Solar state: Look to supply lines!

by Dr. Robert Castellano, The Information Network

The article below is part of our new Insight series of consulting services encompassing customized research and business strategies. These Insight services are tailor-made on a case-by-case basis, leveraging our unique combination of market expertise, global presence, and relationships with key industry players.

Data for this article are in our report: "Opportunities in the Solar Market for Crystalline and Thin Film Solar Cells", and was published today in my column on TheStreet.com, a financial website -- http://www.thestreet.com/story/10617281/1/solar-state-look-to-supply-lines.html

There is almost a daily a stream of conflicting data points coming out of the solar industry. One way to reconcile such differences is to look at the supply line.

Dozens of companies sell materials to the solar industry for module construction, assembly and installation, including polysilicon, indium tin oxide (transparent conductive electrode), adhesives, sealants, encapsulants, coatings, sputtering targets and gases. A healthy supply chain means a healthy solar panel market.

I noted in my Sept. 1 article on TheStreet.com that solar panel manufacturers that reported losses a few weeks earlier included Energy Conversion Devices, JA Solar, LDK Solar, ReneSola, Solar Power and Yingli Green Energy.

On Oct. 19, Macquarie upgraded YGE to outperform and raised the price target to $15 from $12. Piper Jaffray reiterated an overweight rating and $6 price target on JASO.

On Oct. 1, Barclays Capital maintained an equal weight rating and $4.50 price target on SOL, and Societe Generale downgraded LDK from hold to sell, reducing the price target from $8.50 to $4.50.

Also of importance, on Sept. 8, ENER rose 24.98 percent to $13.01 on speculation that Applied Materials(AMAT Quote) would acquire ENER for $18 per share. Recently, SunPower and Akeena Solar disappointed investors on Oct. 22, even though it topped Wall Street estimates.

I discussed on Sept. 18 on TheStreet.com that a company I started, SolarPA, has developed an antireflective coating (ARC) utilizing 3-7 nm proprietary nanomaterials to increase the efficiency of solar cells by as much as 12 percent. A number of material and equipment companies approached me to discuss the technology and possible joint marketing.

Air Products(APD Quote)sells gases to the solar industry. Five weeks ago, that company laid off a number of R&D employees in its solar department, deciding to focus instead on its core businesses.

Covidien sells materials to solar manufacturers. Five weeks ago, its global marketing manager for PV materials left the company for reasons unknown.

Ferro sells thick film pastes to the solar industry. Two weeks ago, the company reorganized and laid off its business development manager who handles new business opportunities such as solar.

An improvement of 10 percent efficiency corresponds to a reduction of manufacturing costs of about 10 percent. Clearly, at a time when Chinese solar manufacturers are receiving nearly free money from banks and the Chinese government, then selling product at lower prices than can be made in other parts of the world, a 10 percent decrease in manufacturing costs can be significant, particularly during this period of slow growth for the industry.

By the way, Applied Materials and Oerlikon also initiated talks, as they are selling equipment with an amorphous silicon recipe with efficiencies in the 8 percent range. They continue trying to develop a micromorph structure with efficiency in the 10 percent range with no firm production-worthy results, in my opinion.

Using SolarPA's ARC coating, I believe, could bump up their product to 9 percent. Yet, both companies discontinued discussions.

In my analysis and judgment, business conditions in the supply chain are not healthy, otherwise we would not be seeing behind closed door activities such as layoffs and organizational changes -- activities that would have otherwise gone unnoticed by an analyst. And if the supply chain is not healthy, the solar panel industry is suffering with the same conditions.

I see a recovery in 2010, but estimate growth at only 26 percent based in watts. That's little more than half the average growth rate of 40 percent per year over the past decade excluding 2008.