Analysis: Solar trade wars prompt SolarCity's Silevo acquisition


What do you make of the move by SolarCity to acquire Silveo?

It is an interesting move because it is quite something different from what we’ve seen in the past, where actually manufacturers have moved to downstream business. With SolarCity’s announcement, we’re seeing the reverse movement happening.

SolarCity is well financed, being publically traded and having a good track record on the stock exchange and so it is not too difficult for them to raise money, but the other aspect that might have been quite important in this transaction is that we’ve seen in the U.S. and also in Europe that it’s getting much more difficult for Chinese manufacturers – with more stringent import duties being imposed.

As I understand it, the vast majority of the modules that SolarCity uses for its installations actually came from Chinese suppliers, so with those higher import duties being imposed it makes it more attractive to have a domestic manufacturer where SolarCity won’t have to fear that any kind of trade issue might disrupt its supply chain and change the price of the modules it uses massively.

Given that Silevo is a relatively unproven technology, is it a particularly risky move?

It’s been quite a while since we’ve seen such a technology investment. Basically the companies that have done so recently are First Solar, with its TetraSun acquisition, and Hanergy, which basically acquired thin film manufacturers that were struggling to survive. In those cases yes, both firms have taken some technological risk but given the size of their core business obviously that was a significantly more limited risk than if you look at SolarCity’s business model and what that potentially means for a company like SolarCity to build initially 200 MW and then rather rapidly scale that up to the GW scale.

With manufacturing operations at that scale, theoretically at this stage of course, it could mean that SolarCity could supply all of its installations with Silevo modules. Won’t that be putting all of their eggs into one basket technologically, so to speak?

I understand that initially the business model of the leasing providers was to be supplier independent and take the most cost efficient technology available in the market. Maybe they understand that this kind of sourcing is also exposed to some kind of risk, if you rely on suppliers from Mainland China.

There is the aspect however, that SolarCity will be taking on a bigger risk because the product warranty with Silevo modules now has to be covered by SolarCity and not their module supplier anymore – with a limited track record so far in terms of what kind of long term durability, for performance, those modules will show. There is definitely a bigger risk.

Given the fact that SolarCity’s business model relies heavily on financing through U.S. banks, which supply the the debt financing of the installations, they most likely have checked with those banks as to whether they would be willing to fund projects using Silevo technology. At least if I was in their position I would check ahead of time because if the product is not bankable then SolarCity’s business model is ruined!

Is this then a ray of hope for PV module manufacturing in the U.S.?

It’s a good sign. There’s not too much module manufacturing left in the U.S. With SolarCity’s plans, it would make them the largest manufacturer with module production in the U.S. at that time. The majority of First Solar’s manufacturing is in Malaysia and not in the U.S. and SunPower produces its modules in the Philippines.

If SolarCity is convinced that this is a viable and maybe even superior technology, then you have the advantage of product differentiation. SolarCity is not alone in the solar lease market segment and as long as solar lease companies offer modules from the same suppliers then your differentiation will come down to what price you are able to offer. Now with a higher efficiency product, which is obviously highly suited for rooftop installations, then it would give you an extra differentiation – being a fully American product. That, I believe, would resonate well will U.S. customers.

Does this signal a shift away from low cost producers to a premium, higher efficiency product?

I don’t know if we can call this a signal of a coming trend. If you look at the business model that SolarCity started out with, it was an electricity rate that it is selling to its customers. The question is whether this higher efficiency module allows SolarCity to be at least cost competitive and even have a cost advantage over sourcing the modules from external sources?

Regardless, I do still think that there could be a marketing angle in Silevo being an “all American” product. Electricity is a commodity and so is solar electricity and ultimately if SolarCity can’t offer the same rates for electricity for its customers, compared to its competitors – like SunRun and other leasing firms – their business model wouldn’t work.

I wouldn’t have expected such a move from that end of the value chain at this point in time. After all being agnostic to the technology employed and benefitting from the very competitive pricing environment for PV module manufacturers was a key aspect of their business strategy until know. It will be interesting to see if indeed in 3 years time 80% or more of SolarCity’s installations will be supplied with modules from the Silevo plant.

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