For more than a decade, the solar industry's manufacturing buildout has been fast, chaotic, and -- for the most part -- financially destructive. Dozens of companies would take on short-term debt, primarily from Chinese state-run banks, to build out capacity using standard equipment that led to lots of capacity, but very little differentiation among manufacturers.
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If you look at data sheets and cost structures, Canadian Solar (NASDAQ: CSIQ), ReneSola (NYSE: SOL), JinkoSolar (NYSE: JKS), Hanwha Q Cells (NASDAQ: HQCL), and JA Solar (NASDAQ: JASO) are all making very similar products and selling them for very similar prices.
Commodities are prevalent partly because trying to take a different path from commodity panels has been really tough. SunPower (NASDAQ: SPWR) and First Solar (NASDAQ: FSLR) -- who have differentiated technology -- have been stuck competing with companies who were willing to sell a commodity product at low prices, competing on price alone, putting extreme pressure on their businesses. And it was almost impossible for the differentiation in technology to show when commodity prices plunged year after year.
Image source: First Solar.
Changing winds in solar energy
The dynamic of costs driving everything may be starting to change in 2017. In residential solar, customers are trending toward more efficient panels to maximize the power from their roofs, and they're willing to pay a premium to do so. Finally, cost isn't the only driver in the market today.
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On the utility side, commodity panels have had an advantage, but the weakness of the manufacturers in the market could undermine any cost advantage they have. Utilities and solar developers want low costs, but they also want reliable manufacturing partners. If the manufacturer goes bankrupt, the warranty on panels is worthless, and given the long lead time many projects are built on, they may not be able to supply panels as contracted. And if the difference between a reliable manufacturer and a weak one is a few pennies per watt, then a stronger partner may be worth the premium.
We're starting to see signs of developers making this decision in 2017. First Solar has signed 252 MW of projects in Australia, 107 MW in France, and a collaborative deal with Turkey's Zorlu Holding to distribute solar panels in 26 markets. SunPower signed a 125 MW agreement with NextEra Energy to supply its P-Series panels. These announcements came as Chinese manufacturers have announced very few large supply agreements in comparison to their capacity and have begun reporting financial losses.
As commodity manufacturers weaken, customers find their products less attractive. We saw this as Suntech Power hit financial trouble, and in the last few years at Yingli Green Energy, where its financial weakness has resulted in a decline in shipments. Customers want stable partners, and that may put First Solar and SunPower in a good position.
R&D could decide the future winners in solar
Playing into this dynamic is investment in R&D. To stay ahead of the competition, solar manufacturers need to invest in R&D. And you can see below that First Solar and SunPower are investing a lot more in R&D than competitors.
Lately, this has led to First Solar's Series 6 upgrade and SunPower's X-Series and P-Series products, which should have an efficiency advantage over comparable products in the market. And as they invest more in R&D, that competitive advantage should increase.
Can technology create a long-term advantage?
Everyone in solar is in rough financial shape in early 2017 as margins shrink and the global market goes through a slight downturn. And most Chinese manufacturers are both highly indebted and have little ability to differentiate on a technology level, so they'll likely continue to struggle in the commodity market. And as that weakness shows, developers may choose stronger players as suppliers.
This creates an opening for First Solar and SunPower, who have differentiated technology and more stable operations. First Solar's massive expected $1.5 billion cash balance even at the end of 2017 will mean this is a stable partner. SunPower's balance sheet isn't as strong, but it's two-thirds owned by French oil giant Total, which is a big reason it has attracted customers like NextEra Energy.
Both manufacturers may be able to consolidate power in 2017 as competitors hit a rough patch. And if they can do that, they may emerge with a larger market share and higher margins in the future. With solar energy just reaching a point of sustainable growth, that could be a great position to be in for investors.
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