Second quarter earnings season takeaways for new entrants in PV manufacturing

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Once again disregarding the crackbrained notion that PV market fortunes are correlated with oil prices, virtually all tier-one manufacturers guided for a very strong second half-year with order visibility reaching into 2016. Indicative order books of up to three quarters and beyond have been unheard of for quite a while and could point to market tightness for high-quality modules leading to a less hostile and more comforting pricing environment over the short to medium term.

Conditions for PV producers are improving, but new market entrants must by agile to survive. Image: Asola

In combination with low sourcing costs for feedstock and other key materials, efficiency improvements, higher automation levels, continuous technological progress and new ventures in higher margin PV power plant businesses, leading incumbents seem to be set for another round of margin expansions. This friendly business climate is likely to spur further investments by new entrants in PV manufacturing projects, especially in projects that are accommodated in local content markets. Below are four key takeaways of the second quarter earnings season that project development teams of new entrants should consider in their comparative competition analysis:

1 – High churn outs but no burn outs

The weighted capacity utilisation of an industry peer group of leading publicly listed downstream, integrated ingot-to-module PV producers is pointing to full utilisation in the third quarter of 2015, marking the ninth consecutive quarter where utilisation levels have been fluctuating above the 90% threshold, which is indicative of an expanding industry (Figure 1). As already elaborated, the majority of these players that represent almost 60% of global manufacturing capacity have full order books for the remainder of this year, with some even starting to fill books for 2016.

Figure 1: Utilisation levels within peer group of integrated PV producers. Source: Source: company data, Viridis.iQ GmbH estimates.

Fully-utilised incumbent production capacities are a tailwind for new entrant projects in three ways. First, to mention the obvious, it points to a healthy market environment where supply and demand are balanced. Second, it is likely to ease pricing pressure. And third, it reduces competitive pressures within emerging PV markets as incumbents focus their attention on higher volume gigawatt markets.

2 – The Good, the Bad and the Ugly

Despite high utilisation across the board the big divide in earnings power of various downstream business models increases, with integrated players largely taking the pole position. The great march downstream continues as integrated PV manufacturers get ready to increase their share in the higher-margin PV power plant developer and operator space, where unlevered project IRRs are in high-single to low double-digit territory, depending on geography and project design. With virtually every larger integrated manufacturer venturing into the PV power plant space, capacity weighted gross margins of this peer group are expected to receive further support on elevated levels and potentially even cross the magic 20% threshold, not seen for almost a decade (Fig. 2).

Figure 2: Gross margin, integrated versus non-integrated. Source: company data, Viridis.iQ GmbH estimates.

Of course, no projection without a premise! The margin boost story largely depends on two factors: first, the continuous availability of low cost feedstock and, second, the integrated downstream players’ ability to flip and monetise power plant projects at attractive terms.

And the Ugly? Ain’t no sunshine when the equity is gone…

PV manufacturing start-ups should ideally commence with the production of modules and crawl up the value chain and integrate backwards depending on the specific project setting and circumstances. Ideally, in order to create a blue-sky scenario from the outset of the business initiation a pipeline of prospective PV power plants stands readily available as a sink for factory output and as a margin booster.

3 – Revenge of the Nerds

The reins of the ivory tower inhabitants are gradually being loosened as the increase of the R&D expense ratio shows (Fig. 3). The actual spend on research and development is likely to be higher to the tune of 50bps as capitalised expenses are not included in the quarterly expense ratio. During the last industry correction a larger proportion of the cost savings per watt were realised through supply-chain optimisation and reduction of procurement costs. The resurgence of R&D expenses might indicate that a preliminary bottom is reached at the material cost front and, hence, a shift in focus to new process, cell and module designs.

Figure 3: R&D expense ratio. Source: company data, Viridis.iQ GmbH estimates

Depending on selected target markets, respective sizes, institutional business and trading environment, as well as regional product requirements, the new entrant should have a long-term vision for its technology and product roadmap in place from the outset. Innovation cycles in the PV industry are fast and it is therefore not a given that the initial product and process specific plant setting will be top-notch and sufficient to meet customer needs a few years down the road. This is of particular importance as tighter industry margins lead to payback times that usually exceed regular innovation cycles. So, beware of your competitors’ R&D efforts!

4 – Overconfidence in action, or how to conjure feedstock prices:

If you ask two industry experts, you’ll usually end up with more than just a single prediction. In this instance, the outlook for second half-year polysilicon prices was profoundly different, depending on whom you asked. While polysilicon manufacturers broadly anticipate a digestion of inventories and a price rebound, processors of silicon feedstock have a more moderate view and expect pricing to remain stable. While it seems obvious that current prices in the capital-intensive polysilicon industry are below reinvestment levels, forecasts on short-term price movements remain a gamble – especially as measurement of feedstock inventory levels throughout the supply chain is more of an art than science. At least, inventory levels of a peer group of publicly listed upstream players are not particularly low, even if adjusted for effects resulting from the quasi shut-out of foreign polysilicon producers from the Chinese markets (Figure 4).

Figure 4: Indicative inventory levels of polysilicon manufactures. Source: Source: company data, Viridis.iQ GmbH estimates.

Fully integrated PV manufacturing start-ups should try to take advantage of current polysilicon pricing, optimally by entering into longer-term procurement agreements were a proportion of feedstock needs are sourced at pre-determined prices, even if that means that these quantities are sourced at a premium to spot prices. Such a strategy will reduce uncertainty resulting from volatility in polysilicon cost and therefore increase business planning accuracy.


Broadly speaking, while still a diverse peer group, integrated downstream players make good progress on their recovery path and gain leeway by diversification into adjacent higher-margin business segments. Mid-term visibility seems to be good and could result in a further decrease of competitive pressure in local content markets. While attractive margins can be earned in a nicely growing industry, new entrants should prepare themselves with a concise product, technology and procurement roadmap that takes changing market regimes, fast innovation cycles, institutional shifts and sourcing cost volatility into consideration. Once a solid business model is found, it’s all about agility and adaptability.

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