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Chinese challenger aims for top spot in solar tech

Suntech Power Holdings has come from China--and out of nowhere--to become a big name in solar power.

Bucking the automation trend, Suntech Power Holdings credits its rise in the solar industry to people, and lots of them.

Rather than use expensive robots, Suntech employs roughly 2,500 workers to assemble solar cells into panels and perform other tasks ordinarily handled by machines. The workers give Suntech a lower operating cost than Western competitors, and there are fewer broken cells, said Steve Chan, vice president of business development at the company.

The factory workers make, on average, about $200 a month, not including housing subsidies, free food and an on-site medical clinic. (It's about half of what a new college graduate earns in China).

Low-tech as it sounds, the approach has led to a Moore's Law-like growth rate for the Shanghai-based company. Suntech, which makes both solar cells and completed panels, was an asterisk in overall market share in 2002. By 2005, it was the eighth largest solar cell maker in the world, according to statistics from Photon International. In 2006, it jumped to fourth and this year passed No. 3 Kyocera in solar cell manufacturing capacity.

The rise of Suntech

These lists show the market share leaders for manufacturers of photovoltaic cells in 2005 and 2006.

2005
1. Sharp
2. Q-Cells
3. Kyocera
4. Sanyo
5. Mitsubishi
6. Schott Solar
7. BP Solar
8. Suntech
9. Motech
10. Shell Solar

2006
1. Sharp
2. Q-Cells
3. Kyocera
4. Suntech
5. Sanyo
6. Mitsubishi
7. Motech
8. Schott Solar
9. Deutsche Cell
10. BP Solar

Source: Photo International

Suntech's revenue and profits are following a similar path. Sales in 2006 rose to $598.6 million, more than doubling 2005 revenue, while net income rose by from 30.6 million in 2005 to 106 million last year. Revenue this year will likely hit $1 billion. In 2002, revenue was $3 million.

"We came from nowhere," Chan said. "We were able to grow in the face of an industry shortage of silicon."

Many believe the company now has its eye on toppling Sharp as No. 1 in the industry. Sharp has factory capacity to produce enough solar cells to put out 600 megawatts of power in a year, compared with Suntech's 360 megawatts. By 2010, Suntech expects to have the factory capacity to produce 1 gigawatt of solar cells a year.

"Suntech, longer term, is going to be the Honda Civic of the industry," said Jeff Osborne, an analyst at CIBC World Markets. "My fundamental belief is that 80 to 90 percent of the market, long term, will be a commodity product and the Chinese and Taiwanese are going to dominate that (commodity) sector."

Alternative energy is becoming big business in China. In the past two years, several Chinese solar companies--such as Nanjing's Sunergy, JA Solar Holdings and Solarfun Power Holdings--have held initial public offerings in the U.S. Suntech did it first, in late 2005; because of the IPO, founder Zhengrong Shi is one of the richest men in the country.

Chinese manufacturers have also begun to expand into the market for solar water heaters. Meanwhile, The Jiangsu province has linked up with the Cleantech Network and Tsinghua University to create a clean-tech industrial park.

Not the usual story
But just when you think this might be another story about how low-cost labor in China will bowl over established Westerners, guess again. Product quality, solar cell efficiency and access to large amounts of silicon remain key considerations and will hinder many of the new entrants from China, said Paula Mints, an associate director for Navigant Consulting. Most of the other Chinese companies have barely made a dent in the market, and price cutting is already trimming their margins.

Then there is the problem of shipping. Solar panels weigh a lot. Shipping them from China virtually eliminates any of the costs saved through cheaper labor, Mints said.

"The shipping costs are significant. You've got to get the stuff across the ocean and then you've got to land it," she said. "Unless the domestic market takes off, the other manufacturers will be challenged."

To address these problems, Suntech is preparing its second act. While trying to beat competitors with lower costs, Suntech will go high-tech in another area. It is building a conveyor belt and robotic system for cell manufacturing that will allow it to shoot for gigawatt-scale output, said Chan. Managing manual laborers "will probably become cumbersome at some point," he said.

Two of the five robotic systems Suntech hopes to one day deploy are already being beta tested.

It is also building its own industrial park near its factories, which will house equipment providers (assembling the robots designed by Suntech) as well as component suppliers, to cut down costs and increase efficiency. The strategy neatly mimics what Dell has done in PCs.

To top it off, the company is wedging its way into thin-film solar cells, roofing tiles with integrated solar cells through the acquisition of a Japanese company, and higher-margin solar cells that can convert more sunlight into electricity than average cells.

"We feel we are going to hit 20 percent efficiency in a few years, but we will do it with a low-cost structure," Chan said.

If the company succeeds, other Chinese companies will follow suit, so what happens over the next few years for Suntech is a big deal in solar.

"The Chinese companies are where we will have to keep our eyes open," said Ron Kenedi, vice president of the Solar Energy Solutions Group at Sharp.

Suntech's story, oddly enough, starts in Australia. Suntech founder Shi was conducting solar technology research at the University of New South Wales in the mid-1990s. (Suntech's CTO and many of the company's researchers are still based in Australia). While there, he founded CSG, a thin-film solar company.

In 2001, Shi founded Suntech with the idea of capitalizing on China's low labor costs. The timing couldn't have been better. Germany's generous subsidies for solar panels caused demand to soar worldwide.

"Essentially there was a shortage, which was magical for them," said Navigant Consulting's Mints. "Customers were saying, 'I don't care if (the panels) come from China.'"

Because of the costs of shipping the panels to Germany, Suntech's products actually sold for more than competitors' products in some instances, she said. Still, high demand overcame any objections.

Chan, though, asserts that the company has begun to exploit an advantage in cost, and that the gap will get wider. A silicon solar cell costs about $2.90 to make, he says. Established manufacturers, who buy silicon under long-term contracts, have to put about $1.50 worth of silicon into the cell. That leaves about $1.40 to cover other expenses. (Solar cells are then wired together into solar panels, which you see on roofs, but the bulk of the manufacturing costs are associated with the cells).

By contrast, Suntech until recently had been paying $2.20 for its silicon and covering everything else with 70 cents. It had to buy it on the spot market because silicon manufacturers wouldn't sell it under long-term contracts until this year.

"When you have an IPO, they start to talk to you," Chan said.

Under its new long-term contracts, Suntech will be able to put out cells for around $2.20: $1.50 for silicon costs and 70 cents for other expenses. That extra margin will either feed profits or, more likely, help the company in price wars.

CIBC World Markets' Osborne identified other cost advantages for Chinese companies. Labor costs for a Chinese company amounts to about 4 percent to 6 percent of revenue. For a U.S. company, labor amounts to about 10 percent of revenue. Research and development in China comes to about 1.5 percent of revenue; for the U.S. it's closer to 10 percent. The Chinese government also gives companies based there income tax holidays.

Meanwhile, domestic demand could start to build, giving local manufacturers an edge. The Chinese government has begun to impose regulations to increase the amount of renewable energy consumed in China. Now, Suntech sells roughly 10 percent of its solar panels to China, but 90 percent of these are then re-exported to the West.

Nonetheless, managing growth is easier said than done. Suntech's stated goal, after all, is to triple manufacturing capacity in about three years as well as to move into new product areas like thin film and solar roof tiles. The company will also have to hire sales representatives in Europe and North America. In the early days, Shi handled a lot of the German sales calls, said Chan.

These sales reps will require Western-level salaries. That will take some adjustment for the company, which has been able to get by on a lower executive budget.

Competition among Chinese companies has also been eroding margins, according to an April research note from Dave Edwards at ThinkEquity Partners.

Still, Suntech and Germany's Q-Cells are worth watching, said Mints.

"They are very aggressive," she said.

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