Life Isn't So Good For Solar Manufacturers Compared to Installers

Yesterday, we reported on soaring solar installations in the US, but life isn’t so good for the manufacturers that make the solar components and panels.

In our recent article, Which Solar Companies Would Survive a Shake-Out?, we note that many of the German pioneers who got the industry off the ground are in trouble because of an onslaught of Chinese competitors, who vastly increased production capacity, leading to oversupply and slumping prices at a time of lower demand because of the recession.

This week, one of those German manufacturers bit the dust, as Solon (SOO1) filed for bankruptcy. Even though it’s looking at a strong 2013, the company can’t cover its financing costs until then.

Solon was Germany’s first publicly traded solar company, going public in 1998. It employs over 800 people at its plants in Germany, Italy, France and the US.

This year, Germany cut its landmark solar feed-in tariffs (FIT), lowering demand for solar installations in the country, and creating a potential shake-out for its solar companies, which are already reeling from Chinese competition.

Germany’s FIT, which guarantees a 20-year price for the electricity solar generates, made it the world’s largest solar market and created 150,000 jobs by 2010. The FIT was created in 2000 by legislation introduced by a centre-left coalition of Social Democrats and Greens.

Because the FIT provides incentives for solar generated electricity production, Chinese manufacturers were able to enter the market with much lower prices, pressuring domestic panel suppliers.

Since the end of 2010, about 5,000 solar companies in Germany have shut down or laid off employees, about 20,000 so far.

First Solar Focuses on New Business Strategy

US-based First Solar (Nasdaq: FSLR) is one of the companies expected to make it through the shake-out, but not without some pain.

The company is also reeling from the low prices for solar panels and cut its 2011 and 2012 forecasts.

Shares, which dropped 20% on the news, are at the lowest levels since 2007, declining 74% this year.

The company, which for years handily beat analyst estimates and is the lowest cost solar producer in the world, is implementing a new business strategy, moving away from Europe where subsidies are declining, to focus on utility-scale systems (where it’s had much success) in emerging markets (Asia, Mid-East) where subsidies aren’t needed. 

It will also focus on further cost-cutting efficiencies and will operate at 80% of capacity next year.

"Management is realistic and forward-thinking in this strategy, but we believe the Company’s industry leadership position and valuation multiple will remain under pressure as it executes on this strategy," says Ardour Capital, which expects EPS growth to be flat or down over the next 2-3 years.

First Solar expects to install a healthy 1.2 GW in 2012, of which 80% is already contracted, and expects further growth in 2013. Still, even after efficiency improvements (they are already extremely efficient), margins could continue to be eroded due to even lower pricing trends. In 2010, FSLR had 46% margins, which could be reduced to 15-20%.

That’s still a healthy margin if you compare it to other industries.

Last week, First Solar announced it would sell its mammoth 550 MW Topaz plant to Warren Buffett’s utility arm, which many view as positive for the company and the industry.

24 GW of utility-scale solar is in the US pipeline, but in the "post-Solyndra environment" it could be difficult to get all those projects financed, especially since the 1603 Treasury Grant Program may not be renewed at the end of this year.

With the sale of Topaz to Buffet, that plant will be built.

While many analysts have a "hold" rating on FSLR and many other solar stocks, and are not expecting a strong 2012 for the sector, some see it differently.

Clean Energy Intel recommends buying shares of FSLR at such historic low prices, and expects a market rally for solar in 2012, given strong demand in the US and Asia, while Chinese solar manufacturers are pulling back on new capacity because of oversupply. They also recommend Suntech Power (STP), Yingli Green Energy (YGE) and Trina Solar (TSL).  

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