Chairman Miao told investors on Yingli’s first-quarter 2009 earnings report that although the company remained confident in the future of the global solar market, current market and operating conditions had forced the company to reduce its 2009 production outlook to a range of 450 megawatts to 500 megawatts, down from a previous estimate of 550 to 600 megawatts.
Tom Zarrella announced last month that a slowdown in spending by customers for its photovoltaic (PV) equipment business would likely continue through fiscal 2010 ended March. Albeit the chief executive of GT Solar expressed confidence on the earnings call that polysilicon customers would honor their existing photovoltaic purchase contracts, due to “anticipation of the promising long-term future growth of solar,” evidence presented in the recently filed 2009 annual report suggests that cancellation risks on existing multi-million dollar photovoltaic (PV) and polysilicon contracts remain high.
GT Solar’s two principal business categories, photovoltaic (directional solidification systems, or DSS units) and polysilicon (chemical vapor deposition, or CVD, reactors) contribute 82 percent and 18 percent of total revenue: DSS units are specialized furnaces that melt polysilicon feedstock and cast multicrystalline ingots from which solar wafers are made; CVD reactors are used to react gases at high temperatures and pressures to produce polysilicon, the key raw material used in solar cells. During fiscal 2009 ended March 28, the four largest customers by sales were: (i) LDK Solar Co., (ii) South Korea's OCI Company ,(iii) Yingli Green Energy, and (iv) Glory Silicon Energy Co., of JiangSu, China—accounting for approximately 20 percent, 17 percent, 14 percent, and 11 percent of revenue, respectively.
GT Solar expects to convert approximately 40 percent of its $341 million in DSS furnace order backlog to revenue by April 3, 2010 (consisting of 34 PV equipment contracts). The company admits, however, that capex budget cuts by customers has reduced visibility of forward order rates and that the company has been approached by existing customers about contract revisions, specifically the pushing out of delivery schedules of contracts in its order backlog.
Industry analysts contend that the risk of customers actually canceling contracts is limited, as GT Solar usually requires deposits of 20 percent to 40 percent of the value of the contract. Nonetheless, this has not proved a determent in preventing some customers from breaching the terms of their contracts. In fact, during fiscal 2009, some customers just walked away from their contracts, forcing the company to take an $11.5 million charge against earnings and to reduce its order backlog value by about $39 million.
All along the PV value chain—from raw material suppliers of polysilicon feedstock to the megawatts shipped and installed by solar module manufacturers—prices are still in freefall. Since hitting about $500 per kg last year, spot polysilicon prices have plummeted to around $70 per kilogram. Some forecasts are calling for solar-grade crystalline ingots to drop as low as $25 per kilogram. If true, this could prove to be bad news for fabrication wafer customers of GT Solar and good news to consumers.
The question still needs to be asked—and answered—however, if commercial solar cell makers can improve utilization yields and lower variable costs enough to generate margin gains on end-product (gigawatts of solar modules) delivered to customers?
In a research note to clients, Hapoalim Securities analyst Gordon Johnson warned that solar industry fundamentals are in bigger trouble than expected by most observers. Many Chinese solar vendors are offering modules for prices far below what most American and European solar cell makers could conceivably operate at even marginal profitability. As recounted in Eric Savitz’s Tech Trader Daily, Johnson asserts that some of his “most trusted industry contacts” say that companies like Yingli , Suntech, and Trina Solar are able to offer modules for sale at $1.70-$1.80/watt, or 1.21-1.28 Euros/watt, by slashing wages of their Chinese workers. He notes that at the recent Intersolar conference, the talk was that solar modules were priced in the 1.60-1.70 Euros/watt range.
At the risk of sounding obvious, the strategy of Yingli and other Chinese vendors is to leverage the cost-competitive advantage of its commodity-like business model to expand market share at the expense of its American and European competitors. Ergo, even though government policies towards alternative energy in the United States and European countries gives one reason to be confident in the future of the global solar market, it is unclear which players in their respective space along the PV value chain—stretching from Chinese silicon wafer makers LDK and Yingli, to fabrication equipment provider GT Solar, up the chain to fully-integrated manufacturers of everything from ingots to solar panels (like Canadian Solar)—will be left standing after the coming tectonic-plate shifting shakeout of seismic proportions. Whether or not any solar company can generate sustainable profitability in the growing commoditization of the industry is another question best asked when the actual recovery occurs.
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.