solar industry evolution and growth strategies

Industry Evolution and Growth Strategies for International Solar PV

Module Manufacturers

Dan Baldauf

Solar PV Overview

• Varied solar technologies

• Varied companies along the solar PV value chain

Global Industry

Manufacturers in USA, Taiwan, Europe, China, Japan, India

Literary Review

• Michael Gort and Stephen Keppler (Industry Evolution)

• Igor Ansoff (Growth Strategies)

• More recent academics were added to ensure theories were up to date.

Research Methodologies

• Primary Sources (3 interviews)

• Secondary Sources (annual reports, market reports, academic literature, and internet searches)

Industry Evolution (Gort and Keppler)

1. First commercialization of product

2. Rapid rise in net entry 3. Net entry

reaches approximately O

4. Period of negative net entry “Shakeout”

5. Net entry levels reaches approximately O

International Solar PV Module Industry

*Data was collected from multiple industry directories and with internet searches.

Stage 1 (1958-2001)

*1st crystalline solar module commercialized in 1958

First solar companies enter the industry

Stage 2 (2001-2009)

In Stage 2 the number of module manufacturers increase from 120 to 340.

Rapid Rise in Net Entry

Average Selling Price $/watt First Solar Trina Suntech Yingli SunPower Hanwha Canadian Solar

31/12/2007 2,48 3,80 3,72 3,86 4,48 4,42 3,7531/12/2008 2,37 3,92 3,89 3,88 4,71 3,92 4,2331/12/2009 1,75 2,10 2,40 2,00 3,63 2,24 2,1331/12/2010 1,49 1,75 1,82 1,75 3,59 1,75 1,8031/12/2011 1,26 1,33 1,51 1,43 2,94 1,41 1,34

Stage 2 (2001-2009)Price Decrease

From 2007-2011, average module prices decreased by 57%.

*As over capacity increases, it makes it harder for companies to move inventory

Over Capacity

Stage 2 (2001-2009)

As prices decrease, companies seek to lower their costs, mainly with economies of scale (Keppler K. S., 2001).

* Prices dropped faster than costs causing margins to be squeezed.

Stage 2 (2001-2009)Profit Decline

• As companies increase their capacity and expand their businesses, they gain valuable experience.

• Their larger economies of scale also give them a cost advantage.• Incumbents with better resources and experience begin to dominate

innovation.

Stage 2 (2001-2009)Incumbent’s Advantage

Outside the industry includes..•Research institutes•Universities•Inventors•Companies not manufacturing modules

Shifts in the Sources of Innovations

Stage 3 (2001-2012)

42%

Unit 1

Unit 2

Unit 3

Process Innovation

Unit 4

Unit 5

Unit 6

Process Innovation

Unit 1

Unit 2 Unit 3

As companies have larger capacities, the incentive to make process innovations is greater. Each innovation can save costs or increase quality per unit created.

Stage 3 (2001-2012)Shifts in the Types of Innovations

Product Innovations Still Relevant

Stage 3 (2001-2012)

*The rate of product innovations has been increasing. The diversity of innovations is also increasing.

Static Optimum Shakeout

Stage 4 (2012-20??)

Exit rates increase while entry rates decrease. The intensity of the shakeout usually depends on the amount of innovation and demand in the industry. High amount of innovation lead to more intense shakeouts.

Demand

Stage 4 (2012-20??)

Demand is likely to increase when the technology hits grid parity, or when it becomes as cheap as conventional power. Large amounts of demand allow for more growth opportunities, leading to higher survival rates.

Consolidation

Stage 4 (2012-20??)

Demand will increase and more firms will exit so consolidation must occur. Few firms will occupy a majority of the market by the end of the shakeout.

Global Market Share Top 10 Global Share

2000 5%

2001 7%

2002 9%

2003 11%

2004 15%

2005 21%

2006 28%

2007 39%

2008 53%

2009 58%

2010 54%

2011 47%

Differences

Industry Comparison

Some differences between the previously studied industries and the solar industry..•Shaped by international forces•Subsidy driven (unpredictable demand)•Higher acquisition rates

Similarities

Industry Comparison

Some similarities between the previously studied industries and the solar industry..•Shakeouts also caused by innovation•High entry followed by high exit (Static Optimum Shakeout)•Significant entry will happen

Early Entrants

Shakeout Survival

Other factors that influence survival are..•Early entry (experience and ability to innovate)•Economies of scale

SuntechFirst SolarTrina

Yingli

Low Cost

Shakeout Survival

Some ways to lower costs..•Process innovation is the key during Stage 4.•Vertical integration allows better cost control, but less flexibility.•Companies lay off employees to lower costs.

SuntechFirst SolarTrina

Yingli

Product Differentiation

Shakeout Survival

Companies can survive shakeouts by serving a niche area..•In the solar industry module efficiencies range from 14.0% - 20.4%•The three main solar customers are residential, commercial, and utility

SuntechFirst SolarTrina

Yingli

Residential Commercial Utility

Growth Matrix

Growth Strategies

Igor Ansoff is regarded as the father of strategic management, and is most famous for his growth matrix.

Additional integration growth strategies will also be included to further build on Ansoff’s Matrix.

Market Penetration

Growth Strategies

The term market refers to customer groups purchasing a product designed for a specific mission. The mission of solar modules is to convert sun light to electricity that then feeds into the grid. Market penetration strategies include.. •Increase sales to current customers•Find new customers•Foreign geographic markets are included

When a company seeks to increase the sales of their product in its current market. – Igor Ansoff

Market Penetration

Growth Strategies

• Instead of using price reductions or promotions, companies should focus on maintaining a competitive advantage via innovation.

• Stage 4 is when process innovations are key. Firms should then focus on process innovations to become more efficient than their rivals.

• More efficient firms can make a better product offering which will ensure customer loyalty.• Small process innovations are the least risky way to grow a business.

Product Development

Growth Strategies

•Small incremental product innovations.•If product is marketable no large risky product innovation needed.•Large product innovations only used when market is demanding them and technology is ready. Not to fix lackluster growth. •Acquisition as a product development strategy. Companies can acquire innovation from failing companies if there is still value.

Product retains the same mission, but characteristics of the product are changed to better serve the mission. – Igor Ansoff

Market Development

Growth Strategies

•Commercial passenger planes to transportation planes. Non grid connected modules for solar industry. •Risks can be lower if synergies exist. •Similar to product development, market development strategies should only be used if the marketplace and technology are ready. •Non grid connected market too small.

An adaptation of a present product line, generally with some modification in the product characteristics, to new missions.– Igor Ansoff

Diversification

Growth Strategies

•The riskiest strategy. •Categorized by “related” and “unrelated” diversification.

A simultaneous departure from the present product line and the present market structure.– Igor Ansoff

Related Diversification

Growth Strategies

•Related diversification is when there are meaningful commonalities between the company’s core business and the new venture it is taking on. •Economies of scale and synergies can be achieved.•Technologically related companies use this to enter into new markets.

Unrelated Diversification

Growth Strategies

•Unrelated diversification is when there are no meaningful commonalities between the company’s core business and the new venture it is taking on. •This involves a very high amount of risk. Failure rate of 90-99%. (Park, 2004).•This strategy should not be used to solve lackluster growth.

Solar manufacturers should avoid both types of diversification because they are in a high growth industry and they have limited funds from the shakeout.

Backward IntegrationGrowth Strategies

Advantages: •Guaranteed access to supply •Access to more innovation•Cost savings•More control over quality

Disadvantages:•Expensive to integrate (Billions associated with polysilicon production)•Risk of failure associated with diversification•Reduces flexibility

Backward Integration

Growth Strategies

Levels of Vertical Integration

Company First Solar Trina Suntech Yingli SunPower Solar World Q Cells LDKLevel of Vertical Integration Polysilicon Production Procured Procured Procured x - x - xIngot Production x x x x - x - xWafer Production x x x x Procured x Procured xCell Production x x x x x x x xModule Production x x x x x x x xInstallation of Large Power Plants x x x x x xRecycling x x

Companies can also use supply contracts.

Forward Integration

Growth Strategies

This involves companies entering into installation.

Risks associated are: •Same risks with related diversification•Possible lack of distribution channels and expertise•Competing with customers

Benefits include:•Saving on the margins charged by installers•Industry output will grow and so will opportunities in this field

Ansoff’s Strategies

Conclusions

• Least Risky• Process Innovations to gain competitive

advantage

• Small incremental product innovations• No large product innovations unless

market and technology are ready

✓

✗

✓

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• Should only be used if market and technology are ready

• Market too small but could become significant in the future

• Solar industry is a fast growing market • Not enough resources to diversify

because of shakeout

Integration and Final Comments

Conclusions

Solar firms considering backward vertical integration should understand that the solar PV technology is far from finished evolving.

New technologies offer promise of better efficiencies and/or lower costs.

Generally speaking, solar companies with successful products should focus on improving their business efficiency along with small product improvements.

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