Raj Prabhu, Managing Partner of Mercom Capital has been tracking funding announcements in the solar industry since 2009. His firm believes that by following the money, it can deliver valuable insight to its customers on market trends – sectors in distress and sectors that are thriving. "Following the money is a good indicator of the health of the industry. It gives us and our clients insights into trends in terms of technology and also just general market direction," he said.

When you look at the solar industry today, some market segments are in distress, while others are thriving.  “If you are in downstream you are healthy.  If you’re manufacturing, you’re not healthy,” Prabhu put it simply. And while he acknowledges that we really can’t judge the success of solar by how the manufacturers are faring, it’s still valuable to take a hard look at what’s happening in that segment with an eye toward who is buying whom and why.

Bleeding at the Top: Solar Manufactures Struggle To Stay Afloat

GTM Research’s Shyam Metha is an analyst who looks at the solar manufacturing space. Today, he doesn’t see a whole lot to be excited about, especially in China.  Mehta authored a comprehensive report that was released in October entitled, “Global PV Module Manufacturers 2013: Competitive Positioning, Consolidation and the China Factor,” in which he predicted that up to 180 solar PV module manufacturers will either be acquired or will fold over the next two years, the majority of which will come from high-cost manufacturing markets in the U.S., Europe, and Canada.

“It’s the devil or the deep blue sea for the majority of these high-cost firms,” said Mehta in a statement. “Manufacturing costs for firms in Europe, the U.S. and Japan are currently over 80 cents per watt. The cost for their Chinese competitors is between 58 cents and 68 cents per watt. The writing is on the wall; these companies will either take what they can get via acquisition or they will bow out.”

While part of the report’s consolidation analysis focuses on companies operating in high-cost PV manufacturing markets, questions about Chinese module manufacturers, their strategies in the face of U.S. and potentially European import tariffs, as well as their domestic demand, debt and diversity are explored extensively in the report. The report estimates that about 54 of the 180 “ill-fated” firms will come from China. Most of these are what Mehta calls “solar zombies,” companies with manufacturing capacities less than 300 megawatts that have operated uncompetitively with support from the government for years. “For these firms, the window of competitiveness has been closed for a quite some time,” said Mehta.

China’s number of doomed firms could be much higher if not for an aggressive downstream build-out that will prop up select domestic suppliers. China’s recent announcement to increase its cumulative 2015 solar target from 15 gigawatts (GW) to 21 GW will most likely provide captive demand for firms such as Alex Solar, LDK Solar, and Astronergy. Mehta thought even the 21-GW goal could be conservative – he said he had heard a rumor that the Chinese government could raise that number as high as 40 GW.  “We have seen a select few suppliers win really large projects or EPC awards for 50-, 100-, and 200-MW ground-mount projects,” he said.  The government is giving them a dedicated sales channel to sell their product, which will keep them treading water for a bit longer, according to Mehta.

In addition, Mehta pointed to the municipal loan that LDK Solar received in July 2012 and the China Development Bank’s renewal of its pledge to support 12 selected domestic suppliers as evidence that the Chinese government will continue to provide financial support to established firms with large workforces in order to cover near-term debt obligations, or possibly encourage diversified Chinese industrial conglomerates to acquire these companies. Potential beneficiaries of these strategies include Trina Solar, Yingli Green Energy, Suntech Power, JA Solar, Jinko Solar and Renesola.  Together, these companies comprise more than 20 percent of existing global module capacity.

The report goes into detailed analysis of the competitive positioning of approximately 85 solar manufactures, rating their efficiency-adjusted manufacturing cost structure, near-term liquidity, future availability of capital, technology differentiation, brand/bankability, and channel penetration a five-point scale.  It also lays out potential business model and product differentiation strategies that large, diversified firms might pursue to strengthen their position in the market.  The chart below explains some of the differentiation strategies that larger firms might seek out and which companies they may target to meet those goals:

Finally, the report assesses the likelihood of different market outcomes for the major module suppliers. GTM categorizes outcomes in the following ways: market exits, acquisition candidates; transformation to a non-standard business model or product; survivors; and industry leaders.  Of the 49 firms that the report charts, GTM predicts that only Canadian Solar, Trina Solar, Yingli and Sunpower are highly likely to become industry leaders.  It rates First Solar, Hyundai Heavy Industries, Talesun, Rensola, JA Solar, Suntech and Jinko solar as possibly becoming market leaders but states it’s unclear at this time.

“I would say we would see a lot more market exits in terms of plant closures or in terms of divestment from PV from diversified firms or insolvencies,” concluded Mehta. “We expect a lot more over the next year.”

Middlemen: Solar Leasing Growing Strong

While module manufactures work diligently to reduce expenditures in order to ride out the oversupply, module prices just keep dropping. And those low prices are driving solar installations like never before. Homeowners and small business owners can now go solar at the lowest prices in history and many markets are approaching that “be-all and end-all” goal of grid parity.  Couple that with increased lender confidence regarding solar power and its no surprise that the solar leasing market is booming.

Today the majority of new solar installations in California are being financed through lease arrangements and as result, more and more banks and corporations are waking up to the potential returns they could reap by helping homeowners go solar through a solar lease.

Mercom Capital’s Prabhu has tracked lender interest in the solar leasing market and estimated that there was about $1 billion in solar lease funds announced in the third quarter of 2012.  “The banks are seeing this as a win-win; obviously the risk factor has kind of diminished and they feel comfortable,” he said.