Roadmap for A Changed Landscape: Consolidation and Integration in the Solar PV Business

Factors such as the transformed financial markets and a looming polysilicon glut are shaping a changed competitive landscape in solar, says Greg Boutin of Riverdale Partners. He believes a handful of vertically integrated giants will emerge to dominate the industry and take it to the finish line of ‘grid parity’.

The financial storm the world is going through might turn out to be positive for solar power. By speeding up consolidation, the crisis could end the current fragmentation and facilitate the emergence of industry behemoths, with a game-changing ability to deliver massive economies of scale. That, in turn, would shift the industry towards ‘grid parity’ where solar without subsidies is competitive against other power generation technologies. Starting with the most favourable regions, based largely on power prices and solar insolation, and then reaching others through a ‘domino effect’ on installed system prices, this may engender a real ‘big bang’ for the solar energy space. It could see solar quickly snowball its way to dominance of the electricity generation market.

Figure 1. Silicon capacity increases to 2012
Courtesy of and Prometheus Institute

The ongoing consolidation wave is nothing new to solar players. In the past few years, the space has witnessed a series of forward acquisitions, with many solar module manufacturers or project sponsors acquiring integrators and installers. SunPower acquired PowerLight early in 2007, while solar financier SunEdison acquired Portland-based installer Renewable NRG in April 2008. Through both organic growth and acquisitions, Germany’s SolarWorld has integrated assets along the entire solar value chain to create an end-to-end solar corporation (it acquired all of Royal Dutch Shell’s solar crystalline operations in 2006).

In October 2008, Chinese silicon and module manufacturer Suntech – headed by one of China’s wealthiest men, Dr Zhengrong Shi – further validated the trend by purchasing EI Solutions, the company Energy Innovations created out of its acquisition of Prevalent Power back in 2005. This came together with the creation of Gemini Solar Development Company LLC, a joint venture between Suntech and project developer and financier MMA Renewable Ventures, and the expansion of Suntech’s US dealer network, in part to ‘build brand recognition with downstream solar integrators’, the company noted.

Already, consolidation has created corporations that can better weather the sector’s inherent cycles, and leverage their political and economical muscle to champion the solar cause. But much more is needed before solar energy can truly be regarded as a real contender among mainstream energy sources. The existence of solar giants could, for instance, open the door to ambitious national programmes aiming at tackling global warming and defusing some of the risk associated with peak oil. Certainly, the current conjunction of events makes it likely that the consolidation trend will intensify.

Polysilicon industry to ensure access to market

Management consulting firm Riverdale Partners predict that the push to integrate will witness further participation from upstream players. Companies that started in the polysilicon business want to join in on the action and can afford to, even in the current capital market.

After a shortage of polysilicon left almost all manufacturers scrambling to add new lines of production, those companies are likely to face a capacity glut in 2010–2011. The estimated world capacity of global polysilicon for 2008 is 50,000 tonnes. However, summing up all the announced capacity additions underway, Riverdale estimates this number will swell to 150,000 tonnes by the end of 2010. That’s a tripling of capacity over the next two years, whereas current projections see the solar photovoltaic market itself taking eight years to triple. Granted, those projections could be conservative if solar was to reach grid parity in large markets during the period, but barring a huge spike in utility prices, this is not expected to happen before 2015.

Meanwhile, having taken advantage of the silicon crunch to increase their average gross margin to about 50% in 2008, from 20% back in 2001, polysilicon producers are sitting on hefty piles of both cash and assets. Risking being cut away from demand and facing the possibility of a serious price drop, most are now frantically signing long-term supply contracts, often extending the privileged relationships they built with clients during the silicon shortage years. A glance at the ‘companies’ section of one online industry source showed that 20 out of 37 recent news articles were related to the signing of long-term supply agreements – of five years on average – between polysilicon wafer manufacturers and module makers.

But polysilicon players won’t fully secure their destiny until they have taken control of their demand chain. And in order to do that, they need to build solar module manufacturing and retailing capabilities or, even better, acquire them. This is a strategy they are all actively contemplating, if not vigorously pursuing.

Norway’s REC kicked off the trend in late 2007 by initiating the construction of its own facilities in Singapore to transform silicon all the way through to solar modules. Its next strategic direction is likely to revolve around swallowing up solar integrators and installers. ‘I am convinced that in this business it will be the same as in other industries – there will be consolidation’, REC chief executive Erik Thorsen reportedly said recently. Other polysilicon players, such as Hemlock Semiconductor Corp, Wacker Chemie, Tokuyama, Mitsubishi, Sumitomo, Timminco, Arise Technologies Corporation, and LDK Solar, are expected to follow suit.

Meanwhile, other types of players, such as large electric conglomerates have also recognized the strategic and future value of ‘last mile’ solar players, and are moving to acquire key small- and mid-sized companies in that space. In August 2008, GE – which is aiming to grow its solar sales to one billion dollars by the end of the decade – took a 32% stake in Spain’s largest solar power project developer, Fotowatio, which owns, operates and is developing around 1 GW of solar projects in Spain, Italy and the US. The move came right after taking a majority participation in PrimeStar Solar, a thin-film PV technology and manufacturing company, and signing a partnership agreement with GAF, North America’s largest manufacturer of residential and commercial roofing, back in June. Three clear signs that GE is interested in playing a role along the entire solar value chain, and putting its money where its mouth is.

Utilities are also expected to get into the space sooner or later [see Elisa Wood’s feature, on page 29 of this issue – ed]. Many are already actively involved in project commissioning and financing. Southern California Edison, Duke Energy, and San Diego Gas and Electric are all entering distributed solar, and many other utilities have similar plans. The risk for them is to see parallel ‘solar utilities’ emerge and grow rapidly into major rivals once grid parity is reached. Conditional on their statutory requirements, some of the regular utilities could soon move into the project development and installation business by acquiring some of the players in that space.

Downstream players should leverage trends

All solar module manufacturers, integrators and installers have become prime merger and acquisition targets and their business strategies should reflect this.

Even balance-of-system components manufacturers are targeted, as Suntech confirmed recently, saying: ‘The company is also increasing its efforts to seek out those balance-of-system components … for a truly integrated offering.’ Indeed, one of the key players in that space, inverter manufacturer Xantrex Technology, was acquired in June 2008 by Schneider Electric, a GE competitor.

Short term, many of those potential acquisition targets risk experiencing a capital crunch, alongside mixed market prospects. For example, in 2009 sales are expected to be impacted by Spain’s move to slash its subsidies. It is unclear whether other countries such as Germany and the US (which has just renewed its federal solar incentives), together with France and Italy (which both have programmes that are starting to generate some serious activity), will make up for the loss. All downstream solar players might therefore take advantage of the trend to ensure improved access to capital, capabilities and supplies, and increase their overall stability in a volatile market by securing the protection of a major money maker.

Longer term, those downstream solar players are supported by solid fundamentals. It is widely anticipated that grid parity will be achieved in the next five to eight years, as installed system prices drop and utility prices continue to increase by an average of 5% a year. Environmental regulations and incentives seem likely to increase as governments move to curb global warming – emissions trading markets should grow rapidly as a result, and carbon taxes may take off the ground. Due to both this and peak oil, it appears unlikely that fossil fuel and conventional electricity prices will ease up in any long-lasting manner. And finally, the green marketing wave, fuelled by increased customer awareness, should continue to amplify those trends and drive growth in solar installations.

Siding with one of the major solar conglomerates in the making can enable players to compete successfully in a ‘mainstream’ solar market. But, companies that pursue independent strategies without the necessary size may find themselves in increasingly niche markets, or fighting for survival in the research and development business along with a myriad of startups seeking money from dried-up venture capital wells.

Acquisition targets should manage valuation

Riverdale believes that companies that have the flexibility to be acquired should leverage the sunny outlook to drive up their valuation. They should pursue a global rollout strategy while focusing their marketing and product development efforts on one of the top three solar markets – power plants for utilities, commercial and institutional buildings, or residential installations. They should also proactively seek and assess the right potential acquirers and ‘sync up’ their market strategy with those of their prospective allies.

For those that intend to remain in full control of their destiny, and have the means to back their intentions, an aggressive acquisition strategy to build the business to the necessary size while maintaining a finely targeted positioning should be formulated.

Whatever future they envisage for themselves, companies should gear their marketing strategies to compete in a world in which only a few vertically integrated giants will remain, next to a multitude of ventures on a quest to develop the ‘next’ technology. Companies that are ‘stuck in the middle’ will most likely find it difficult to survive. It is unclear yet whether distribution will be fully integrated in those vertical giants, or controlled by utilities, but what is near certain is that it will be consolidated.

As players in an industry that is both booming and consolidating, companies in the solar space face the key strategic issue of targeting the right markets. To that end, solar businesses must filter out the market noise, prioritize the perceived opportunities using a balance of strategic and practical criteria, and achieve clarity on the ‘size-of-the-prize’. For each market opportunity, they should be able to answer these questions:

  • what are the trends that drive it, and how powerful and sustainable are those trends?
  • how is maximum relevance achieved with this opportunity?
  • how do we best differentiate our value proposition against the competition?

Getting this right will make a significant difference in the valuation and augment chances of ultimately achieving market leadership.

Boosting acquisition potential

Companies that do seek to be acquired, or that would constitute a nice acquisition target, should proactively assess, select, and perhaps approach potential acquirers to offer a partnership, test compatibility, and make sure the future of their organization is not left to chance. Running a valuation exercise and obtaining full visibility into the areas they should focus on will help boost valuation levels. In uncertain times, potential acquirers will be focusing on the quality of customer-facing activities. Winners have a stable portfolio of business relationships; a large, qualified pipeline of prospects; and a streamlined sales process that squeezes out all of the potential value from both portfolio and pipeline.

As for firms that seek to dominate a particular market segment independently, they should select one that guarantees long-term profitable growth and aggressively plan their roadmap to market leadership, including an acquisition plan that draws the shortest path to critical mass in that market. They should build positions in markets that are likely to rebound once the crisis is over, like the residential market, where local integrators and installers may be acquired at a lower cost than six months ago, especially in the US.

Targeting the right markets

As the residential market weakens due to the degradation of the construction market – while power plant and commercial roof projects are likely to suffer from the credit crunch – a key survival skill becomes the ability to interpret current trends and target the right market, to creatively identify resilient niches, and to deploy differentiated strategies and value propositions driving returns.

Although solar power plant projects require capital injections that became rarer and costlier with the crisis, they compete for capital with fossil-fuel projects that immobilize capital longer – until the plant produces electricity – and are then subject to the fluctuating price of gas and coal. Increased renewable energy sourcing by utilities is also mandated by regulations in a number of states and countries. Combined, those factors should make the power plant market much more resilient than the commercial or residential markets.

Sharpening a lead generation and conversion formula and executing it skillfully are key levers of a company’s growth engine. Converting leads efficiently takes relentless focus and a streamlined sales process. In the current context, solar companies should consider customer relationship management solutions to help maximize conversion ratios for their valuable leads.

Competing globally

Many businesses in solar still focus most of their efforts on a single geographical area. As solar deployment processes get increasingly standardized, those businesses are at risk of rapidly losing their competitive edge – outflanked by competitors that establish profit sanctuaries in other markets as well as a footprint across markets, offering them superior economies of scale. US-centric and European businesses, in particular, are seeing much of that these days, with players from Asia assailing their commercial territories.

The key to long-term viability is to home in on a replicable competitive advantage and to deploy it globally. To establish and defend profit sources while taking the battle to the competition, by developing a fine understanding of key countries and markets and methodically rolling out a worldwide expansion strategy. Solar firms must build early partnerships in growing markets, such as France, Italy, China and Canada, or aim to leapfrog the competition through smarter deployment in an established market (such as Germany, Spain, and the US) that is not currently served. Companies seeking to be acquired should aim at complementing the market positions of their potential acquirers.

Seeking new growth through differentiation

Sourcing commercial leads in ‘blue ocean’ markets requires creativity and openness, which determine the organizational ability to deploy game-changing strategies.

Differentiation should be explored aggressively to identify or build profitable niches. Could the traditional balance-of-system supply business be converted into the provision of power output maximization services, including both tracking systems and inverters? Could solar modules, as a recent project in California has done, be placed on ponds and lakes? Could the company deploy localized PR campaigns and achieve better returns by targeting specific neighbourhoods one after another (perhaps even using satellite photography to identify large commercial roofs and pre-fill proposals)? Research and brainstorming can go a long way in that area and yield considerable benefits.

No dominant brand has really emerged just yet, but brands can be key differentiation drivers. Traditionally anchored deeply in the research and engineering world, organizations in solar have yet to realize the multiplying commercial effect that thought leadership and PR efforts can have when anchored in a well-defined corporate and brand identity.

In the residential and commercial sectors especially, companies need to know what their brand, in their prospects’ minds, is synonymous with. Is it reliability? Value? Innovation? Green? Through research in Germany, Riverdale found that ‘green’ or ‘clean’ are nice attributes to have, but are never the main buying motivation for 95% of the market. Marketers need to be very careful with positioning – many have placed too much emphasis on the green attributes of their products at the expense of ‘real’ customer value, and as a consequence have difficulties reaching mainstream audiences.

Focusing products on customer needs

A wide range of commercial decisions and trade-offs are made early in any product development process, and changing them along the way can be costly, both in terms of resources and time-to-market. As such, using the right process to inform those trade-offs is a ‘mission-critical’ requirement.

Relying solely on engineering inputs to make these decisions is likely to deliver a product that requires major adaptation to meet the market needs. Customer needs must be taken into account from the very minute teams start working on the product concept generation. Be it efficiency, cost, ease of installation, reliability, durability, modularity, aesthetics, marketing features – product attributes can’t simply be maximized. They must be optimized, based on known and latent market needs, on the company’s existing and acquirable capabilities, and on the competition’s current and anticipated potential top features.

Solar companies can leverage a range of customer discovery efforts, from targeted interviews and surveys through to ethnographic studies and quantitative market analysis. Product development frameworks such as Pragmatic Marketing can be implemented to ensure a market-centric innovation process that amplifies all key competitive advantages.

These are interesting times for solar companies. The economic crisis offers unusual opportunities to those ready to adopt a new perspective, targeted towards tracking and stimulating demand. It’s time for the array of solar ventures to work together and build stronger corporations, better able to convert that demand into a mainstream business. It’s time for solar to move from sparkles to beams.

Greg Boutin leads the cleantech practice at Riverdale Partners, a boutique management consulting firm that recently worked on the go-to-market strategies of a German solar integrator. For more information see:

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