It is a foregone conclusion that the first half of 2011 was a particularly bad time for the solar photovoltaic (PV) industry along the value chain. In fact these were the worst two quarters in recent memory. Years of increasing investments in ever-larger production capacities led to spiraling overproduction at a time of weakening markets, impacted by investor caution over uncertain changes to Germany’ s and Italian feed-in tariffs and global financial troubles, leading to a perfect storm for the industry.
Inventories stacked higher and higher, prices plummeted, margins collapsed. Three U.S. companies went bankrupt, and the largest European PV manufacturers – Q-Cells SE and REC ASA – reported massive losses and announced restructuring plans, including reducing output, closing plants and laying off workers.
But what were the deeper impacts of this period for the global PV industry? And now that we are into the fourth quarter of 2011 and receiving third quarter results, where is the PV industry headed?
Looking at the numbers, part 1: seasonal effects
As bad as the first half of 2011 was, it comes amid medium- and long-term trends of sustained market growth for the PV industry. Also, comparisons of shipments and revenues should not only be made to the third and fourth quarters of 2010, but to the first two quarters of the previous year as well.
It is important not to underestimate the impact of seasonal swings in PV markets, particularly in markets such as Germany and Ontario, where severe winter weather can be a factor in the first quarter. More significant are year-end rushes to install systems in nations with annual feed-in tariff digressions, which usually lead to a predictable fourth quarter spike and first quarter slump.
A closer look at revenues and margins
To more closely examine these trends, Solar Server performed an analysis of revenues and margins from the six of the world’s largest PV cell and module manufacturers. This analysis shows that while the six companies’ total revenues fell to 6.74 billion in the first half of 2011, an 11% decline from the second half of 2010, these aggregate revenues still represent a 15% growth over the first half of 2010.
However, margins tell a different story. The average operating margins of the six companies stayed relatively steady in 2010, remaining between 15% and 18% across four quarters, then collapsed to an average of 8.4% in the first quarter of 2011 and -15.9% in the second quarter.
The impact of a disastrous second quarter of 2011 for Q-Cells significantly brings down this average. However, even when Q-Cells’ results are excluded, the five remaining manufacturers showed an average operating margin of 11.7% in the first quarter of 2011 and 0.3% in the second quarter.
Furthermore, Q-Cells was not the only manufacturer to post operating losses in the hundreds of millions in the second quarter of 2011.
Industry leader Suntech Power Holding Company Ltd. reported a USD 170 million operating loss, representing an operating margin of -20.5%.
An analysis of global markets by IHS iSuppli suggests that these top manufacturers did better overall than the remainder of the PV industry, with global PV markets in the first half of 2011 down 4% from the first half of 2010. Due in part to these overly ambitious capacity expansions, declining margins are a natural result of insufficient market demand to sell the PV products being produced.
Remaining competitive in PV manufacturing
It is also notable that while profitability suffered across the PV industry, some manufacturers, such as First Solar Inc., Trina Solar Ltd. and Yingli Green Energy Holding Company, had room to fall. These three companies boasted operating margins of 27%, 22% and 23% respectively in the second half of 2010. In the first half of 2011, these margins fell to 18%, 10% and 14%, allowing these companies to post profits despite market conditions.
A few other manufacturers were able to hold on to impressive margins. JinkoSolar Holding Company Ltd. reported an 18% operating margin in the second quarter of 2011, while its shipments reached a record level.
Also, many companies that did fail, notably Solyndra LLC and Evergreen Solar Inc., had been experiencing financial trouble and had shown difficulty meeting their goals for some time. The market downturn did not turn either into a troubled company – it merely made their difficulties untenable.
The failures of these companies should not be seen as a threat to the industry. Some unprofitable and uncompetitive players have been eliminated from the solar space, leaving more successful companies.
Nationalism has been perhaps too easy of an answer during this difficult period, and the alleged difficulties that U.S. PV manufacturers have had competing with Asian crystalline silicon PV manufacturers and efforts to redress these difficulties have become front-page news. However, the pending trade case is unlikely to alter the long-term, established trend of PV manufacturing moving to Asia.
Furthermore, it is worth noting that the company with the highest margins among top PV manufacturers and the lowest cost per watt in the industry, First Solar, is a thin-film manufacturer with significant U.S. and German manufacturing.
Variation in the value chain
This difficult market environment for PV cells and modules has affected different parts of the PV value chain very differently. Wafer manufacturers may have suffered the most, with REC at first temporarily and now permanently shutting down a number of Norwegian wafer operations, and MEMC Electronic Materials Inc. reporting heavy losses from collapsed prices. Inverter makers have also suffered from oversupply and excess inventories.
However, despite big declines in market polysilicon prices, polysilicon manufacturing remains highly profitable for large players. In the second quarter of 2011, Wacker Chemie AG reported a 47% operating margin from its polysilicon division, while REC’s polysilicon division reported a 55% operating margin.Polysilicon industry leaders Wacker Chemie and Hemlock Semiconductor Group also report that they are sold out of polysilicon for several years to come.
Tepid recovery in 3Q 2011
We are now starting to see initial results for the third quarter of 2011, and it appears that the difficult times are not over. A large number of companies, including Trina and Yingli, have downgraded shipment, revenue and/or margin guidances, evidence that markets have not recovered as strongly as many have hoped.
Both Trina and Yingli are also posting low estimates for gross margins, signs that price pressures have not let up. Likewise, select financial results from Suntech show a decline in revenues and similarly tight margins. However, First Solar’s third quarter 2011 results show that the company has retained a high operating margin of 22%, while posting record revenues of over USD 1 billion.
The releasing of preliminary third quarter 2011 results has been accompanied by a new round of bankruptcies and plant closings.
In November 2011, Energy Conversion Devices Inc., Photowatt France and Silicio Solar have all shuttered manufacturing capacities.
Photowatt France is among the companies that have taken steps towards bankruptcy.
However, for many companies shipments continue to increase, in many cases over 2010 levels, while these companies report stagnant revenue growth and low to negative margins.
Geography and market shifts
The global PV market is not only changing in terms of its financial characteristics, but in the geography of its markets.
In 2011, German market growth has slowed as planned and in line with the goals of the feed-in tariff program. The exact year-end volume of the German market is a matter of debate and speculation. Notably, on October 3rd, 2011 IHS iSuppli predicted that the German PV market will spike in the fourth quarter of 2011 as customers rush to beat year-end FIT deadlines, reaching 5.9 GW over the first year.
However, the Italian market boomed in the first half of 2011, replacing Germany as the world’s largest market during this period. On September 8th, 2011, Italy’s GSE estimated that the nation will add 8.5 GW of PV plants in 2011.
Other markets are also dramatically increasing in size in 2011, most notably the United States, China and France, and these markets will be important to watch in 2012.
On November 7th, 2011 Solarbuzz estimated that the the Chinese PV market could reach 1.8 GW by the end of 2011. Similarly, GTM and Solarbuzz have both predicted that that the U.S. PV market will double in 2011, which would put it at 1.7 GW.
Finally, according to the French Society for Solar Energy Professionals, France is on course to install 1.3 GW by the end of 2011.
2011 global PV market picture
In contrast, on November 15th, 2011 IMS Research predicted that the global PV market in 2011 will reach 24 GW. If these predictions are accurate, the aggregate total PV markets in these five nations alone will total 19.2 GW in 2011. This does not include markets in Australia, Belgium, India, Japan, Ontario, Spain, the U.K. and other nations.
There is not a consensus in the industry that this will be the case. With its third quarter 2011 results, SMA Solar Technology AG has offered a total 2011 market estimate of 19-21 GW, a significant decline from the 23 MW installed in 2010.
Pressure on equipment manufacturers
Now that we have entered the third quarter of 2011, these market pressures from overcapacity and slower than anticipated growth are now coming to bear on equipment makers.
It may be a number of years until PV markets catch up with the aggregate capacities that have come online. This means that sooner or later, companies will have to stop expanding production capacities, and stop buying new capital equipment.
This appears to have already begun. On November 7th, Roth & Rau reported declining revenues and significant losses in its third quarter and year-to-date financial results
Some equipment manufacturers are diversifying beyond the solar space as a means to overcome this slowdown in manufacturing equipment.
Notably, GT Advanced Technologies has expanded its Sapphire Division, while its polysilicon equipment sales remain strong, enabling it to maintain revenues and margins despite a slowdown in PV manufacturing equipment sales.
Conditions look to worsen in 2012. On November 10th, 2011 IMS Research released a report which predicts that PV manufacturing equipment sales will decline 55% in 2012 from 2011 levels.
Outlook: 2012 and beyond
If recovery in the third quarter of 2011 is less impressive than anticipated, what does this mean for the global PV industry in 2012 and beyond?
The PV industry continues to be impacted by a number of outside factors, including the condition of global financial markets and the apetite for subsidy programs in individual nations. However, certain trends are clear.
EuPD Research is among the market analysts predicting a smaller PV market in 2012 and 2013 compared to 2011 levels.
However, in a recent interview with Solar Server, EuPD Research CEO Markus Hoehner suggested that we re-align our thinking about these changes. Instead of describing a pending decline in 2012 and 2013, Hoehner states that there was a boom in 2010 and 2011, and that markets will return to normal in 2012 and 2013.
The global solar industry has grown roughly 40% in the last decade, doubling around every two years. Such a rate of growth is appropriate given the role that solar technologies can play in addressing global climate change and other inherent challenges of our current energy infrastructure. However, rapidly growing industries are frequently subject to dramatic swings.
And while the intense pressure on margins is clearly a result of oversupply, in any industry the long-term trend is for margins to fall.
The solar industry has gotten used to these very high rates of growth, with ever-expanding capacities. For the next few years we may have to adjust to slower growth rates, and a lull while national markets in nations including China and India overcome multiple challenges to market development and grow into their potential.
Germany will reduce its feed-in tariff rates again in 2012, and Italy’s feed-in tariff is also designed to decline with this increase in installed capacities. The global PV industry will likely not be able to rely on one or even two dominant markets for the vast majority of its sales in coming years. This much broader geography of PV markets will bring its own set of unique challenges, but ultimately is very healthy for the industry.
The history of the past ten years shows that markets can grow very rapidly with the right policies. One of the world’s largest PV plants was just completed in Ukraine, and that in Chile some very large PV projects are currently under development. Neither nation has a well-developed PV market.
The global PV industry of the next few years will be a different industry. Some companies either have or will develop the flexibility to adapt to the new market conditions and diversity of national markets. Others will not.
In the medium- to long- term, the global PV industry is set to continue on its remarkable growth path. There is a very bright future ahead for those who can adapt to current and pending changes.