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    Crisis of American Solar Manufacturing - The Fall of First Solar (FSLR)

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    Poor demand in China, triggering 25% decrease in average selling price (ASP), was cited by First Solar as the cause of a surprisingly bad Q4 forecast and equally poor 2017 expectations. The main victim of ASP drop was a First Solar’s technological roadmap. The company announced up to $585M in asset impairments, writing down “series 4” production lines, and terminating development of “series 5” module. The entire strategy shifted to advance the development of “series 6”.  

    Earlier this year, First Solar used low cost as a business case to announce re-entry into third party module sales, an area long lost to Chinese. The company produced an exciting narrative about its efforts, and in April, Bloomberg published an article titled “Cheaper Than China Again, First Solar Vindicates U.S. Investment” containing many supportive views:

    “First Solar’s investments over the past five years have increased efficiency by almost 50 percent and wrung costs from the manufacturing process. Meanwhile, the change indicates the limits of what Chinese companies can do without further investment.”

     “The Chinese have hit a wall regarding polysilicon costs and technology,” Jeffrey Osborne, a Cowen & Co. analyst in New York, said in an interview. There aren’t a lot of levers left for them to pull and their labor costs are rising.” 

    “First Solar is the only manufacturer we see with a significant cost advantage in a commodity market,” said Patrick Jobin, an analyst with Credit Suisse Group AG. “Right now, in most markets they have at least a five percent advantage. They will be at a 10 to 20 percent advantage in a few years.”

    “First Solar finally has technology leadership again,” Osborne said. “Now, they’re shifting back to superior technology instead of construction projects.”

    Fast forward to November; the market reality had crushed First Solar’s cost metric to pieces. An organization that reasserted itself to lead was forced to reject its cadmium telluride road map as deficient. In July, another exclusive technology, polysilicon n-type monocrystalline, acquired with the purchase of TetraSun, was too dull, compared to efficiency abilities of cadmium. Ironically, the Malaysian factory making mono cells was retrofitted with “series 5” production lines, now also being discontinued.

    There is no easy way to put this; First Solar has a problem with its technology because the timeline to develop a competitive product is too long to meet cyclical ASP drops. The condition is hidden when selling legacy solar plants, but immediately turning into a weakness when selling modules to third parties. The tech has demonstrated to be expensive to compete, considering $370M spent on R&D since 2013. Finally, it appears very expensive to expand, needing $900M to build 3GW to produce “series 6”.  

    The end game for the new strategy is to have “series 6” offer 40% reduction in cost, compared to $0.41 per watt delivered by “series 4” today. However, recent Chinese forecasts indicate a challenge to this reduction already by late 2018. Figures offered by Jinko (JKS) and Canadian (CSIQ) describe 22 to 28% reduction from costs declared during Q3 2016. The lowest number quoted is $0.29 per watt available by Q4 2017. If another, 20% drop happens in 2018, it will bring the cost below $0.25, which is an estimate of cost for “series 6”.

    The above challenge is the biggest risk to First Solar, besides an internal apprehension about the ability to deliver “series 6” to its objective. Chinese are capable of contesting First Solar easier than ever due to the statistical superiority of running in the one technology’ majority and having a history of winning with it.

    None of the top Chinese companies use exclusive, and therefore expensive technologies. Instead, they make modules using polycrystalline and monocrystalline cells of p-type. This technology covers 95% of global demand, and this superior number forces global equipment manufacturers to pursue objectives and demands of the largest contributors. A sheer number of scientists and budgets dedicated to making poly and mono modules, cheaper and more efficient, is overwhelmingly larger than First Solar’s human capacity and R&D expense. Statistical majority and odds to succeed are on the polysilicon side. For years Chinese were taking business away from First Solar, playing them.  

    Companies themselves run low-cost R&D departments with the goal to investigate recent innovations. Their focus is on selecting the most efficient and moderately priced technology, to allow easy adoption into a mass production. In-house scientists, modify off-the-shelf systems, to further lower the cost. This approach enabled Canadian Solar and Jinko Solar to spent just a fraction, $38M and $58M, what First Solar did on R&D since 2013.

    It is clear that First Solar, contrary to the Bloomberg’s title, does not have an advantage, and the proof is in the Q4 warning versus what Chinese expect from Q4. Current skepticism about the company is not only limited to what its technology may, or may not deliver. Reduced capacity, no new products, spell more market share loss. No making money but more spending to pursue investment on a long leap into the unknown will weaken today’s financial strength, which is so often quoted as part of First Solar’s appeal.

    The financial status of the company, its cash reserves, will neutralize concerns for many, for the time being. A lot of articles in SA find the stock as attractive, in financial and also in the technical analysis. This quick summary spells out fundamental, an operational concern about the ability to succeed for the strategy, which on cost, unfortunately until now only tried to catch up and failed.

    Fundamental values remain timeless during periods like one today when glut threatens gross margins via ASP, and when unsupportive US energy policy may push solar into shadows. I think that fundamentally, First Solar is no longer that company.

    What happened in last 7 to 8 years, indicates slow deterioration of the company’s leadership, which in my view, has to do with the difficulty to maintain its technology against the greater force of another technological thrust. Chinese has methodically gained in every area because of their concentrated approach to focus on cost reductions. In the grass root stage, exclusive technology like cadmium enticed with anticipation to win the competition race. In maturing industry, its exclusive footprint runs the risk of extinction.

    Edited by odyd


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