New U.S. Solar Photovoltaic Entrant Opts for Vertical Integration

In this era of tense, mission-critical negotiations between suppliers of polysilicon and the solar photovoltaic module manufacturers that count on it, the latest entry into the solar PV market is going vertically integrated.

Hoku Scientific, a Hawaii-based company that specializes in fuel cells, announced plans this week to expand into both the manufacturing of solar photovoltaic (PV) modules and the essential polysilicon raw material. The company expects to base its operations in Singapore, a lower cost location for manufacturing and one that could benefit local government financing and support. Hoku intends to operate the solar module and polysilicon business under two business units separate from its existing fuel cell business — now to be called Hoku Fuel Cells. The solar module business unit will be named Hoku Solar and is expected to reach initial manufacturing capacity of 30 megawatts (MW) per year beginning in the second half of calendar year 2007. The polysilicon business unit will be named Hoku Materials, with polysilicon processing plant capacity of 1,500 metric tons per year beginning in the second half of calendar year 2008. This initial capital investment to ramp up these businesses is expected to be approximately $250 million, which the company will seek to fund through the issuance of debt and from potential customers’ cash down payments for future supply of polysilicon and modules. The move for the company represents a broadening of its technology platform beyond fuel cells, which are regularly characterized as a longer-term area of business. And by moving into both the solar module business and the polysilicon business, the plan also represents a strategic shift from the majority of PV manufacturers who purchase their raw material from outside companies. This vertically integrated approach, Hoku says, will give the company more stability from market fluctuations in the materials cycle. “One of the primary limits to the growth of the solar market is supply constraints of polysilicon, the key material used in solar modules and integrated circuits,” said Dustin Shindo, chairman of the board of directors, president and chief executive officer of Hoku Scientific. “To address these supply constraints, we also plan to manufacture sufficient quantities of polysilicon to meet our initial and future expected demand.” Research and investment firm Piper Jaffray noted the strong business prospects for Hoku broadening beyond fuel cells but also acknowledged the move will not be an easy one. “While we clearly prefer solar to fuel cells due to solar’s large and rapidly growing end market, Hoku will have to demonstrate that it can execute on this solar strategy, which requires process know-how and capital funding,” said a statement from Piper Jaffray analysts, who added that solar requires substantial capital expenditures and that the polysilicon know-how to pull off a successful business in this field may be difficult. Hoku stressed the move was not an indication of poor expectations for the fuel cell market but rather a horizontal business move, expanding into solar. “While the market for fuel cell products is still emerging, the solar market is already a rapidly growing industry,” Shindo said. “We are confident in the long-term opportunity of the fuel cell market in general, and we remain committed to our traditional fuel cell business.” Piper Jaffray analysts agreed saying “this initiative is not indication of reduced fuel cell membrane prospects, but rather an attempt by the company to leverage synergies in clean-tech and broaden its offerings.” They also noted that Hawaii, where Hoku is based, is characterized by high-energy costs and plenty of sunlight, making it an attractive market for solar.
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