Weakening euro a threat to Chinese manufacturers

The report states: "We also believe if the euro reaches… parity with the US dollar, the cost competitiveness of Chinese manufacturers could significantly erode. We think this could structurally change our supply, demand and ASP assumptions for the next two years… Furthermore, we think changes in government policy in solar power (especially in Germany) could also materially change the supply/demand landscape for the industry."

The weakening euro, says the report, is a key swing factor for the sector in the near term. It remains positive however, about the cost leadership of Chinese solar manufacturers. Chinese solar investment is also expected to continue, but the team says it sees shrinking margins and intensifying global competition in the mid-term.

The report continues by saying that Chinese low-cost manufacturers have a 30 percent relative cost advantage over both European and Japanese manufacturers at the moment. "This is," it says, "the key reason why we believe both Chinese c-Si module makers and thin film makers should continue to gain market share. We also believe their cost advantage enables them to lower solar panel prices. This should encourage more installations so as to optimize production capacity and return on capital."

The report goes on to say that lower-priced PV modules, made in China, have become more acceptable globally. Due to their lower cost structure and higher cash returns versus their European peers in the past, Chinese solar manufacturers have "expanded significantly" to take 30 percent, 52 percent and 37 percent of 2010E global polysilicon, wafer, and cell/module capacity respectively.

"Under our base case assumption of an Euro/US$ exchange rate of €/US$ 1.20," says the report, "we believe China should continue to invest in the solar supply chain, as long as finance is readily available and cash returns remain above the cost of capital."

Additionally, the report says it estimates that China’s capital investment in solar manufacturing capacity has increased from USD$1.1 billion in 2007 to USD$4.7 billion in 2009 – more than Europe and the US. "We attribute this expansion to the higher cash returns that the Chinese solar companies are generating versus European peers owing to better asset utilization and/or higher margins."

It said that in the future, it expects to see continued investment from China, of USD$3.9 billion and USD$3.3 billion in 2010E and 2011E respectively, "as long as cash returns remain above the cost of capital".

The report also outlines what the team believes to be the competitive advantages of China’s solar mid-stream players. These are: (i) a low cost structure; (ii) a competitive pricing strategy; (iii) proven in-field projects; (iv) an established branding; and (v) global distribution networks.

It says, though, in a structurally evolving industry, Chinese solar companies need to maintain their competitive positions. Therefore, the team expects them to optimize their cash returns by establishing an asset-light business model, which may benefit from a quicker asset turnover and a less expensive capacity expansion.