Phoenix Solar reviewing preferred supplier base as part of streamlining business

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The number of preferred suppliers its currently uses may be reduced, according to Phoenix Solar’s CEO, Dr Andreas Hänel in a conference call to discuss third quarter results. He also noted that his company was considering a purchasing shift away from dealing directly with US and Chinese suppliers and dealing with suppliers regional warehouse systems in an effort to streamline operations and reduce lead-times. Phoenix Solar has been heavily impacted by inventory build and rapidly falling prices that have required €29 million in cumulative write downs and losses of €13.2 million at the firm in just the third quarter.

Phoenix Solar warned a month ago of inventory write downs and significant losses for the fiscal year 2011, while saying it would be reviewing business models, without providing details.

A key takeaway from the quarterly conference call was not so much a change in the business model but ‘streamlining’ operations.

Phoenix Solar management noted that its PV project business wasn’t a cause of concern as it was working hard on building a profitable pipeline of projects in the US and Asia for 2012. However, as a consequence of the drastic fall in module prices, a key focus of attention would be projects of 1MW and more in Germany next year. Despite a 15% cut to the German FiT in January, IRR’s remained highly attractive to investors, according to Dr. Hänel.

Management noted that Saudi Arabia wouldn’t be a focus of attention in 2012, highlighting the possible slow pace of developing business in the region, while needing to target markets that have a market.

The main challenge to returning to profitability next year would be tackling the low margin business within its Components and Systems segment, which also took the brunt of inventory write downs on plummeting prices this year.

This segment of the business had generated revenue of €65.8 million in the third quarter but losses of €15.4 million. Phoenix Solar reported inventory write downs of €20.5 million in respect to modules in the first 9-months of the year. PV inverter write downs have cost the company €6.9 million and BOS write downs of €1.6 million by the end of the third quarter.

Streamlining the business in this area was a key theme of Dr. Hänel’s commentary. Having stopped purchases of modules to burn inventory and reduce the impact of further write downs in the fourth quarter and beyond, the CEO said that the number of module suppliers it used would be reviewed and potentially reduced.

The reduction in suppliers would have positive knock-on effects at the operational end of the business as the company could simplify procurement systems as part of the streamlining.

Further efforts in this area could include stopping direct bulk deliveries from suppliers, which have primarily been based in the US or China, with lead times of 3-4 weeks, typically.

Suppliers

In light of the rapid price declines and volatile demand environment, procuring product and pricing correctly had become almost an impossible task. Though a decision was yet to made, Dr. Hänel noted that the company was looking at dealing with supplier’s warehouse operations in the future, rather than directly with factories to reduce inventory issues and lead-times.

Taking advantage of the overcapacity, Phoenix Solar said that it would move towards greater reliance on JiT (Just in Time) procurement processes for its PV projects segment.

With massive overcapacity, analysts on the call noted that larger installers were foregoing the usual distributor route for module supply and dealing directly with China-based PV module manufacturers, attracted by the aggressive low prices being offered.

However, the Phoenix Solar CEO noted that this could be short lived and when demand slackens after a busy fourth quarter, Chinese producers could be saddled with container shipment cancellations. Installers going direct were also limited in product choice for projects which such a strategy, according to Dr. Hänel.

The image painted was of a supply chain becoming increasingly dysfunctional, especially in Germany. Dr. Hänel therefore sees opportunities to provide further “valued added” services to installers in the future, with a more “service oriented approach” though didn’t expand on this in the conference call.

Well known for its long-term dealings with First Solar, Phoenix Solar’s CEO noted that the company had only one long-term supply agreement currently in place and that contract didn’t expire until the end of 2012. However, it was renegotiating contracts with suppliers for 2012.

Phoenix Solar has also seen a significant procurement shift away from thin film modules and back to crystalline technologies due to the rapid price declines. Indeed, the shift has been significant since 2009 when thin film made up 74.2% of its product mix but is estimated to have fallen to around 40% by the end of 2011.

Currently, Phoenix Solar’s preferred thin film suppliers are First Solar and MiaSole, both based in the US, while crystalline suppliers include Schott Solar from Germany, while Suntech, Trina Solar, Yingli Green and LDK are all based in China.

Suppliers on the inverter side are all from Europe and include; SMA, Coverteam, Schneider, Fronius, Power-one and Delta.

Using an outside consultancy firm, Phoenix Solar said that its complete review of the business would be completed by end of the year to be acted in 2012.

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