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Greener and Renewable – The Rise of Solar Inverters
Greener and Renewable – The Rise of Solar Inverters
Solar inverters are attractive alternative investments for many. These devices are at the forefront of enabling continuous improvement in the production and consumption of energy, the practice of which on a corporate or municipal level can dramatically improve environmental conditions and lower costs. Solar inverters are especially of interest to those with environment, social and governance (ESG) portfolios by combining innovation and efficiency in production to generate smart renewable energy with low consumption costs.
Just 11 years ago, the German company SMA Solar Technology claimed 30% of market share in solar inverters; now the Chinese companies Huawei and Sungrow dominate the sector. What has happened to the solar inverter industry in the past decade? How did Chinese companies gain such a large market share? Are they able to continue their dominant position in the future? We will offer some possible answers to these and other questions in this article.
China replaces Germany as the world’s top solar inverter maker
Solar materials and inverter industries emerged in China after the global solar market shifted, from primarily Germany (a key supplier of solar inverter technology, developed from its electric technology advantages) and Italy, to China at the end of the last decade. As we noted in our polysilicon article1, China had set its sights since 2013 to take over global supply and demand.
An inverter is essentially a manufacturing process that assembles several electronic components together to realize two main target functions, which are changing from direct current to alternating current and optimizing power tracking (chart 1)2. The cost items of an inverter can be broken down into the following: raw materials, labor and other costs (e.g., electricity, depreciation and amortization).
Raw materials include printed circuit boards, integrated circuits, capacitance, inverter cooler and solar inverter control boxes, transistors, sensors, inductors, and similar items used in the manufacturing process. Ginlong’s initial public offering file showed that raw materials account for more than 92% of the total cost, with labor accounting for more about 4%.3 Raw materials are commodities made from labor and energies, of which China is a key supplier, with cost advantages in production.
The industry cluster along China’s eastern coastline consists of cell, module, inverter, and other auxiliary materials makers. It helps inverter firms make prompt responses to solar farm investors’ requests and enables suppliers and module makers to upgrade products efficiently. This cluster also helps improve supply chain stability and lower transportation costs. These factors contribute to Chinese inverter producers’ cost advantages compared to what German makers can offer. More important, Chinese players have accelerated their gains in market share as demand grows locally). As shown in chart 2, Huawei and Sungrow, the top two Chinese inverter makers, grew their total market share from 3.8% in 2012 to 37.8% in 2018, while SMA’s fell from 21.9% to 7.9% during the same period.
There have been no major technological changes in the solar inverter industry in the past few years. Chinese companies’ moat locates in four areas: cost advantages; fast product upgrades; sales channels; and authority qualifications. For example, Sungrow, the second largest inverter maker in China, provides Engineering, Procurement and Construction services for solar farm investors to develop channels for inverter sales. Qualifications, such as those confirmed by the Conformité Européene in Europe, Edison Testing Laboratories in the US, and the English Standards Association of Australia, are needed before sales in each market to guarantee construction and operation safety, processes that take time and money for approval.
Chinese companies’ leading positions can ensure sustainability for the future
The solar inverter manufacturing business is typical in that innovation takes place more in product mix rather than in significant technology changes. The manufacturer needs to be close to market and customers, and keeping costs low is core competitive advantages. Again looking at chart 2, we can see that the top five Chinese solar inverter producers together had a total market share of 50% in terms of global shipment in 2018.4
As China is one of the most important solar markets, Chinese inverter producers are proactively expanding capacity, production and sales, not only in China but also overseas markets. In the long run, capacities outside of China, for example, those in India, South America, and the Middle East, may create some local makers which eventually may compete with the Chinese. However, the inverter business is not about the inverter itself, but the collaboration of electronic components suppliers and module makers. We believe it will take a long time for other countries to cultivate the entire supply chain and become cost leaders. As a result, we believe Chinese inverter players will continue to gain market share for the foreseeable future.
In conclusion, Chinese solar inverter players have made great progress in the last decade. We believe they will continue to benefit from growing solar demand in China and the rest of the world for a long time to come as governments and entire industry sectors come to rely more and more on solar inverters for sustainable, inexpensive, and ecologically sound energy. In fact, at the moment, it is hard to imagine a sector better suited for ESG investment than solar inverters. Consequently, Chinese companies are likely to become more aggressive in overseas expansion to consolidate their leading positions in the coming years.
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