WHEB Commentary

Hyewon Kong

Solar shakeout: sun rise in the East, set in the West


This week Q-Cells, once the world’s largest solar manufacturer, filed for insolvency. Its share price dramatically fell below €0.2 from its peak of €80 back in 2007. As an investor who has been following the solar industry for many years, I have very mixed feelings about the fall-out from this German solar company.

Q-Cells is not an isolated case – there have already been a number of bankruptcies in the solar industry since last year – but it is nonetheless a rather symbolic event.

What went wrong and where is it all heading then? 

The European solar panels industry has been structurally challenged by a combination of relatively low barriers to entry and government feed-in-tariffs, resulting in fierce competition, oversupply and inevitable price declines.

Q-Cells along with other European solar manufacturers had neither cost leadership nor technology leadership to compete against Asian manufacturers operating with much larger capacity and much lower prices. They were not able to generate positive returns on capital and were heavily dependent on government subsidies to keep their operations afloat.

In tough economic times like now, governments are forced to scale back their subsidies. Therefore, the European solar panel industry was doomed to fail. It was not a matter of if, but only of when it would eventually collapse.

Only a few winners

Applied Materials estimates that there is an issue of overcapacity in the industry. (http://www.appliedmaterials.com/sites/default/files/03282012_pinto.pdf) In 2012, total demand is expected to reach 30GW vis-à-vis a supply of over 50GW, which will negatively affect prices and revenues. We’re already seeing some Tier 2 and Tier 3 Chinese players going out of business and many of the existing players are making losses. Only the top players with better economies of scale, leading cost and financing structures can be expected to survive through this.

Solar all doom and gloom? No, positive in longer-term

So what does this mean for our investments? We have favored the cost leaders such as Yingli Green Energy and Trina Solar in the past but we are currently not investing in any solar companies given the deteriorating fundamentals of the industry, affected by oversupply and price shortfalls. In the meantime, we are focusing on energy efficiency investments to help minimize resource use and save money.The massive investments of the past few years have caused a temporary set back for solar energy and resulted in declining profits and competitiveness problems at the firm level. However, the industry as a whole has a bright future. Solar panel prices keep decreasing and this means that solar power will become truly competitive even without subsidies. We can finally reach grid parity, the point at which solar power is equal to or cheaper than conventional energy sources. In conclusion, we are hopeful for the solar investment opportunities in the long run.

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