This shakeout is happening fast. 16 firms per year compared to 4.8.
To use this graph or not?
By comparing similarities and differences of the solar industry and previously studied industries the solar industry evolution can be better understood.
Growth is essential for smaller manufacturers who need to compete on cost with larger competitors.
There are a wide variety of solar companies that exist today, all with specific needs and appropriate growth strategies. Given the industry evolution context there are several strategies that will be generally applicable to all solar manufacturers.
Solar Industry Evolution and Growth Strategies
Industry Evolution and GrowthStrategies for International Solar PV Module Manufacturers Dan Baldauf
Solar PV Overview• Varied solar technologies• Varied companies along the solar PV value chain
Global IndustryManufacturers in USA, Taiwan, Europe, China, Japan, India
Literary Review• Michael Gort and Stephen Keppler (Industry Evolution)• Igor Ansoff (Growth Strategies)• More recent academics were added to ensure theories were up to date.
Research Methodologies• Primary Sources (3 interviews)• Secondary Sources (annual reports, market reports, academic literature, and internet searches)
Industry Evolution (Gort and Keppler)1. Firstcommercializationof product 5. Net entry levels reaches approximately O 2. Rapid rise in net entry 3. Net entry 4. Period of reaches negative net entry approximately O “Shakeout”
International Solar PV Module Industry *Data was collected from multiple industry directories and with internet searches.
Stage 1 (1958-2001) First solar companies enter the industry *1st crystalline solar module commercialized in 1958
Stage 2 (2001-2009) Rapid Rise in Net Entry In Stage 2 the number of module manufacturers increase from 120 to 340.
Stage 2 (2001-2009) Price Decrease From 2007-2011, average module prices decreased by 57%. Average Selling Price $/watt First Solar Trina Suntech Yingli SunPower Hanwha Canadian Solar 31/12/2007 2,48 3,80 3,72 3,86 4,48 4,42 3,75 31/12/2008 2,37 3,92 3,89 3,88 4,71 3,92 4,23 31/12/2009 1,75 2,10 2,40 2,00 3,63 2,24 2,13 31/12/2010 1,49 1,75 1,82 1,75 3,59 1,75 1,80 31/12/2011 1,26 1,33 1,51 1,43 2,94 1,41 1,34
Stage 2 (2001-2009) Over CapacityAs prices decrease, companies seek to lower their costs, mainly with economies ofscale (Keppler K. S., 2001). *As over capacity increases, it makes it harder for companies to move inventory
Stage 2 (2001-2009)Profit Decline * Prices dropped faster than costs causing margins to be squeezed.
Stage 2 (2001-2009) Incumbent’s Advantage • As companies increase their capacity and expand their businesses, they gain valuable experience. • Their larger economies of scale also give them a cost advantage. • Incumbents with better resources and experience begin to dominate innovation.
Stage 3 (2001-2012) Shifts in the Sources of InnovationsOutside the industry includes..•Research institutes•Universities•Inventors•Companies not manufacturing modules 42%
Stage 3 (2001-2012)Shifts in the Types of InnovationsAs companies have larger capacities, the incentive to make process innovations isgreater. Each innovation can save costs or increase quality per unit created. Unit 2 Unit 3 Unit 1 Unit 1 Unit 4 Process Unit 2 Innovation Process Unit 5 Innovation Unit 3 Unit 6
Stage 3 (2001-2012) Product Innovations Still Relevant*The rate of product innovations has been increasing. The diversity of innovations is alsoincreasing.
Stage 4 (2012-20??) Static Optimum ShakeoutExit rates increase while entry rates decrease. The intensity of the shakeout usuallydepends on the amount of innovation and demand in the industry. High amount ofinnovation lead to more intense shakeouts.
Stage 4 (2012-20??) DemandDemand is likely to increase when the technology hits grid parity, or when itbecomes as cheap as conventional power. Large amounts of demand allow formore growth opportunities, leading to higher survival rates.
Stage 4 (2012-20??)ConsolidationDemand will increase and more firms will exit so consolidation must occur. Fewfirms will occupy a majority of the market by the end of the shakeout. Global Market Share Top 10 Global Share 2000 5% 2001 7% 2002 9% 2003 11% 2004 15% 2005 21% 2006 28% 2007 39% 2008 53% 2009 58% 2010 54% 2011 47%
Industry Comparison DifferencesSome differences between the previously studied industries and the solar industry..•Shaped by international forces•Subsidy driven (unpredictable demand)•Higher acquisition rates
Industry Comparison SimilaritiesSome similarities between the previously studied industries and the solarindustry..•Shakeouts also caused by innovation•High entry followed by high exit (Static Optimum Shakeout)•Significant entry will happen
YingliShakeout Survival First Suntech Trina Solar Early EntrantsOther factors that influence survival are..•Early entry (experience and ability to innovate)•Economies of scale
YingliShakeout Survival First Suntech Trina Solar Low CostSome ways to lower costs..•Process innovation is the key during Stage 4.•Vertical integration allows better cost control, but less flexibility.•Companies lay off employees to lower costs.
YingliShakeout Survival First Suntech Trina Solar Product DifferentiationCompanies can survive shakeouts by serving a niche area..•In the solar industry module efficiencies range from 14.0% - 20.4%•The three main solar customers are residential, commercial, and utility Residential Commercial Utility
Growth Strategies Growth MatrixIgor Ansoff is regarded as the father of strategic management, and is most famousfor his growth matrix.Additional integration growth strategies will also be included to further build onAnsoff’s Matrix.
Growth Strategies Market PenetrationWhen a company seeks to increase the sales of their product in its current market. – Igor AnsoffThe term market refers to customer groups purchasing a product designed for a specificmission. The mission of solar modules is to convert sun light to electricity that then feeds intothe grid.Market penetration strategies include..•Increase sales to current customers•Find new customers•Foreign geographic markets are included
Growth Strategies Market Penetration• Instead of using price reductions or promotions, companies should focus on maintaining a competitive advantage via innovation.• Stage 4 is when process innovations are key. Firms should then focus on process innovations to become more efficient than their rivals.• More efficient firms can make a better product offering which will ensure customer loyalty.• Small process innovations are the least risky way to grow a business.
Growth Strategies Product DevelopmentProduct retains the same mission, but characteristics of the product are changed to betterserve the mission. – Igor Ansoff•Small incremental product innovations.•If product is marketable no large risky product innovation needed.•Large product innovations only used when market is demanding them and technology isready. Not to fix lackluster growth.•Acquisition as a product development strategy. Companies can acquire innovation fromfailing companies if there is still value.
Growth Strategies Market DevelopmentAn adaptation of a present product line, generally with some modification in the productcharacteristics, to new missions.– Igor Ansoff•Commercial passenger planes to transportation planes. Non grid connected modules forsolar industry.•Risks can be lower if synergies exist.•Similar to product development, market development strategies should only be used if themarketplace and technology are ready.•Non grid connected market too small.
Growth Strategies DiversificationA simultaneous departure from the present product line and the present market structure.–Igor Ansoff•The riskiest strategy.•Categorized by “related” and “unrelated” diversification.
Growth Strategies Related Diversification•Related diversification is when there are meaningful commonalities between the company’score business and the new venture it is taking on.•Economies of scale and synergies can be achieved.•Technologically related companies use this to enter into new markets.
Growth Strategies Unrelated Diversification•Unrelated diversification is when there are no meaningful commonalities between thecompany’s core business and the new venture it is taking on.•This involves a very high amount of risk. Failure rate of 90-99%. (Park, 2004).•This strategy should not be used to solve lackluster growth.Solar manufacturers should avoid both types of diversification because they are in a highgrowth industry and they have limited funds from the shakeout.
Growth Strategies Backward IntegrationAdvantages:•Guaranteed access to supply•Access to more innovation•Cost savings•More control over qualityDisadvantages:•Expensive to integrate (Billions associated with polysilicon production)•Risk of failure associated with diversification•Reduces flexibility
Growth Strategies Backward Integration Levels of Vertical Integration Company First Solar Trina Suntech Yingli SunPower Solar World Q Cells LDK Level of Vertical Integration Polysilicon Production Procured Procured Procured x - x - x Ingot Production x x x x - x - x Wafer Production x x x x Procured x Procured x Cell Production x x x x x x x x Module Production x x x x x x x x Installation of Large Power Plants x x x x x x Recycling x xCompanies can also use supply contracts.
Growth Strategies Forward IntegrationThis involves companies entering into installation.Risks associated are:•Same risks with related diversification•Possible lack of distribution channels and expertise•Competing with customersBenefits include:•Saving on the margins charged by installers•Industry output will grow and so will opportunities in this field
Conclusions Ansoff’s Strategies • Least Risky • Small incremental product innovations • Process Innovations to gain competitive • No large product innovations unless advantage market and technology are ready ✓ ✓ ✗ ✗ • Should only be used if market and • Solar industry is a fast growing market technology are ready • Not enough resources to diversify • Market too small but could become because of shakeout significant in the future
Conclusions Integration and Final CommentsSolar firms considering backward vertical integration should understand that the solar PVtechnology is far from finished evolving.New technologies offer promise of better efficiencies and/or lower costs.Generally speaking, solar companies with successful products should focus on improvingtheir business efficiency along with small product improvements.