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Solar Cells Come in Focus as ESG Grows
The Evolution of China’s Solar Cell and Module Industry
Solar cells and modules are excellent examples of new technologies that are not harmful to the environment, promote sustainability, offer steady growth predictions and have consistent demand for skilled workers, all attributes that put these verticals in favor with environment, social and governance (ESG) investors. As with other sectors within the solar energy industry, Chinese firms here are in the forefront as well.
The manufacturing of solar cells is an intricate business. The evolution of its equipment, along with continual technological improvements, have been pivotal in product development. In contrast to a solar-grade wafer, solar cell manufacturing involves more automation. The ingot is a piece of relatively pure material, typically metal, that is molded into a shape suitable for further processing. The ingot process in manufacturing the wafer needs to be controlled by a skilled technician due to the variation in the quality of polysilicon. Generally, the majority of solar cell work can be completed by machines, as they are part of a standard manufacturing process. As a result, the advancement of equipment or production lines becomes an area of focus. Similar to that of solar-grade wafer producers, many cell equipment manufacturers started from semiconductor backgrounds. For example, Meyer Burger (Switzerland), Tempress Systems (Netherlands), Shenzhen S.C. New Energy (China), and NAURA Technology (China) all were semiconductor producers who later expanded into cell equipment manufacturing.
Technological improvement in the manufacturing process is currently directed at advancing the conversion rate. At this time, passivated emitter and rear contact (PERC) is considered the second-generation technology in solar cells. This has an improved conversion rate of about 22.5%1 under mass production based on traditional silicon solar cells. But it also almost has reached the potential limit of the silicon-based solar cell.
Therefore, the next generation of solar cells will focus on heterostructures using other materials, as cost-cutting is a requirement for both cell and cell equipment makers. Module manufacturing is more of a replication business, using similar equipment and providing a homogenous product. In the past, equipment providers produced outputs that resembled production lines for other industries; it is by now a fairly mature business. For some time, it has been known that China has been the leader in the business of replication for decades, thanks to comparative advantages in cheap labor and land abundance.
The Drivers of Industry Dynamics
There are four inputs in the production of solar cells: wafers, auxiliary materials (e.g., silver or aluminum), equipment, and labor. Citing solar cell leader Tongwei’s cost structure in 20192, wafer and auxiliary materials accounted for 84.1% of the total production cost, followed by equipment depreciation and amortization and other costs totaling 11.1%, with labor at 4.7%. Key inputs for a module are cell, labor, equipment, and energy, which make up 94.8%, 2.8%, 1.5%, and 0.9%3, respectively, according to a report by Risen Energy. China leads the solar materials supply chain, which also benefits cell and module production from a cost perspective. There are a few cell and module capacities outside of China that focus on different technology routes. However, in the long term, we think the expectation and trend will be that Chinese firms will continue to consolidate the market.
For the cell business, cash cost and sale price determine whether a business will suspend capacity in the short term, as adequate liquidity is important for companies to survive during a down cycle. However, and similar to the wafer business, besides cost, technology is another key factor that determines success or failure in the long run.
Accordingly, downstream demand, equipment and production process innovations drive solar cell developments. Businesses that are not well prepared for technological changes ultimately will fall behind and be driven out of the market. Once innovation reaches its full potential, the lower the margin an industry has, the fewer new entrants there will be. It is relatively easy to decipher the consolidation landscape if we look at each player’s capacity expansion plan. For module businesses, the consolidation may be driven by channel, especially to C business. Players that emphasize significance in building up their channels today are likely to succeed in the future.
By year-end 20194, the top five Chinese solar cell producers held a total market share of 33% in terms of capacity, while the top five Chinese module makers’ total market share was 35%5, with dominance in polysilicon (56%) and wafer (70%) production. Chart 1 illustrates that both cells and modules are now oversupplied. However, as technology is improving at exponential rates, the expectation is that costs will be lowered and efficiency increased. This ultimately will encourage end demand and partially offset oversupply. Current soft demand is likely to stop or delay small or new cell and module firms’ new capacity plans and benefit existing leaders, at least from a medium-term perspective.
In the long-term, the manufacturing business offers a relatively stable margin. If there is no special technology required, cell and module margins will not be high, as is the case with most manufacturing subsectors. We are likely to see module consolidation trends occurring earlier than on the cell side, as the module manufacturing process is already mature. In the current low margin environment, the industry is not attractive to new entrants. Existing leaders are able to build their capacity and enjoy a large market share with low prices thanks to economies of scale.
However, cell technology is on track to fast advancements. Capital could prove to be a barrier to some small private enterprises, but the call for traditional energy state owned enterprises (SOEs) is rising, as they have good access to funding and incentives to change; all the same, in our opinion, SOEs still have a long way to go. We cannot be assured that solar cell leaders today will be able to survive and consolidate the market in the future as there are still new entrants, and with new technological advancements, it will be a difficult task to predict the outlook of these businesses.
As with its presence in other solar industries, China has little to fear from foreign competition in solar cell or module manufacturing. And with these businesses gradually attracting notice from ESG investors who want the comfort of a stable operating environment, positive outlook for jobs growth and a promise of a more environmentally sound future, this sector looks especially attractive.
1 Tongwei 2019 annual report.
2 Tongwei 2019 annual report.
3 Risen Energy 2019 annual report.
4 UBS research, “UBS global solar supply & demand model”, 2020.
5 UBS research, “UBS global solar supply & demand model”, 2020.
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