Solar margins improving, but a long way to go

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Michael Fuhs: Who is earning money in the solar industry at the moment?

Jenny Chase: Lawyers, some product developers and a few inverter makers but nobody else, really.

But if I look at your chart, there are also some module manufacturers.

Actually no. There are a few module manufacturers that made money in the last quarter, or at least had positive EBIT margins, but few of these made a net profit in the quarter.

REC had a positive EBIT margin though, didn’t it?

Yes, REC Solar did. That is actually quite interesting!

Does REC prove the point that it doesn’t matter whether you are in China or Europe?

REC Solar has a big integrated factory in Singapore – a vertically integrated wafer, cell and module plant that is one of the most automated plants in the world. I think REC has benefited a lot from the uncertainty about anti-dumping tariffs on Chinese modules, because it is seen as a relatively competitive, non-Chinese option.

Do you think other European companies could benefit from the anti-dumping tariff discussion and the minimum price regulation, and could achieve positive EBIT margins?

I would suspect it’s more likely that other Southeast Asian manufacturers – so Taiwanese, Malaysian, Singaporean and Korean companies – will come in and take market share from the Chinese.

Why is it so difficult to have competitive production in Europe?

I’m not sure it’s impossible. I don’t think labor costs are such a big part of making a module, especially with the new generation of equipment, which is highly automated. But it’s also very difficult to do anything in Europe on a scale that it’s being done in Southeast Asia. Most of these new plants benefit from massive tax breaks. Malaysia offers pretty significant tax holidays. And if you’re going to build a 1 or 2 GW fab, then you’re going to do it where you have that sort of advantage.

Do those tax breaks conform to WTO regulations?

I think you’re allowed to give tax breaks to manufacturing, because nearly every government does it to some extent.

So there’s no excuse for European governments not to follow suit?

I think they would be joining the club. I mean there have certainly been European Union grants to solar manufacturers in Europe. I’m not a lawyer; I don’t know exactly when it starts becoming a problem for the WTO, but certainly countries implementing strategic support for their high-tech manufacturing industries, is very much the way of the world.

Regarding high-tech manufacturing industries, in your talk you showed that…

… solar isn’t actually that high-tech?

Exactly. Why, in your opinion, is solar more of a commodity than high-tech industry?

There are parts of solar which are high tech. Making silicon is a very high-technology process, in fact it consists of two high-technology processes end to end. Designing inverters is probably quite high-tech too, but making solar wafers, cells and modules is a commodity manufacturing business. You’ve got to have the equipment, and you’ve got to be good at turning out lots of goods that are all the same without wasting a lot of energy on materials. And you can buy the equipment off the shelf. I mean, if you and I decided to go into business making modules in the European Union and we could get ourselves, say €20 million to start with, we could probably do it within six months.

What does that tell us the R&D spending of companies about this issue?

We did a study in 2011 of the top 50 quoted solar manufacturers. R&D spending is between 2 and 3%, depending on the year. I think that’s basically because they are doing a high throughput, they’re spending a lot on materials, they’re spending a lot on labor. They’ve got a lot of things to spend money on other than R&D. And also, a lot of the improvements they’re making for the processes are not even coming from R&D budgets, they’re just noticing something is not quite right with the line and tweaking it. You know, they’re not trying to reinvent anything.

What is the difference from a really high-tech industry?

The semiconductor and pharmaceutical industries spend typically about 15% of revenue on R&D every year.

But on your charts one could also see the R&D spending of European companies was much higher. Why is that?

Well, the chart actually bundles European and U.S. companies together, and certainly that includes two big U.S. companies: First Solar and Sunpower, which invest heavily in R&D, in First Solar’s case, because nobody else is doing R&D for them. First Solar has its own technology and has to keep developing it to stay competitive. Sunpower is claiming to have a non-commoditized product, so it spends a bit more to maintain that claim. And the other thing is, there are a lot of inverter makers and manufacturing equipment suppliers in Europe and they are having to come up with a new generation of products a lot more often than the module makers are. That means they spend a lot more on R&D than module makers.

Why do you think inverter manufacturers are more on the high tech and less on the commodity side than modules. I mean, it’s electronics, you can also buy it in Asia.

Well, you do. But you need somebody in a factory in Europe to make sure you have the right design of inverter. Most inverter makers don’t have a warehouse full of inverters. If you call in an order, they’ll make your inverters for you fresh, because they have too many models for them to just have one off the shelf.

For the large installations at least.

Well, yes. And even for the small ones. Also, inverters are always being pushed to do slightly more things than a module, to correspond to slightly more stringent regulations, to have more settings. The requirements on inverters are increasing quite rapidly, whereas a module is basically still a module.

You say you are suspicious about the argument it’s job creation that should motivate governments to support solar. Why is that?

I’m a bit suspicious because one of the key drivers of post-production in the solar industry has to be more efficient use of labor. People are expensive, especially in Europe. And that means when people go to work they have to be more productive. So, I’m suspicious of the argument that the more jobs created, the better. Because I think sometimes if you work it out, the subsidy could pay those same salaries without them actually doing anything. I’m a bit worried about the idea if something is labor intensive, it’s a good thing.

So what should be the motivation for governments to spend money on this?

Research and development does have benefits down the line, but that’s very difficult to prove. I think it only starts being proven when the manufacturing companies are coming back and inviting institutes like Fraunhofer to be industry partners. And I think that does happen but I don’t have any data supporting the value of R&D. For instance, PhD students are creating a huge body of work and pushing forward the boundaries of science and I think when you have good academics and good PhD students and smart people, that means companies that are making profit help make their products better and start putting money back in. And I think that’s good for the economy.

How have the budgets for R&D in solar evolved?

It looks to me as if investment in solar by governments has risen, it’s almost doubled since 2004. It’s been pretty stable compared with the massive fluctuations we’ve seen in what investors are putting into the sector, which is probably a good thing because research and development needs long-term horizons.

On the other hand, you have demonstrated venture capital funding has been falling rapidly in the last two years.

Yes, a lot of U.S. investors lost a lot of money and have decided not to do that any more, which I think is fair enough.

Interview by Michael Fuhs.