules that meet market requirements at any given time. All other capacity then becomes ‘ineffective’ and can be removed from any capacity/utilization and supply/demand analysis.

While many producers are hopeful of revitalizing dormant production capacity, it is likely wishful thinking that capacity that was uncompetitive in 2011 can be restarted in 2013 as competitive.

Any increase in market demand drives an increase in effective capacity conversion/utilization and subsequent capacity expansion phases from the market leaders: not an opportunity for uncompetitive capacity to be re-used.

Eliminating uncompetitive capacity

Removing ineffective capacity is done in several ways. The easy part is simply removing capacity as companies exit the industry, through choice or through corporate failure (insolvency, etc.). Next, legacy capacity that has been idled (effectively ‘mothballed’) for some time needs to be removed. Finally, ‘ramped’ capacity levels need to be fully worked in on a quarterly basis.

Ramped capacity is not the same as ‘nameplate’ capacity, or what the equipment is specified to do when shipped to the fab. While there is both upside and downside to this statement, the ‘downside’ cases far outweigh the ‘upsides’ in PV today.

For example,some production lines as part of previous c-Si expansion phases can operate at >100% of nameplate capacity. Conversely, some the thin-film fabs may only be capable of producing 50-60% if equipment was to be used 24/7.

Next, it is essential to factor in uptime, yield and shift schedules employed by manufacturers. For example, a nominal 30MW line at a Tier 3 c-Si cell maker in China may only ever run single-shift with significant downtime between production-runs. Very quickly, a 30MW ‘fab’ becomes a 5MW fab.

Lastly, phased line ‘ramping’ (up and down) needs to be considered. This allows distinguishing between ‘nameplate’ (or year-end) capacity and ‘annual’ (or available) capacity. During 2010-2011, when significant production capacity was delivered – the difference between year-end/nameplate and annual/available was considerable.

The final capacity metric tracked is therefore ‘Effective & Annual’ capacity. This is the key figure to consider when reviewing quarterly supply/demand and inventory changes. Utilization should be referenced to these capacity figures, more indicative of an Effective-Capacity Conversion term.

Assessing the capacity/demand balance for 2012

Figure 1 provides an illustration of the different capacity terms discussed above, for 2011 and 2012. During 2012, nameplate/year-end capacity of equipment operating in ramped fabs exceeds the 60GW level. However, the Annual & Effective capacity figure is only 43GW, spread over 100+ cell/module and thin-film manufacturers. Further differentiation of this capacity is required.

This is done by considering Tier categories. Recall that Tier 1 manufacturers are characterized by economy-of-scale and low cost. They satisfy cell/module market requirements, and – most importantly – have sales pipelines/backlogs. Today, 21 manufacturers fall into the Tier 1 grouping.

The Tier 1 Annual & Effective capacity level for 2012 is 26GW. The China & Taiwan specific segment of this represents 21GW. These two figures now provide the underlying drivers behind supply and demand for 2012 and explain why some companies are currently running production lines flat out while others are being forced to question their participation within the industry.

Taiwan cell manufacturing now the barometer on downstream PV demand

Having just completed a road trip across Taiwan that took in the major stakeholders in the c-Si value-chain, it is evident that Taiwan cell makers are providing the benchmark on effective market supply and demand issues.

The elevated role of Taiwan cell manufacturing should not come as any surprise. Taiwan cell makers have commanded priority status for some time, and if anything, the US trade issue is simply providing further evidence of this.

Well before the ‘anti-dumping’ bandwagon gained traction, shipment of cells from Taiwan to leading Tier 1 c-Si module manufacturers in Japan and China had been growing:  acknowledgement that the likes of Gintech, Motech and NSP had profited from value-chain-specialization at a time when the vertical-integration strategies of their China Tier 1 peers had been capturing the PV headlines.

When will more capacity be required?

While the capacity issue is essential to understand the end-market supply/demand and pricing environment, it has an equally important – but different – relevance to the equipment supply chain. For PV capital equipment suppliers, the answer ultimately guides expectations on new order intake and equipment build schedules for new production lines.

PV equipment supply had been (somewhat artificially) inflated to a US$10-billion-plus SAM during each of 2010 and 2011. This raised the bar on PV revenue expectations to levels previously reserved for adjacent segments such as semiconductor or flat panel display, and for many companies, this created expectation levels that would turn out to be simply unsustainable.

Rather, the question of capacity can be reframed more as: “When will leading PV manufacturers have sufficient confidence in long-term PV demand to justify the next round of CapEx sign-off?” But this question comes with its own subset of unknowns, including: What will happen to equipment taken offline? Will a used-equipment market open up that will cannibalize new tool shipments for additional Tier 1 capacity expansions? And just what form will this equipment take as the industry refuses to conform to any broad consensus on technology roadmaps deployed across the value-chain.

Ultimately, it may again be the Taiwan cell makers that provide the answers to these questions. What roadmaps and strategies will be employed by Gintech, Motech and NSP during 2H’12 when the issue of capacity expansion is revisited? Will Taiwan cell production conform to the cast-mono aspirations of GCL and ReneSola? Will high-efficiency concepts be implemented? Or will substrate choice simply migrate from p-type multi to p-type mono to n-type adoption in order to raise the efficiency levels gradually closer to the 20% level over the next 2-3 years?

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