The entire solar PV upstream value-chain, including equipment and materials suppliers, is set for drastic changes during 2017, ushered in by a perfect storm of events that has impacted on the industry within a space of 2-3 months, according to the latest release of the PV Manufacturing & Technology Quarterly report from the research team of PV-Tech’s parent owner Solar Media, Ltd.
Indeed, the headline takeaway from our latest research report makes stark reading, as many within the upstream segment of the industry come to terms with a host of factors that now means every PV manufacturer needs to make sweeping changes to their near-term strategy going into 2017. And for those confident enough to have a five year strategy, let’s not even go there!
In the first of two blogs on PV-Tech, we will examine the causes of this, show graphics to back up the facts, and discuss what this means going into 2017. This blog focuses on the ‘why’, with the second feature showing data and graphics from our new research report.
Understanding the cause
It is of course all too easy to fall back on supply/demand and one of the most mislabelled metrics these days: overcapacity. Capacity numbers in the press are always there to make the case for overcapacity; and in terms of the supply arising from company expansions in recent times, we have all known about this capacity for ages, so why be so surprised by this now?
As we pull back from the numbers and the graphics, and the analysis, it all comes down to China and being exclusively a China driven event, both from an upstream (capacity/supply) and downstream (end-market demand) in the country.
Now, again, this is not new. China has been the largest solar end-market for some time. And of course has the dominant share of all c-Si capacity and production still.
The issue however that has caused module pricing to collapse from global blended ASP levels in the mid 50 cents/Watt to the low 40’s or high 30’s – in the space of just 3 months – is that both China-driven upstream and downstream factors have impacted on the industry at exactly the same time; more on this below.
Other factors are being cited as ‘important’, including US market uncertainty (when was any PV market ever ‘certain’?), alarmingly low pricing in China and India on the spot market, pipeline push-outs across emerging market regions, and so on.
However, each of these is a distant second in terms of importance compared to the above China driven typhoon that has the potential to wreak havoc on the most innocent of bystanders.
A year of two halves
Typically, the solar industry was subject to quarterly growth across the year, with almost always Q4 being the peak in demand. Q1 peaks in the past few years have been from countries such as Japan and the UK that had incentive cuts on 31 March, but the size of these markets was well below that of dominant China, and did not alter the basic annual growth dynamic of the industry.
The fact in 2016 that China has become a year of two halves, each with a 6-month period of growth, has been the main factor in driving Q3 change, the level of which has not been seen before in the industry mid-year. Add this to the fact that upstream capacity has been coming online at frantic rates, and we have our dual upstream/downstream inflection point, occurring in July this year.
Nobody is sheltered from China
In the past, when the PV industry saw capacity added with excessive tendencies, the capacity additions were not confined to China, with Korea and Taiwan playing their role: this time around, the capacity additions (with mainly the exception of Wacker’s new polysilicon plant in the US) are China specific.
Even looking across Southeast Asia, the capacity additions (almost exclusive to cells and modules) are coming from Chinese companies adding overseas capacity; the only exception to the rule being Hanwha Q-CELLS as a Korean-driven initiative.
Therefore, to be more precise, we can say that the changes in Q3’16 are coming from Chinese companies (both those confined to domestic-only supply and the dozen or so that serve both local demand and overseas markets), Wacker and Hanwha Q CELLS.
The rest of the industry, from a manufacturing standpoint, has done very little (aside from reworking existing capacity) in terms of change, and as such almost all of these companies are now being impacted by price and cost benchmarks coming from the afore-mentioned grouping.
Before we look at some of the graphics backing up the 2H’16 reset, it is worth noting that the industry has actually been spared (if this word can be used) from a chronic price erosion by about 6 months, simply because of the 6-month grace period for build-outs in China leading up to the end of Q2’16. Had this not been in place, pricing would have crashed in January 2016, not July 2016.
In fact, the role of the China market being such a large part of global demand has not simply been to the detriment of overseas based PV producers, but to a large number of China-only c-Si manufacturers that had got rather too bullish about their local market being so strong and effectively carved out for local production.
Those impacted most now are the cell and module producers in China that had moved away from Europe several years ago, decided that their role in the world was not to try and serve the import-restrictive European and US markets, and settle into a mode of quasi own-brand and OEM/tolled activities in China. Indeed, some of these companies even added to the overcapacity, choosing to bring more capacity online within China.
Upstream strategies in a low ASP climate
Of course, ASPs can be tolerably low if costs can be reduced in equal measures, and there appears to be a somewhat bullish section of the PV industry that is painting a rather rosy picture on this being a fait accompli going forward. But costs never decline as quickly as ASPs do, and it can easily take 18-24 months to get back to prior margin levels, and there would appear to be signs now that this will in fact happen.
Actually, for a bunch of Chinese c-Si producers, the timing of the industry downturn is particularly unfortunate, and will likely play out over the next 12-18 months. Perhaps a couple of companies here are best to pull out to talk through the issues impacting all of them: Renesola and JinkoSolar.
Renesola had previously been a winner in the overcapacity world of 2012-2013, where having a highly flexible third-party production model worked very well. As this model began to show an increasingly unacceptable level of outsourcing costs, the company retreated from this approach, seeking to use its in-house module capacity as much as possible. Now perhaps, Renesola is very well positioned to re-embark on its previous winning formula, albeit with more arms-length OEM dealings than it had in the past.
JinkoSolar decided a few years ago to significantly expand its in-house midstream capacity, moving towards a model whereby in-house production would be dominant. Now, in the face of third-party cell and module capacity having to sell at or below costs simply to exist, a company like JinkoSolar is left having to debate how much of the new capacity added to use, and scrutinizing underutilization costs and outsourcing costs in equal measures.
Accepting change, and changing tact
But the need to re-examine strategies (or more specifically, tactics) is across the entire upstream segment, with no single company spared from having to reset 2017 plans. For most in the industry, little had been said about 2017 anyway, or at least to the outside world; First Solar is almost the only upstream PV manufacturer that had the courage to present a 5 year plan in recent times. The rest were probably wise not to outline anything too detailed, as whatever they had said in the past would now be confined to the drawing board.
Furthermore, we have some companies going through what appears to be the denial phase, which goes something along the lines of: we knew at the start of the year, this was going to happen in Q3’16 and we prepared for it. Anyone hearing this, or any similar wisdom of hindsight, should take it with a pinch of salt, as nobody – and I mean nobody – was forecasting anything close to what has happened between Q2’16 and Q3’16.
And – much more worrying now – there is nothing at all that suggests 2017 is not simply going to be a continuation of what has happened so far in 2H’16. Right now, if you were a major producer knowing you always have the lowest costs (whatever), you would be very happy for this scenario. In reality, this is the best way (and by far the quickest) to win market-share in the PV industry, as opposed to winning through product innovation.
Therefore, it should not come as any surprise that the two companies that are most likely to retain significant capex spend in 2017 are the two companies with the lowest multi-GW manufacturing costs in the world: GCL and LONGi Silicon Materials. Whatsmore, the capex from these two companies is heavily weighted to cells and modules, having GW scale capacity outside China, and targeting global module shipments, not just China.
A draconian pricing environment lasting all through 2017, along with a massive overseas midstream push from GCL (factoring in GCL Poly and GCL Systems Integration) and LONGi Silicon Materials (and LERRI Solar) has the potential to totally redefine what the PV industry looks like going into 2018. Succeed or not, the wise move would be for every competitor (or new entrant) to plan for 2018 assuming they succeed with their plans; anything else then is an upside scenario.
Technology on hold
So, what is the impact on technology?
This is actually an interesting point, as it would be easy to say quickly that capex will be frozen, R&D spending will be minimized, headcount levels optimized and that cost-reduction will be the name of the game until 2018. And this indeed may be what things look like for the next 18 months, with PV equipment suppliers seeing only upgrade orders with tool ASPs and margins impacted within a buyer’s market.
Certainly, what was shaping up as a fascinating duel between mono-PERC and multi black-silicon may be put on the backburner, ready to resurface in a modified format in 2018. Maybe 2017 will just be about mono-PERC optimization, and very low-cost multi wafer supply?
Can we really expect any of the heterojunction new-entrants to remotely survive in a 30-35c/W module environment, even if they can justify a 20% premium?
The next blog – to appear on PV-Tech in the next few days – will present data and graphics to support the above discussion, and also review what we might now expect to see at PV CellTech in Penang, 14-15 March 2017, when the CTOs from the top c-Si manufacturers take the stage to outline their new plans for PV manufacturing and technology going into 2018.
New report now available – The new PV Manufacturing & Technology Quarterly report from Solar Media Ltd. – the parent company of PV-Tech – provides a definitive guide to solar PV technology today. The report covers production metrics for the industry and the leading solar manufacturers across the entire value-chain, including polysilicon, ingot, wafer, cell, and c-Si & thin-film modules.