JA Solar in ‘made to order’ mode: capacity constrained on SECIUM cells

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Cost savings, technology focus and inventory control were key takeaways from JA Solar’s third quarter 2011 conference call, held this week. In line with piers, rapid price declines and weaker than expected demand impacting revenue and margins thus leading to inventory write downs of US$21.7 million. JA Solar reported shipments (cell and modules combined) of 445MW, which was at the low end of guidance of 450MW, and represented an increase of 11% over the prior quarter. Revenue was reported at US$388 million, a decrease of 7.3% compared to the second quarter of 2011. JA Solar reported an operating loss of US$43.3 million compared with operating loss of US$31.7 million in the second quarter. Gross margin was negative 4.3% in the third quarter compared with negative 2.7% in the second quarter.

Shifting business

Peng Fang, CEO of JA Solar, noted in the conference call to discuss third quarter results that the company had a clear shift from customers wanting higher efficiency modules due to the better return on investment, especially since feed-in tariffs are moving downwards in key markets such as Germany. Fang partly put the increased shipments in the quarter down to this technology shift.

However, Fang also noted the shift in customer selection requirements, highlighting that, “Customers want to work with suppliers who can offer bankability, demonstrated product quality, a strong cash position and the healthy balance sheet.”

Despite this, JA Solar guided lower shipments for the fourth quarter of between 310MW and 330MW and revised downwards, full-year shipments to approximately 1.6GW, compared to previous guidance of 1.8GW.

Geographic breakdown of third quarter revenue was approximately 57% China and 43% international, not surprisingly suggesting that lower utilization rates at PV module manufacturers based in China were falling, reducing demand as approximately 67% of product mix in the second quarter had been for solar cells and 6% solar cell tolling.

There is also a shift in product mix shipments taking place. JA Solar noted that module shipments made up 27% of shipments in the second quarter of 2011, yet module shipments would be slightly higher than 35% of product shipment mix in the fourth quarter. This would increase to more than 50% in 2012, noted Fang in the call.

Despite the looming trade issues in the US, the company noted significant volume demand for modules from the US. Although management were reluctant to guide shipment levels in the first quarter of 2012, they hinted that the seasonally weak first quarter, due to European winter weather may have less of an impact as the US market was strong and not seasonal.

Manufacturing shift

Much attention in the call was given over to manufacturing and technology issues. Understandably, cost reduction strategies were discussed in detail but a key point made by management was the decision to produce to order, given the focus on inventory reduction and manufacturing cost containment. This was reflected in the shipment figures for the fourth quarter being close to actual production levels.

JA Solar said that inventory levels at the end of Q3 were US$190.6 million, a fall of US$63.7 million compared to Q2 2011. Having reduced inventory levels by approximately 25% from the previous quarter, JA Solar management said that inventory levels would come down in terms of megawatts and also dollar level, but wouldn’t be that significant in Q4.

With inventory control and made to order approach capacity expansions like the majority of its rivals have been curbed, impacting capital spending plans for 2012.

Management noted that CapEx and capacity planning hadn’t been nailed-down yet for next year but guided that there would not be any additional cell or wafer capacity added. Spending would be on equipment maintenance and certain upgrades hinting towards some module capacity spend, due to customer demand for high-performance modules, though spending in this area is significantly less than in wafer or cell areas. Overall, management said CapEx would much less than this year.

JA Solar spent approximately US$91 million on CapEx in Q3, primarily to finish off capacity expansion undertaken since the beginning of the year for new higher efficiency products.

With the shift in demand towards higher performing products, JA Solar said it was capacity constrained in this area for its SECIUM and Maple products. Approximately 20% of shipments are expected to be SECIUM or Maple products in Q4. Limited quasi-mono wafer volumes and new cell lines ramping were said to be the key reasons behind the current capacity constraints.. 

“For the fourth quarter the high efficiency cells will continuously decrease in the price, in the cost. So, probably we will be like 5% decrease. However, the volume right now for the high efficiency is very small. So, the major part of next year where we are ramping up the high efficiency product. In the mean time, we will reduce the cost significantly. So, eventually, we're mostly high-efficiency product that has the similar cost,” commented Fang.

JA Solar expects total module production cost to decline between 25 to 30% versus its total module production cost in Q3. But cost reductions would seem to be slowing as management guided total module cost would decline a further 5 to 8% from Q4 levels, while cell processing costs would go down a further 10 to 20% versus current levels. Module costs were said to come down approximately 10 to 15% by mid next year. Standard module products costs would be down to US$0.80 to US$0.85 by mid-Q4.

With a focus on process optimization, yield and further cost reductions on its high-efficiency lines, JA Solar said it had already made significant progress on improving cell efficiencies. Management noted in the call that its multi-crystalline solar cell efficiency reached a record average of 17%, up from an average of 16.8% previously. In particular, through additional process improvements and breakthroughs, its high efficiency Maple solar cell technology average efficiency now stood at 17.9%, with a peak efficiency in the 18% range.

The company said it would now be able to provide a module product in the 245W to 250W range. With additional optimization, it expects to produce modules in the 260W and 255W power range in volume by Q2 2012. 

In R&D, the company noted it was developing new technologies that included a roadmap to reach 30% cell efficiency, utilizing a p-type wafer. 

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