case study rec group

Student Registration Number: 0892684

0889025

- Case Study –

Renewable Energy Corporation (REC) Group

Hand-in date:

11.05.2011

Campus:

BI Oslo

Exam code and name:

GRA 3158 Leadership and Strategies

Program:

Master of Science in Innovation and Entrepreneurship

Contents

Case _________________________________________________________1-8

References_____________________________________________________9

Exhibit 1: Total Annual Revenue and Earnings (2003 – 2009)____________10

Exhibit 2: Stock market performance (9 May, 2006 to 11 April, 2011)______10

Exhibit 3: REC Group Timeline _____________________________________11

Exhibit 4: REC value chain _________________________________________12

Exhibit 5: World marketed energy use (by fuel type), 1980 – 2030___________12

Exhibit 6: Effects of incentives in major markets on PV shipments ___________13

Exhibit 7: Active residential installers (by share), MW basis ________________13

Exhibit 8: eSolar’s Sierra Sun Tower, California __________________________14

Appendix-1: REC Business System (RBS) _______________________________15

GRA3158 Leadership and Strategies 11.05.2011

After a difficult year in 2009 caused by the slow market growth since the financial crisis of

2008 and restructuring hampering its operations, Renewable Energy Corporation (REC)

Group had posted earnings of more than NOK 1 billion in 2010. With revenues rising every

year and a strong market growth in 2010, REC was looking into the future with optimism.

“The solar market is on a strong long-term growth trend, with continued room to build and

create value for our shareholders”, said CEO and President, Mr. Ole Enger1. REC had

officially inaugurated its largest production facility in Singapore and completed the expansion

of its polysilicon production facilities in the USA in 2010. What implications would these

have on the leadership strategies in REC?

Industry background

World energy prices increased rapidly from 2003 to 2008, fuelled mostly by the increment in

fossil fuel prices. This rapid increase in cost combined with concerns for climate change

renewed interests in the renewable energy sources. The Solar Energy Handbook2 predicted

that the share of renewable energy for electricity generation would increase from 2.5% in

2008 to 20% in 2030 (see exhibit 5).

Harnessing of solar energy had been done for centuries. As early as 7 th century BC,

magnifying glasses were used to concentrate sunlight to make fire. However, it was only in

1839 that the photovoltaic effect was discovered by a French scientist Edmond Becquerel

which demonstrated that electricity generation in an electrolytic cell increased when exposed

to light. In 1883, Charles Fritt, an American inventor described the first solar cells made from

selenium wafers and in 1921, Albert Einstein was awarded the Nobel Prize for his research on

the photoelectric effect. There were more developments for years to come but it was only in

1954 that the first silicon photovoltaic (PV) cells were discovered in the Bell Labs which were

1 All the statements from Mr. Enger were taken from REC’s annual reports.2 Vishal Shah. Solar Energy Handbook. Barclays Capital, New York, May 01, 2009. P. 3

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capable of producing enough electricity from sun light to run every-day electrical equipment.

However, the first practical PV modules were produced by Sharp Corporation in 1963 and in

the same year a 242 watt PV array was installed on a lighthouse in Japan. In 1964, NASA

launched the first satellite powered by a 470 W PV array, the Nimbus.

The solar industry had a five staged value chain. First stage was the production of solar-grade

polysilicon. The availability and price of the polysilicon was a prime factor in cost

effectiveness of solar systems. The process was very complex and there were only a handful

of quality producers in the world including REC. The second stage consisted of producing

wafers from the polysilicon and the third entailed the production of solar cells. The fourth

stage consisted of creating the modules by electronically connecting an array of cells. In the

fifth stage, the cell manufacturers functioned as system integrator; designing and building

solar energy systems for the end users (residential and commercial buildings, and industries).

By the end of 2009 the total global solar PV capacity was 20 GW with a growth of 44% as

compared to 2008. However there were huge challenges for the solar industry moving

forward. The biggest challenge was of cost competitiveness. In spite of years of technological

progress and development, solar energy was still more expensive to produce than other

traditional energy sources. There were promotion and support schemes in many countries,

mainly from the ones in Europe, like the feed-in tariff3 rates and quotas which helped solar

energy to compete. Sharp increment in shipment of PV systems after announcement of major

incentive packages pointed to this fact (see exhibit 6). However, the sketchy economic

conditions at the time meant that the support systems were not guaranteed. Moreover, solar

energy had to compete with other renewable sources of energy.

3 Price premium offered for electricity produced from renewable energy sources based on supply.

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Company Background

The seed for REC Group was sown in 1994 with the establishment of Scanwafer AS. The

founders Reidar Langmo and Alf Bjørseth believed that multi-crystalline wafers would

become the leading technology in an industry about to accelerate and so started the production

of solar wafers in an ammoniac production facility which had shut down in Glomford,

northern Norway. The REC group however had its humble beginning as Fornybar Energi AS

in 1996. The first solar wafers were produced in 1997 and the founders were at the Glomford

plant washing them by hand. By 1999 the wafer demand exceeded supply fuelled by the

signing of large contracts and the same year REC was officially established. Expansions

began to take place and a second plant was established in Glomford in 2001 making REC the

world’s largest producer of multi-crystalline wafer then. In 2002, REC invested in silicon

production plant in Moses Lake, Washington, USA and the same year ScanCell AS and

ScanModule AB started production making REC the most vertically integrated solar company

in the world.

In 2005, the founder Alf Bjørseth pulled out. With Erik Thorsen as the CEO, REC went

public in May, 2006 valued at NOK 55 billion. In 2010, REC officially opened its largest

integrated manufacturing plant in Singapore producing wafers, cells and modules, and

completed the expansion of its polysilicon and silane gas production plants in Moses Lake,

Washington, USA (see exhibit 3). By 2010, REC was the second largest active residential

system installer in the world (8% market share) and one of the largest suppliers of polysilicon.

Technology, Products and Operations

REC Group was the most integrated solar energy company in the world present across the

complete value chain. REC Group was divided in to three operational groups, namely REC

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Silicon, REC Wafer and REC Solar employing more than 3000 employees worldwide. REC

Silicon produced solar and electronic grade silicon in its three wholly owned units: REC

Silicon Inc., REC Solar Grade Silicon LLC, and REC Advanced Silicon Materials LLC. In

2010, REC Silicon produced 13,673 MT of Siemens4 and granular polysilicon, an increment

of 75% from 2009. REC Wafer consisted of REC Wafer Pte. Ltd. and, produced mono and

multi-crystalline wafers from its units in Glomford and Herøya, Norway and Sinagpore. The

wafers produced in Singapore were used only for meeting internal demand. REC Wafer

produced solar wafers to the effect of 1,210 MW in 2010. Finally, REC Solar which

comprised of REC Scancell AS, REC Cells Pte. Ltd, REC modules Pte. Ltd. produced

downstream solar products for the end-user market. The polysilicon and silane gas produced

by REC Silicon were not only used for wafer production by REC Wafer but also sold to

external buyers. The same applied to wafers and cells. (see exhibit 3)

REC’s solar technology was based on polysilicon. It used polysilion to produce wafers which

were then used to produce solar cells and modules. Technological innovation had been at the

heart of REC’s effort to make solar energy more efficient and cost competitive. REC had been

a highly innovative company with large focus on R&D and spent NOK 290 million on R&D

in 2010 alone. REC Group had 35 patents granted and 200 patents pending as of 2010. REC

was able to reduce the production cost per watt of a solar module by 36% compared to the

cost in 2005 and had targeted to achieve 50% reduction by 2011. REC’s proprietary

technology for polysilicon production called the Fluidized Bed Reactor (FBR) reduced energy

consumption in the deposition of silane gas by more than 80% compared to the industry

standard siemens reactor process. Implementation of FBR was expected to reduce the

production cost of polysilicon in 2011 by 26% compared to the cost in 2010.

4 Polysilicon produced by using the Siemens reactor process.

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Financials

REC Group was one of the largest players in the world solar energy market in 2010 with

annual revenue of NOK 13.77 Billion. Its annual revenue had been growing steadily over the

years; its 2010 revenue was 56% higher than that in 2009. However, REC’s earnings had not

followed suit. It was due to decreasing margins caused by decreasing prices of solar

technology and increasing price of raw materials. This was due to increase in competition in

the solar energy market with many new players coming in, most of them either based in China

or having manufacturing base in China. Also, the euphoria surrounding the alternative energy

sector in late 2000s had given way to more realistic expectations keeping the premium levels

in check. Moreover, the price of petroleum fuels had steadied after soaring in the late nineties.

In 2010, REC’s average selling prices for the modules declined by 17% from that in 2009, for

wafers by 30% and that for polysilicon by 13%. So, even with strong market growth, REC

was not able to generate high earnings (see exhibit 1).

REC’s stock market performance had been nothing short of a roller coaster ride. REC’s shares

opened at NOK 85.51 per share when it went public in May 09, 2006. It reached its highest

point on Nov 08, 2007 closing at an astounding NOK 220 per share with a high of 224.02

making REC Norway’s largest privately owned company for a brief period overtaking the

Orkla Group. However these valuations were not realistic and fuelled by the euphoria

surrounding the alternative energy stemming from the announcements made by many

governments to provide incentives for alternative energy to combat climate change and

growing oil prices. So, as the euphoria subdued and the global financial crisis hit in 2008,

REC’s stock prices tumbled too and decreased gradually thereafter (see exhibit 2). On May

09, 2011, it closed at NOK 17.03 per share.

Challenges

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The biggest challenge for REC Group was similar to that faced by whole alternative energy

sector. How the cost of renewable energy could be brought in par with the cost of energy from

non-renewable sources, mainly petroleum and coal. Although the basis for solar energy was

laid a long time ago, it was still a young industry with respect to traditional energy sector.

Thus there was still a dominant technology to emerge. Technology based on polysilicon had

been widely used but there were new alternatives emerging. Two emerging technologies of

particular interest were the use of Cadmium Telluride (CdTe) instead of polysilicon for

manufacturing solar cells employed by First Solar, and the mirror technology used by esolar

(see exhibit 8). These technologies provided cheaper alternatives to REC’s, at least in terms of

initial costs. CdTe provided alternative raw material to polysilicon which was expensive.

eSolar opted for use of mirrors to reflect sunlight to a point on a tower where the resulting

heat was used to heat water and then the resulting steam used to drive turbine producing

electricity. Technologies based on other energy sources, mainly wind posed great challenge.

Leadership and Strategy

REC was born out of Alf Bjørseth’s vision but moving forward it evolved into a collectively

led organization. REC had a “network of leaders” approach to leadership as opposed to

dominant individual leadership. Alf Bjørseth departed in 2005and Erik Thorsen became the

CEO and oversaw REC’s listing on the Oslo stock exchange. After a difficult year in 2008

and 2009, Thorsen was replaced by Ole Enger in 2009. Throughout the terms of these leaders,

REC had continued to focus on cost reduction through operational efficiency and

technological innovations. REC had continued to integrate vertically across the value chain

making it less vulnerable to supply chain volatility, facilitating quality control and lowering

production costs. At the same time, REC decentralized its operations by reorganizing its

business into three segments thus facilitating narrower focus and higher specialization. REC

had thus focused on delegation of authority which spread the responsibility and authority

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across a group of leaders instead of a single dominant leader. The capacity expansions

initiated in 2006 had carried on, a continuation of REC’s policy of “cost-effectiveness through

industrialization” mentioned in various annual reports since 2004. By 2010, REC had

implemented its complete operation management system called the REC Business System

(RBS) (see appendix 1)in some plants and was preparing to implement it throughout the

organization. “The RBS methodology is the way we are going to work to succeed with our

ambition of being the preferred solar partner for our customers and keeping a competitive

edge in this industry. Building and strengthening the local organizations is key, as we want

decisions to be made as close to the line as possible”, informed Mr. Enger.

REC’s leadership showed traits of ambidextrous leadership with efforts on balancing between

exploitation and exploration. The founders had realized the importance of exploiting the

market to keep the revenue flowing. The first wafers at REC were produced in 1997 and by

1999 demand had exceeded supply. REC was present across the value chain and performed

external sales across each step (see exhibit 4). For example, polysilicon produced by REC

Silicon was not only used to produce wafers by REC Wafers but also sold to other solar

energy and electronic companies. At the same time, focus was on exploration too. Realizing

the importance of cost competitiveness, huge R&D investments were made to develop cost

effective and efficient technologies. REC had spent NOK 807 million in R&D from 2008 to

2010. REC had developed its own proprietary polysilicon production process, FBR and

implemented it across more than half of its production facilities by 2010.

REC Group had been successful in positioning itself as one of the most successful companies

in an emerging sector by focusing on technological innovation and operational efficiency.

REC had differentiated itself from the competition by being the most vertically integrated

solar company in the world. REC’s strategy for cost competitiveness focused on increasing

efficiency and life of its modules. “Our module was recognized as a top performer by Photon

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magazine’s independent comparative field study and the REC Peak Energy module won the

Solar Industry Award for Module Manufacturing Innovation given by industry leaders”

beamed Mr. Enger. While most of its competitors were either based in China or had set up

manufacturing base in China, REC opted to set up its largest unit in Singapore, relatively

smaller and more expensive destination but one known for the superior quality of its products.

Final Thoughts

REC was increasing its revenue every year but the income had not followed the same pattern.

Thus, REC had expanded internationally to be more cost competitive. There was no doubt that

its unit in Singapore would help it reduce the price of its module significantly as was the case

with its polysilicon production unit in the USA. However, REC was an international company

with strong Norwegian roots and most of its operation took place in Norway. Through RBS,

REC intended to delegate more authority to local plants with a view of facilitating quick

decision making. Few plants where RBS was implemented had shown good promise but these

were based in Norway. In Norway, the hierarchical structure was more horizontal thus it

would have been more of an extension of the common practice. However, in the USA and

more in Asia, the hierarchical structure was known to be more vertical. Influence flow was

perceived to be largely unidirectional, from top to bottom and trust restricted resulting in

tighter controls. Would RBS help REC to achieve its goal of creating one seamless

organization by influencing the working culture in its foreign operations?

References

Huemer, L. Kvålshaugen R (2011 wip). The influence paradox in leadership: The source of

ambidextrous leadership. Paper presented at the 4th 'Strategic Management in Latin America'

conference in Bogota, Colombia, January 13-14, 2011, and submitted to the 11 th EURAM

conference in Tallinn, Estonia, June 1-4, 2011.

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Kriger, Mark P. Leadership for an Increasingly Turbulent World: Networks, Hierarchies and

Stars. Oslo, January, 2011. For submission to the Leadership Quarterly.

Kriger, Mark P., and Louis B. Barnes, “The Hidden Side of Organizational Leadership”.

Sloan Management Review 15, 1996.

Veitor, Richard K., “Suntech Power”. Harvard Business Review 9-710-013. Harvard Business

School, Apr 5, 2011.

Renewable Energy Corporation Group (REC). Annual Reports (2003 – 2010). Oslo.

Renewable Energy Corporation Group (REC). Investor Presentation. Oslo, March, 2011.

Office of Integrated Analysis and Forecasting, U.S. Department of Energy. International

Energy Outlook 2009. Washington DC, May, 2009.

Vishal Shah. Solar Energy Handbook. Barclays Capital, New York, May 01, 2009.

US Department of Energy. The History of Solar. Washington DC, March 01, 2004.

Exhibit 1: Total Annual Revenue and Earnings (2003 – 2009)

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2002 2003 2004 2005 2006 2007 2008 2009 2010-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Revenues (NOK in Million) EBIT (NOK in Million)

2002

2003 2004 2005 2006 2007 2008 2009 2010

Revenues (NOK in Million) 432 7131,27

02,45

4 4,334 6,642 8,191 8,831 13,776

EBIT (NOK in Million) -104 -162 40 601 1,574 2,588 2,529 -829 1,018

Exhibit 2: Stock market performance (9 May, 2006 to 11 April, 2011)

09.05.06

18.07.06

26.09.06

05.12.06

13.02.07

24.04.07

03.07.07

11.09.07

20.11.07

29.01.08

08.04.08

17.06.08

26.08.08

04.11.08

13.01.09

24.03.09

02.06.09

11.08.09

20.10.09

29.12.09

09.03.10

18.05.10

27.07.10

05.10.10

14.12.10

22.02.110.00

50.00

100.00

150.00

200.00

250.00

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Exhibit 3: REC Group Timeline

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Exhibit 4: REC value chain

Exhibit 5: World marketed energy use (by fuel type), 1980 – 2030

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Exhibit 6: Effects of incentives in major markets on PV shipments

Exhibit 7: Active residential installers (by share), MW basis

Exhibit 8: eSolar’s Sierra Sun Tower, California

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Source: http://www.esolar.com/news/press_photos.html

Appendix-1: REC Business System (RBS)

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http://www.esolar.com/news/press_photos.html


REC Business System (RBS) was a proprietary business management system developed and

implemented by REC. RBS was inspired by the lean manufacturing practices of companies

like Toyota. RBS aimed at optimal resources optimization for achieving stability and

continuous improvements in the organization ensuring perfect operation and zero defects, thus

achieving customer satisfaction. RBS encouraged cross-functional collaboration and

implementation of process improvements. It aimed at breaking down organizational barriers

for effective problem solving. RBS was a complete management system covering not only

normal operational issues but addressing the issues of sustainability, health, security and

environment based on the principles of REC, RECID (Responsibility, Enthusiasm,

Commitment, Innovation, Drive). With the deployment of RBS, REC aimed at strengthening

local organizations to ensure decisions could be made as close to the line as possible.

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case study rec group

Documents

stock market

active residential

alternative

strong market

solar energy

world marketed

total annual

rec business