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Solar Market Trends

At the crossroads: Expand capacity or withdraw business

March 26, 2020 PV InfoLink

Since December 2019, 28 solar firms in China have announced or launched capacity expansion plans totaling at least RMB 120 billion in investment and 240 GW in capacity. Behind these large-scale expansion plans is leading manufacturers’ ambition to stay ahead of the technology curve and secure share in the growing global solar market.

However, this investment will inevitably result in excess capacity—and with that may come cut-throat competition where older production lines are eliminated.
Technologies and costs

According to capacity expansion announcements made by listed solar PV companies and the patchy statistics on key PV projects for 2020 collected from local governments across China, the capacity expansion plans—all announced within a matter of just three months—will entail a combined investment of over RMB 120 billion that span the entire upstream supply chain: around 47,000 tonnes of polysilicon, 26.6 GW of wafers, 84 GW of cells, and 104 GW of modules.

The Chinese solar growth has slowed in 2019, due to postponed subsidy issuance and short construction lead time that slackened the deployment of PV capacity. Driven by end market demand, manufacturing sector saw growing adoption of PERC technology, which continues to improve in efficiency and cost reduction. The introduction of new technologies, such as high-density modules, heterojunction (HJT)/Tunnel Oxide Passivated Contact (TOPCon) modules, heterojunction back contact (HBC), perovskite, and larger wafers, also plays a part in fueling a capacity expansion boom that occurred in early 2020.

This capacity expansion boom—unlike the one driven by surges in demand ten years ago—is not about replicating old production lines. Instead, it features the uptake of new technologies, which vary from firm to firm. The majority of the expansion plans cover adoption of larger wafers and production of high-efficiency modules.

For example, in a telephone conference with its shareholders after publishing its expansion plan, Tongwei stated that it would build cell production lines capable of adopting wafers up to 210mm in size. Moreover, the company noted that it also considers adopting PERC+ and n-type TOPCon technologies.

Another driver of the hundreds-of-billion worth of capacity expansion is that new production lines can deliver cost savings, an advantage that is plainly evident in the polysilicon sector. In its 2019 roadmap for PV industry development, the China Photovoltaic Industry Association reckons that the cost of polysilicon production will decline further as production lines continue to evolve with technological progress.

Indeed, most of the new production lines churned out polysilicon at a cost of less than RMB 50,000/MT. This cost advantage was particularly strong in 2019, when prices were persistently trending downward to the extent that only manufacturers with new production lines could operate at a decent profit, those with older production lines were mostly straining to make ends meet. One state-owned supplier was even going to close its business.

A further contributing factor that prompts the PV industry to ramp up its production capacity expansion—an analyst of a securities firm told PV Men—is a re-financing law introduced by the China Securities Regulatory Commission on February 14. “Renewable energy technologies replace one another so quickly that when a new technology is being implemented, companies have to bear high costs and ensure high starting profits. But, with the new re-financing law in force, the industry will see a virtuous cycle that ‘begins with low starting profits, proceeds to cost reductions arising from capacity expansion based on new technologies, improved but diversified profits, then cost-driven price reductions, and ends with increased demand,’” the analyst noted.

The new production lines have started mass-producing in advance, in order to test the cyclicity of new technologies and expand channels. Capacity expansion can help to reduce marginal costs and improve market shares, thereby giving PV companies a head start in the era of grid parity.
Pit yourself against giants to stay afloat in the market

While capacity expansion is driven by the advent of new technologies and the possibility of cost reduction, on the business management front it leads to not just competition between Tier-1 and 2 manufacturers but a life-and-death battle. “Expanding production capacity in the PV industry is like becoming addicted to drugs. As long as you gain capacity, you stand a chance to survive; if you don’t do so, you lose out,” observes Hsu Ming, a veteran PV pundit. “If you’re running a company, will you ever have other options?” he added.

In addition, for companies with little if any technological awareness, the double whammy of capacity expansion and technology replacement will push them ever closer to shutdown, argued Hsu. “It grates on capital-intensive industries to bet on the wrong technology.” However, when you expand your capacity on a large scale, it can be devilishly difficult to shift to a different technology.

Meanwhile, companies who seize the opportunity will ride this expansion wave to dominate the market. Companies that figure in this expansion boom are Longi, JA Solar, Risen, Zhonghuan Solar, and Tongwei—all of whom saw profits surge last year.

Equipment suppliers are also generating significantly greater revenues amid the expansion boom. Last year, S.C. New Energy Technology Corporation, JSG, DR Laser, Maxwell, among other major equipment makers, each posted a net-profit growth of up to 80%.

“With the market transitioning towards grid parity, internal rate of return becomes increasingly obvious and certain, so there should be a surge in end-market demand. Plus, as technologies are replacing each other quickly and the post-PERC era is coming, it is pressing to boost power output. No wonder PV giants are climbing on the bandwagon of capacity expansion,” remarked a veteran PV practitioner. Against this backdrop, the jury is still out on which technology will stand out.

Yet, with industrial consolidation already under way, this capacity expansion boom will certainly lead to capacity surpluses. Indeed, “a capacity surplus of a certain scale is commonplace in a market economy environment,” according to a member of the National Development and Reform Commission. Since new production lines are technologically more advanced and entail lower costs, older production lines that operate with low efficiency and incur higher costs are first in the line to be phased out of the market. Given this trend, only by gaining further capacity to improve its market share can a PV firm stay ahead of others.

For harbingers of how oligopolistic competition in the PV industry will be unfolding, look at Tongwei and Aiko Solar. In its 2020–23 plan for capacity expansion, Tongwei pledges to attain No. 1 position in the world rankings of polysilicon and cell production capacity and advance way ahead of the runner-up. Aiko Solar commits itself to achieving 22 GW of cell production capacity by the end of this year, said the vice general manager Michael Ho of Aiko Solar in a public speech. He added that as the industry sees growing competition, cell production lines in the future will be in a poor position to achieve an economy of scale unless they hit 20 GW.

Having said that, just as the PV industry evolves, so its production capacity keeps growing, thus making competition even fiercer. In this case, new production lines will nudge older ones out of the market once they come online but struggle to undergo a transition when the capacity volume becomes saturated.

The advent of the Fourteenth Five-Year Plan and the phase-out of government subsidies may lead to a whole new chapter in the PV industry. PV firms should carefully make business decisions when it comes to technology, costs, and strategy.  

Orignal text: PV Men

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