The PV industry’s black swan

Paula Mints takes a closer look at the PV industry’s “black swan event,” an observed market behavior that performs in an unexpected manner: the not-so-rapid rise of supply control by China and Taiwan.

by Paula Mints, Navigant Consulting

March 18, 2010 – For the PV industry, the swan did not exactly swoop; it floated down for a long, slow and game-changing landing.

A black swan event is an observed market behavior that performs in an unexpected manner. The best example of this sort of event is the housing crisis — seriously, many analysts (and others) noted that housing values were declining, yet, because very few believed that these values would crash, most continued to behave in a business-as-usual manner, that is trading debt, refinancing and lending until the genesis of most of the housing debt was obscured.

In terms of the PV industry, such expected unexpected behavior is seen in the not-so-rapid rise of supply control by two countries: China and Taiwan. In 2009, shipments from China and Taiwan were 46% of total. From controlling price (low) to dominating shipments, manufacturers from these two countries made significant gains in the market in just a few years. The table below presents the amazing increase in shipments from these manufacturers in just a few years. (This is a market research practice that relies on primary data from the supply and demand sides of the market.) These statistics represent shipments to the first point of sale, tracked each kilowatt back to the original manufacturer — though with all of the tolling (wafers processed to cells outside the original technology manufacturer facility), and outsourcing (buying cells and modules and rebranding), it has been a time-consuming task to get to an accurate number. Note that in the five-year period 2004-2009, both the ROW region and China/Taiwan experienced significant compound annual and yearly growth.

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Shipments (in MWp) from China/Taiwan, Europe, Japan and ROW 2004-2009. *ROW region includes India,
Malaysia and The Philippines, among other countries. Most other countries have facility in pilot or pre-pilot stage.

How did manufacturers in China and Taiwan do it?

Let’s get a controversial point right out on the table — manufacturers in China enjoy subsidies. And labor in both China and Taiwan is significantly cheaper than that in other regions (higher labor costs may surprise these manufacturers as they locate module assembly in the US and Europe).

Manufacturers, particularly in China, vertically integrated the supply chain from raw material through to wafer, ingot and cell manufacturing, module assembly and in some cases installation — to drive home an obvious point, these manufacturers control most of their supply chain, with the important exception of glass. To belabor the PV industry’s painful recent past, the 2004-2008 polysilicon shortage was costly in terms of lost opportunities and in terms of raw material costs. Aware that a shortage of its primary raw material could be a problem moving forward and in the past (the 1980s, the 1990s), industry consortiums were formed to solve this future bottleneck. Unfortunately, solving this bottleneck is an expensive proposition, and so it was not successfully addressed.

Manufacturers in China and Taiwan (particularly China) are both willing and able to price aggressively for share. Current prices for PV modules are unsustainably low for most manufacturers. In particular, thin-film manufacturers are in the uncomfortable position of having to push down prices to a painful level — again, because efficiency counts, and lower-efficiency technologies must sink to lower levels during price wars. Prices for cells and modules from China, along with prices for processing wafers and ingots, were so low that everyone (literally!) outsourced a bit in 2009, and will again in 2010.

So, manufacturers, particularly in China, invested in the supply chain, priced aggressively, and enjoyed significant government subsidies. But these points alone do not quality as a black swan event. The qualifying point is the willingness to hold inventory — significant volumes of it — for long periods of time. This last point is what pushes regional dominance from any old industry-as-usual into game-changing status. The conventional wisdom, which to be sure is almost always conventional and often unwise, holds that high inventory levels are a bad thing. Quite a bit of manufacturing and business literature discusses the joys of just-in-time manufacturing: make what you need, get rid of it fast, inventory is a cost. And yes, inventory is a cost typically to be avoided. In this case, module assemblers (modcos) in China and to a certain extent manufacturers are willing to sit on significant inventory for unknown periods of time. At the beginning of 2010, there is ~2.2GW of inventory hanging around waiting to be installed, most of it in China. Most of this inventory will go to Europe, with a small percentage of it landing in the US.

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Global shipments, inventory, production, capacity for 2009 leading into 2010.

Though it may seem anticlimactic, the willingness to price aggressively and government support for manufacturing pales beside the willingness to hold inventory. It is quite possible that 2010 will end with close to 4GW of inventory, most of which may, again, sit patiently in China awaiting installation elsewhere.

And by the way, manufacturers in China and Taiwan shipped 46% of total in 2009 and will likely ship >60% of total in 2010. This is neither good nor bad; it is simply a fact in 2009 and a high likelihood in 2010.

This black swan, however, has an Achilles heel. Eventually inventory levels will have to be worked off (sold), and this inventory may be pushed into the market at even cheaper price points, particularly if demand slows. An incentive-driven industry is inherently risky — live by the incentive, die by the incentive. So, optimistic scenarios aside, a far direr scenario is a crash in sales if demand slows, or when high inventory levels topple over into the market.

Paula Mints is principal analyst, PV Services Program, and associate director in the energy practice at Navigant Consulting. E-mail:

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