First Solar (NASDAQ: FSLR) and SunPower (NASDAQ: SPWR) have long been technology leaders in the solar industry. But instead of expanding in the last few years as competitors did, they've spent the last four or five years treading water as China built out its manufacturing capacity.
Instead of competing in an arms race with commodity solar modules, First Solar and SunPower focused on developing holistic solutions for solar power plants and developed better technology than competitors. Eventually, the race to the bottom would end and cost cuts would be harder to come by. Quality and efficiency could then become differentiators as customers considered more than price alone. And we may finally be at the point where these companies can grow again.
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Learning lessons from the past
The last five years in the solar industry has been driven by rapid manufacturing capacity growth and equally rapid declines in module prices. You can see below that JinkoSolar (NYSE: JKS) more than tripled capacity between 2013 and 2016, similar to the 2.4 GW to 7.0 GW increase in capacity Canadian Solar (NASDAQ: CSIQ) between 2012 and 2016.
On the cost side, Canadian Solar reported that its cost per watt to build a solar module was $1.32 per watt in 2011, meaning sale prices were over $1.50 per watt at the time. By late 2016, solar panels were selling for between $0.35 and $0.40 per watt on the spot market.
This dynamic of rising production and falling prices is why JinkoSolar and Canadian Solar have seen debt levels surge while profitability hasn't been very easy to come by. It's hard to make money in solar manufacturing because of the deflationary price pressure and equipment is the only state of the art for a year or two. When the industry is changing this rapidly, five years after a plant is built, the equipment is obsolete and no longer cost-effective.
This is the conundrum every solar company has faced. Expand and grow, risking going bankrupt because five years down the road when the debt you took to build a manufacturing plant is impossible to pay back. The other option is the sit on the sidelines, waiting for cost reduction to slow to a crawl and then build out manufacturing capacity that's superior to competitors that built capacity only a few years earlier. In many ways, that's what First Solar and SunPower have done.
The time to strike?
Now that commodity solar panel modules cost $0.35 to $0.40 per watt on the spot market, it's hard to see how module prices will fall at the trajectory they have the last five years. Costs will fall, but not at the same pace because components like aluminum and glass don't drop in price like silicon has.
That's why First Solar and SunPower see an opportunity to upgrade their equipment now and expand, taking market share back from competitors. First Solar is upgrading to a product called Series 6, which will increase efficiency to at least 18%, increase module size, and be fully incorporated into a complete solar solution the company will sell to project developers (modules, racking, inverters, etc.). SunPower has shut down its older equipment and is investing in building out next-generation solar modules with cells in excess of 25% efficiency. And its P-Series product takes commodity solar cells and assembles them into a module that's slightly more efficient than competitors, so it's leveraging the upgrades others are making to equipment.
These upgrades should give First Solar and SunPower a leg up on the competition and allow them to steal market share in the next few years. At the same time, it will be very hard for most major solar manufacturers to expand or upgrade equipment because they're holding billions in debt and are barely profitable, if not losing money each quarter. And if they can't keep up, First Solar and SunPower will be able to grow profitably and potentially invest more money in technology advances, expanding their lead.
Now may be the time to invest in expanding high-tech solar manufacturing. And First Solar and SunPower are best positioned to make that investment today, giving them a big advantage going forward.
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