Author: EIC | Economic Intelligence CenterPublished in Bangkok Post/Asia In Depth: Asia Focus section, 7 August 2015
Solar equipment manufacturers around the world were mired in overcapacity, red ink and plant closures just two years ago. Now the industry is on the path to recovery, thanks largely to demand in Asia, rather than Europe as in earlier years. The big buyers are in China and Japan, while large demand is emerging from new Asian markets such as India.
Asia will also account for much of the new manufacturing capacity being planned. Most of the industry’s biggest players are Chinese. But Asia’s new solar factories will now mostly be built elsewhere in the region, especially Southeast Asia. Malaysia and Thailand, for example, are on the short list thanks to favorable land costs, infrastructure and labor factors. Moving outside of China will help manufacturers compete better in new Asian markets, including India, thanks in part to a strategic location.
China targets adding 18 GW of solar power generating capacity in 2015, the most ever. Officials are backing this goal with more supportive policies, such as streamlined project approvals, while subsidies continue. The industry’s brightening prospects are encouraging domestic banks to increase lending to solar projects. China aims to have 100 GW of solar generation capacity in place by 2020.
India is the largest new source of demand, with a goal of installing 100 GW of solar generating capacity by 2022. The government is increasing project funding, seeking overseas financing and opening the market to foreign suppliers. India has signed MOUs with various foreign and domestic companies to develop solar projects. Some will be government-owned, others corporate, others joint ventures.
Japan is cutting solar feed-in tariffs by 16% to reflect lower operating costs, but policy incentives will continue to attract investors to the market. The private sector expects that installed capacity will reach 100GW by 2030, which is twice the government target of 50GW.
These developments are helping equipment prices recover, letting manufacturers earn gross profit margins averaging around 15%, up from just 5% or even negative figures during the industry’s recent trough. Prices collapsed during 2011-2012 because demand hype, easily replicated assembly-line technology and gross profit margins as high as 40% lured new and existing manufacturers to overinvest in new capacity. Meanwhile, demand continued to grow, but not by the heady rates hoped for, due to economic slowdown and subsidy cuts in Europe, the main market at the time. As such, severe oversupply dragged prices down by more than 50%. Vast capacity stood idle, triggering the inevitable consolidation.
Although surviving manufacturers have begun to recover during the past two years, the industry remains fragile. Risk factors include policy uncertainties, threats from new technologies, weak grid infrastructure and fluctuating costs for raw materials like silicon. Solar cells and panels have become more of a commodity product with little differentiation, causing players to compete more on price.
To thrive, manufacturers need to drive down costs through scale, automation and R&D. They should expand vertically throughout the supply chain. Moving upward, they should act to control costs of materials such as raw silicon, silicon ingot and wafers. Downward, they should get closer to end-users by providing engineering, procurement and construction services (EPC). Also they should build their own solar power plants to secure demand and recurring revenues. Solar’s future looks brightest for companies that get big.