Recent earnings reports are confirming that module suppliers have now accepted that previous full-year 2012 shipment forecasts were too optimistic. This is revealed by comparing the most recent shipment guidance withthe previous round of earnings reports (reporting for Q1’12), when all major manufacturers had full-year shipment growth estimates in the strong double-digit range, with some guiding up to 50% growth.
Previous expectations for 2012 shipments had created a situation by mid-year where – when taken together – tier 1 manufacturers were estimating a weighted average growth rate of approximately 30%. However, this compared starkly with the summary presented in the NPD Solarbuzz Quarterly report back in June 2012 when end-market demand was requiring only 9% shipment growth year-on-year.
Several reasons were given for shipment optimism during the quarterly earnings calls three months ago. The first was that many companies were projectingupside to demand (more than anticipated) coming from European markets in the early portion of 2012. In fact, many manufacturers mistakenly believed this would imply that Europe would simply follow a traditional demand pattern and see continually increasing shipments throughout the year. However, this growth pattern did not materialize, and European markets have continuously declined through 2012: the inverse of the demand pull than has been traditionally seen within Europe.
Another reason for optimism was the hope that falling prices would bring much higher growth to emerging markets (through elasticity in demand). Although there has been significant growth Y/Y in many of these emerging markets – especially in Southest Asia and Latin America – the high growth rates were due as much to an extremely low starting base as to rapid growth in real demand.
With demand for 2012 now softening somewhat compared to forecasts a few months ago, PV manufacturers are now hopeful that 2013 will see a surge in these emerging markets as incentive programs and pilot projects confirm solar PV to be a viable power generation source moving forward.
Finally, many of the major companies expected a greater level of industry consolidation to occur and with more urgency. This was hoped for in order to remove competitors’ excess capacity from the industry. Although many firms have enteredinto receivership during the past few quarters, many more – with significant amounts of capacity – continue to operate. This has simply perpetuated the downward pressure on ASPs, at a faster rate than many industry leaders have been able to reduce costs.
With many of these factors failing to materialize in the way upstream suppliers had originally anticipated, almost all major manufacturers have now revised their full-year shipment targets down, with some even anticipating a contraction from 2011 shipment volumes. Revised 2012 forecasts range from a low of -9% to a high of over 40% Y/Y, for industry leaders. Combined, these changes bring the weighted average anticipated growth down to less than 15% Y/Y. While end-market demand is still expected to grow Y/Y during 2012, corporate shipment guidance is coming down as firms start to realize that projected market-share gains may not be worth the ASP declines necessary to achieve these previous goals.
In the short-term, this implies continued downward pressure on ASPs as module manufacturers struggle to maintain reasonable inventory levels amidst a continuing oversupply environment. This has also re-affirmed the focus on cost-reduction even if that means lower-than-hoped-for shipments during 2H’12. Only when a viable cost reduction path is in place will manufacturers be able to achieve positive operating margins and thereby embark again upon market-share aspirations.
Many firms are also moving towards more direct involvement in the downstream as a means of maintaining channels into the end-market. Former ‘pure-play’ module suppliers (or partially-integrated manufacturers) are now launching project divisions, albeit at small volumes, often only a few hundred megawatts in size.
The fact that manufacturers feel the need to even experiment with these options shows how nervous they are about losing access to the downstream and how concerned they are about surviving in the industry as manufacturers-only. Whether some firms that hadpreviously focused all their attention on manufacturing processes can now succeed in project development remains to be seen.
Ultimately, declining margins on PV products dictate that many manufacturers must attempt to evolve with the challenging environment in which they currently exist, and shifting focus downstream in an attempt to regain double-digit margins is for many the only option in play today. However, with excess company participation being the dominant factor in eroded margin levels across the upstream of the PV value-chain, the prospects for a similar situation occurring in the downstream channels cannot be discounted either.