Chinese firms ride vertical integration to solar cost leadership

Chinese solar firms Trina Solar Ltd. and Yingli Green Energy Holding Company Ltd. have capitalized on their vertical structures—combining the sale of Photovoltaic (PV) wafers, cells, panels and installation—to achieve the lowest costs in the industry. But will their success continue as solar market conditions change?

“Yingli and Trina have capitalized on their capability to quickly reduce margins across the solar value chain,” said Dr. Henning Wicht, senior director and principal analyst at iSuppli. “These two companies do not have to renegotiate contracts with wafer and cell suppliers to achieve best-in-class pricing, allowing them to achieve strong growth during what has been a very tough year for the global solar business.

By combining multiple segments of the solar supply chain into a single vertically-integrated business model, they have been able to control costs—and even maintain the lowest inventory levels of any supplier worldwide.”

Trina in the third quarter saw its revenue explode to $250 million, up from $148 million in the second quarter. The majority of its sales during the period were derived from Europe.

The company in the third quarter even managed to decrease its stockpiles to just 22.7 Days of Inventory (DOI). In contrast, DOI for all vertically integrated solar suppliers amounted to about 105 in the third quarter.

In addition to overseas sales, Trina and Yingli also are benefitting from the rise in solar installations in China. iSuppli predicts 200 Megawatts (MW) of solar systems will be installed in China in 2009, up from 30MW in 2008. China’s megawatt installations will rise at an 88 percent CAGR to reach 2,500MW by 2013.

Vertical orientation
“Yingli and Trina, along with US-based First Solar Inc.—represent the most notable success stories in the PV market today,” Wicht said. “In the price-driven environment of 2009, vertical integration provides the scale and control needed to contain costs, and to provide a competitive edge.”

Many other companies are practicing various degrees of vertical integration. For example, Suntech, Sharp, Sanyo, Sunpower have combined cell and panel production. REC Solar Inc. offers polysilicon, wafers, cells and modules. Aleo, Solon and Phoenix Solar engage in both panel production and solar system installation.

Other companies are taking specialized approaches, focusing on specific nodes of the supply chain. For example, companies including JA Solar, Gintech and NSP perform only cell production, while HSC and Wacker exclusively offer polysilicon.

The wave of the future: specialization
While vertical integration may rule the day in the solar industry, the days of dominance for this business model are numbered.

“The future of the solar industry lies in specialization, similar to what occurred in the semiconductor business,” Wicht said. “Chip suppliers once were completely vertically oriented, producing everything from raw silicon and wafers, to manufacturing equipment, to semiconductors, to end equipment.

“However, over the years, it became unfeasible for chip companies to participate in all these segments, leading to a disaggregation of the industry into distinct segments, including raw materials, fab equipment, foundries and assembly and test. Economics dictate that a similar trend will occur in the solar market.”

Wicht noted that the vertical integration approach will become untenable for the solar market in the future.

“Maintaining the investments to remain competitive at all levels of the solar business is not possible for a single supplier,” Wicht said. “Depreciation costs for production equipment will increase. Depreciation cycles will decrease to less than five years, down from as much as 10 years before, due to the need to buy new, more competitive equipment.”

Meanwhile, as the solar market diversifies, those companies that focus on specific nodes of the industry will be able to provide specialized products to meet the needs of particular applications. For instance, companies can provide solar solutions that are specifically tailored to increase the kilowatt yield in low lighting conditions or in high temperatures.

Companies that successfully develop unique, specialized products will be able to avoid heavy competition that can erode prices.

Source: iSuppli, USA