Should a Thin Film Manufacturer Integrate Downstream?

thinfilm cover b Should a Thin Film Manufacturer Integrate Downstream?

Persistentoversupply at the module level has led many module manufacturers tocontemplate an entry into building plants, project development, andenergy sales. First Solar’s proven success in building and operatingutility-scale plants over the last two years has also done thesedesires no harm.

Downstream integration can have definite benefits: it creates asales channel for modules, which can protect shipments and margins in ahighly competitive environment. It also enables overall marginexpansion, since the module producer can capture the developer’smargin. Those in favor point to the likelihood of modules becomingincreasingly commoditized in the future, transforming into a low-marginbusiness; with the onset of unsubsidized grid parity, they say, profitswill shift to "selling electrons."

On the flip side, developing a successful systems business involvescompeting with one’s customers and straying from the core competence ofmanufacturing. Developing projects also requires a completely differentskill set from producing modules; it is difficult to see a modulevendor being able to compete with an established developer unlessprofit margins at the module level are high, in which case it wouldmake little sense to branch out of manufacturing in the first place.Traditionally, successful downstream integration in PV has taken theform of acquisition (First Solar, SunPower), and few thin film firmshave the balance sheets necessary to do so; the few that do are Chinesea-Si companies with large corporate parents (Astronergy, ENN Solar, QS Solar).

As far as profits shifting from modules to electricity sales, thatis a long way off at this point. First Solar expects its EPC/systemsbusiness to have a margin of only 5 to 6 percent in 2010, compared to40 percent for modules. Its decision to integrate downstream was madeto enable it to penetrate a market that it otherwise would not havebeen able to — namely, the U.S. utility-scale market — and untilrecently, it did not place this market against its European customers.The answer to the natural question — why bother? — lies in FirstSolar’s long-term vision to singlehandedly enable parity, a vision thatemerging manufacturers can ill afford to have.

As far as thin film is concerned, First Solar is likely to be ananomalous case rather than a trend-setter in this department. Whilethere will likely be a push from manufacturers to engage in plantconstruction/development/operation in 2010, the companies that manageto do so successfully and reap sustainable benefits from this will befew and far between; in future years, it will be seen as a short-termreaction to market forces, rather than as a sound long-term strategy.Instead of full-on integration, what makes more sense is developingstrong strategic relationships with downstream players. This hasalready begun to happen — ENN Solar, for example, inked a partnership agreement with U.S. utility Duke to jointly develop commercial PV projects, and Signet Solar has collaboratedwith German developer BSC-Solar on project development in Europe. Othercompanies that succeed in doing so will gain a significant competitiveadvantage in the marketplace in the years to come — never a bad thingin what in a few months time will re-emerge as a grossly oversuppliedmarket.