Lesson learned from the third quarter earnings season: Big Chinese manufacturers are back in expansion mode, some are even investigating off-shoring options but Europe is overlooked. This is surprising as end-market installations in Europe should reach a trough in 2015 and start growing again, though at much more moderate rates than before. Here, Southeast European (SEE) markets are leading the pack in terms of growth and could also surprise in terms of volumes, should decade-old fossil fuel burners be replaced by renewable energy generation capacities.
Promising local and regional end markets are a precondition for investors to start due diligence on a local manufacturing plant or offshore location. In addition, tapping into markets where access is limited due to trade constraints is an additional sweetener for the investment case. As most SEE markets are part of the European Union and trade between member states is basically frictionless, these locations could easily be used as a hub to circumvent trade barriers and to gain a competitive edge against most Asian sites. In that respect SEE scores fairly well. So what’s holding investors back?
Capital is shy, especially when it comes to the predictability – or better, the unpredictability – of discretionary changes in the institutional surroundings under which investment decisions take place. Drastic, volatile and erratic modifications to the regulatory regime for renewable energy power plants have been a hallmark of many SEE countries. This is reflected by the peaking of the relative share of PV installations in SEE markets during 2012/13. In such a climate foolhardiness or a specific strategic consideration is needed to make investment commitments with multi-year payback periods.
Labour costs not a deal breaker
The extent to which shifts in an individual market’s regulatory environment erodes the propensity to invest is therefore a question of the operator model. Incumbents that strive to develop international markets from an offshore production hub are certainly less affected than the entrepreneur, who naturally wants to proceed on the learning curve with the backing of a steady-state domestic demand.
Labour cost differentials between Southeast Asia and Europe, or more specific SEE countries, certainly play a role in the location search, but not to the extent that often springs to mind when reading alarming bits and pieces of news on the apparent deterioration of the industrial basis in Europe.
A simple comparison of labour costs in countries that either produce or will manufacture PV modules in the near future with exemplary locations in SEE reveals that the absolute differential in hourly wages excluding nuances in labour productivity cannot be a game-changer, at least not on a stand-alone basis. Strikingly, the absolute difference between South Korea and Hungary is greater than the difference between Hungary and China. So, did Hanwha SolarOne’s decision makers fall victim to a home bias when they decided to ramp a new module fab in South-Korea? Certainly not!
The false mental preoccupation with labour as a determining cost driver becomes evident when looking at a high-level cost breakdown (Figures 4 & 5). The relative breakdown for all-in unit costs is based on a large-scale, integrated, high-efficiency PV multi-module downstream cluster. It’s basically an all-else equal analysis that shows the difference between high- and low-labour cost locations.
This back-of-envelope comparison reveals that no matter how you turn it, materials and capital investments are the biggest levers that ultimately determine the competitiveness. Sure, proponents of the low-labour cost argument will hold against this that the labour factor, no matter how small it is, has the potential to tip the scale in an industry that is operating on razor-slim margins. In reality, however, there are many more levers that can, should be and are utilised in order to counterbalance slight ‘disadvantages’ in labour costs – of which the most important are technology and location-specific incentive packages.
So, why is it that SEE nations do not play a more active role in one of the key growth industries of the 21st century? It seems evident that more collaboration between public decision bodies, industry associations, research institutes and the private sector is needed in order to develop a broad industrial development roadmap. The state that first initiates a dedicated master -plan is likely to make a significant leap forward and benefit from ‘first-mover advantages’. Such a yardstick can really make a difference, independent of the favoured operator model, to the creation of a nucleus from which a prospering PV industry is built.
One of the biggest advantages that many SEE nations enjoy is preferred access to the European Regional Development Fund that has allotted €182 billion (US$225 billion) for people and industry development measures, in priority areas such as “Research & Innovation”, “Competitiveness of SMEs” and “Low-carbon economy” for lesser developed regional economies within the EU. These funds could be used for industry-specific infrastructure investments and therefore turn out to be a significant building block in a broader incentive package for the creation of a local PV industry.
So, Europe’s bad reputation as a location for PV production is certainly not in balance with what it actually has on the bargaining table. It has a market which is partially shielded against tough Chinese competition, a promising overall end-market size, cluster benefits from leading equipment manufacturers, renowned PV research institutes and tier-one feedstock suppliers, as well as a good labour skill-set with varying degrees of compensations levels.
Last but not least, the European cohesion fund offers local governments capital that could be deployed in a broader PV-related incentive package. It only takes one to buy into this pitch to get the ball rolling.
Europe PV manufacturing. The bulk of the solar manufacturing expansions so far announced have been in Asia and the US, but Europe also offer many opportunities for equipment suppliers. Image: aleo solar.
Europe PV installation forecast with SEE share. Source: Viridis.iQ.
Southeast European countries. Source: Viridis.iQ
Hourly compensation costs in manufacturing (US$) in 2012; China based on 2010. Source: US Bureau of Labour Statistics, Viridis.iQ GmbH.
High labour-cost location. source: Viridis.iQ estimates.
Low labour-cost location. Source: Viridis.iQ estimates.