It took a while, but at the end of the day, SunPower Corporation (NASDAQ: SPWR) has received almost everything it wanted from the Trump administration. On Tuesday, the company announced that it will get an exclusion from the 30% solar import tariff that most of its peers are now saddled with.
SunPower doesn't need to move manufacturing plants or shut down production abroad. It can make solar panels in Asia, as it has for over a decade, and avoid tariffs altogether. And the windfall could be worth $100 million annually for the company.
An about-face on tariffs
In January, the Trump administration announced tariffs of 30% on all solar panels imported into the country (falling 5% annually over four years) and the same tariff on solar cells after the first 2,500 megawatts (MW) were imported. SunPower, despite being based in the U.S., was hard-hit because its high-cost solar panels ended up with a larger tariff per watt than competitors.
SunPower sought an exclusion from the tariffs, arguing that its technology is differentiated from commodity solar cells because of its interdigitated back-contact construction. This construction allows SunPower's solar cells to collect and channel electricity generated from a solar cell on the back of the cell, rather than through metal strips on the front of the cell, as most manufacturers do.
The exclusion could include other manufacturers who use similar technology, but there aren't any major manufacturers using similar technology, and the narrow scope of the exemption suggests SunPower will be the sole beneficiary. Other exclusions for small panels of less than 45 watts or frameless solar panels in colors other than black and blue won't move the needle for most manufacturers. As a result, SunPower may have a price advantage in the U.S.
How SunPower stacks up now
The 30% tariff had previously put SunPower in a tough position, exacerbating its high costs. For example, if a SunPower solar panel cost $0.50 per watt and a commodity solar panel cost $0.40 per watt, tariffs on SunPower panels would be $0.15 compared to $0.12 for competitors. The end cost in the U.S. would be $0.65 per watt for SunPower panels and $0.52 per watt for competitors.
With the exemption, SunPower's cost in this example would remain $0.50 per watt and competitors would have a net cost of $0.52 per watt in the U.S. Suddenly, SunPower may have a cost advantage on top of any efficiency advantage.
It would be surprising if SunPower didn't use this position to maintain full manufacturing utilization and potentially raise prices as well. Over the next few years, gross margins should be strong as a result.
An advantage built to last
Tariffs aren't terribly popular in the solar industry, but it's hard to see them going away while President Trump is in the White House. So SunPower's exclusion will be extremely valuable for at least two and a half more years.
The immediate impact will be significant and should allow management to increase its guidance for EBITDA of $95 million to $125 million in 2018. Profitability should increase even further in 2019 as the exclusion is part of a full year of results. No matter how you look at it, this was a big win for SunPower.
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