Hanwha solar merger an act of desperation or hope?

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No one should be surprised about the inevitable merger announcement of China-based PV manufacturer, Hanwha SolarOne, and its sister company, Hanwha Q CELLS, headquartered in Germany with the majority of production in Malaysia. 

The writing was on the wall as soon as former Q-Cells was acquired by a member of the Hanwha Group a little time after Hanwha acquired Chinese producer, Solarfun, what is now SolarOne.

Desperation

However, Hanwha SolarOne has struggled to reverse its fortunes, having been hit hard by the two years of profitless prosperity and lacklustre growth since the recovery in early 2014. 

The company was still updating former Solarfun equipment and technology to something approaching Hanwha Q CELLS' level, but had continued to lack brand awareness, product differentiation and broad geographical footprint. 

Listed on the NYSE, Hanwha SolarOne’s shares have languished for several years and lost half their meagre value since shares were sold off due to the US anti-dumping case. 

Investor analyst and financial community interest in the company in the US has been indifferent for several years, with only one or two lower tier financial analysts attending quarterly earnings calls and asking barely a few questions of management. 

In 2013, Hanwha SolarOne was ranked eighth in the world, based on PV module shipments of 1.28GW, but is expected to fall one further position in 2014, based on shipment guidance of 1.43GW to 1.46GW. The company has one of the lowest shipment growth levels amongst the top 10 producers in 2014. 

Financial results have therefore failed to keep pace with the majority of its main China-based rivals, which have been posting record shipments and strong revenue growth, most returning to profitability in 2014. 

Hanwha Group member, Hanwha Chemical, had made bold statements about transforming Hanwha SolarOne into a top 3-ranked producer, deemed essential to capture a market share position that would bring about commanding manufacturing scale and brand leadership to lock in place a competitive long-term position within the industry. 

On its own that strategy has failed to materialise and looked increasingly unattainable. 

However, when Hanwha Group added Q-Cells to the sisterhood it was seen as another attempt to bolster Hanwha SolarOne’s already lacklustre performance. 

Indeed, Hanwha Q CELLS, as it was rebranded, was called upon to provide much needed solar cell and module assembly technology knowhow as it turned out that Solarfun’s technology and product portfolio was simply vanilla and was walking backwards compared to rivals. 

Not only did Hanwha SolarOne copy smart Hanwha Q CELLS solar cell processes but also adopted innovations such as glass/glass modules. 

The initial phase of collaboration went further when Hanwha SolarOne undertook a lengthy upgrade to automate its back-end module assembly lines, to improve product reliability and consistency, and reduce overall manufacturing costs. 

A second phase of collaboration took the form of a somewhat confusing sales pact, in which the sister companies tried to avoid competition across key markets but at the same time find ways to leverage lower cost product from China with higher performance and better brand awareness product from Malaysia. 

That strategy established in 2013 has yet to be proved successful for Hanwha SolarOne. Its regional footprint has remained limited. The Asia-Pacific region remained its most important region at 83% of total shipments in the third quarter of 2014 with Europe and Africa accounting for only 9% of shipments and North America at only 8%. 

With the US anti-dumping decision earlier this year, Hanwha SolarOne has seen shipments to the US decline from 12% in the prior year period. The EU case last year also made Hanwha SolarOne’s module less attractive. 

With little business growth, Hanwha SolarOne said a year ago that it would make a shift in its sales strategy to “higher value” markets, within countries such as Japan, the US and the UK, while it wanted to expand into emerging markets that were perceived to be less competitive, such as the Middle East, Africa, South America and Southeast Asia. 

A year later only a small difference has been achieved with the company shipping to 25 countries in the third quarter of 2014, the company did not guide total shipments to individual countries in the previous year's third quarter. 

Japan remains its strongest market which accounted for over 40% of shipments for more than the last twelve months. 

This of course is in stark contrast to the business recovery of Hanwha Q CELLS.

Hope

The merger is hoped to further improve Hanwha SolarOne’s product technology standing, leveraging PERC solar cell technology from Hanwha Q CELLS to improve its efforts to shift to higher value markets. 

As a result it would be expected that the company will undertake a major cell line upgrade to closely match those of Q CELLS, otherwise Hanwha SolarOne would be limited in the availability of high-efficiency (HE) cells and would be robbing Q CELLS of end market needs to expand itself.

However, the impact of greater economies of scale in manufacturing and purchasing power should not be overlooked and was highlighted by the company in its acquisition announcement and conference call. 

On a basic level that all sounds good, but Hanwha SolarOne deployed a ‘copy smart’ strategy, not a ‘copy exact’ manufacturing strategy with Q CELLS technology. The interesting aspect will be whether Hanwha SolarOne fully adopts Q CELLS technology over time or whether product differentiation remains. 

Indeed, this raises the issue of how successful Hanwha SolarOne will be in dealing with Q CELLS product and its brand. 

Hanwha SolarOne hopes that its global footprint, avoidance of duties and the scale of production combine to make the company the force it wants to be but has yet to achieve by its own. 

Despite a press release, conference call, presentation and a FAQ document issued by the company over the Q CELLS acquisition, the marketing issues were never explained in detail, only stating that the product offerings of both companies to the market would be retained.  

However, further down the FAQ list, the company noted that when the deal was secured sometime in the first quarter of 2015, it expected to announce a new corporate brand. So on one side the product brands will remain as before but a new corporate brand will be established. 

No guesses as to what the next corporate branding is going to be but with Q CELLS holding the brand bragging rights it will be an interesting aspect to watch unfold. 

Nevertheless there are still question marks over the overall marketing strategy, especially when the initial partnership strategy remains open to question and in many respects Q CELLS' recovery in sales and shipments has been primarily separate from anything Hanwha SolarOne may have brought to the party that was established over 18 months ago. 

Clearly the position of Hanwha SolarOne in the market and its relative underachievement against its rivals have been the key drivers for the merger now rather than later. 

However, the hope as to what this brings to the yet to be announced new corporate brand are unknown and therefore questionable. 

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