Solar industry, by nature, is segmented into companies producing different parts of the final solar energy system. These different parts or stages of production include polysilicon, solar wafers, solar cells and solar modules.

Solar Industry Integration Limited, Overcapacity Hurting Margins

Dispersion in the solar industry

Much of the dispersion in the solar industry exists because of the unique technological processes required at each stage but there are certain benefits to be gained from integration of processes under the umbrella of one organization. However, the current division of labor among different companies and even among different regions creates a situation where companies are unable to benefit from economies of technological integration.

As the demand for solar power expanded beyond expected, many new entrants emerged in the solar trade over the past five years. This meant that an industry-wide oversupply situation developed, pressuring pricing and margins. Many corporations were unable to bear the losses and shut down.

However, Chinese producers expanded the most in this industry including producers like GCL-Poly Energy Holdings Ltd. (OTCMKTS:GCPEF) (HKG:3800), LDK Solar Co., Ltd (ADR) (NYSE:LDK) (FRA:LD41) (ETR:LD41), Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE) and Trina Solar Limited (ADR) (NYSE:TSL) (FRA:TR3) (ETR:TR3).

Polysilicon manufacturing is largely a non-competitive area. This is because the production of polysilicon is a complex process and it is technologically difficult to achieve high purity at a competitive price, making it a challenging business to enter. Hence, the six largest manufacturers account for the bulk of industry production.

Figure 1: Largest Producers of Polysilicon in terms of Capacity (Tonnes)


solar industry
Source: James Evans

Solar wafer types

Wafer manufacturers specialize in using polysilicon and converting them into wafers with the required electric properties. Wafers are of two different types including monocrystalline wafers and multicrystalline wafers. Mono wafers are more expensive to produce and offer higher efficiency levels. However, companies producing wafers produce both types of wafers and do not normally specialize in one kind of wafer. The margins between the two types of wafers can be seen in the graph below.

Figure 2: Monocrystalline and Multicrystalline Wafers Pricing ($ per piece)

solar industry
Source: James Evans

Wafer manufacturers are exposed to polysilicon supply and price fluctuation. Since polysilicon is an oligopolistic industry, the manufacturers rule the prices.

At the next stage of solar cell manufacturing, vertical integration is more common. Many cell manufacturers are vertically integrated and also produce solar modules. However, some companies maintain a pure-play existence. The largest manufacturing plants of solar cells and solar modules are located in China and Taiwan.

In solar module production, competition is driven by new capacity additions. The higher the capacity of a certain firm, the better it is able to control its costs and the stronger existence it has in the market. In this case, integration also sometimes helps companies achieve technological economies of scale.

Figure 3: Solar Cell and Solar Module Production Capacity of the Top Companies

solar industry
Source: James Evans

However, competition remains high in solar industry, with manufacturers cutting production costs through technology improvements and economies of scale. Production overcapacity has led to margin contraction for many companies, after five years of manufacturing expansion. Some manufacturers are securing demand by diversifying into downstream solar-project development, including companies such as First Solar, Inc. (NASDAQ:FSLR), Sunedison Inc (NYSE:SUNE) and SunPower Corporation (NASDAQ:SPWR).