Case Study

OCS November 2016 Industry Analysis

Full industry analysis for the CIMA OCS November 2016 exam.

History and Background

The genesis of the solar industry can really be traced back to the beginnings of the “space age” in the Cold War era, where the first real push to invest in harnessing the sun's energy on a relatively large scale occurred. With the discovery by Bell Laboratories in 1954 that silicon had photoelectric properties, the era of the photovoltaic (PV) cell was born. Throughout the 60s and 70s, NASA incorporated solar cells into their satellites, investing significantly in research into increasingly efficient PV cells. During the 1970s, NASA and US government investment in R&D radically reduced the costs of PV cells by 80%. Large-scale terrestrial installations however were still commercially unattractive relative to fossil fuel sources, and remained something of a novelty. Viable commercial uses throughout the 80s and into the 90s were restricted to small, discrete products such as watches, calculators, radios and other personal electrical devices. In reality, the social and cultural impetus to produce energy via solar on a large scale was not pervasive enough. Warnings by environmentalists that we would soon run out of fossil fuels seemed to be consistently contradicted by the discovery of fresh sources, and so a “moral panic” never took hold in the mainstream. As a result, government subsidisation remained relatively low and unreliable.

The second pivotal moment of course came towards the turn of the 21st century, with the advent of the global warming concern. Here we saw an increasingly mainstream and urgent sense of concern take hold with regard to the impacts of continued fossil fuel use—what we might call the “Al Gore effect”! As a result of more concentrated public and environmentalist pressure, governments began to respond by ratcheting up the investment in and subsidisation of renewable energy sources. Initially government spending and public markets outstripped other sources and gave the industry a much-needed shot in the arm. However, as can be seen below, since 2004 non-government investment has overtaken government investment, and now accounts for the vast majority of investment in renewable energies. Of course, whether that investment would fall off to a significant degree if the attendant government supports were eliminated is an open question, and a point to which we will return below.

Notwithstanding continued reliance on government support, however, there are some strong indications within the industry that it is becoming a viable, autonomous source of large-scale energy that can compete with more traditional technologies. For example, over recent years we have seen more and more countries wherein solar producers have reached what is called “grid parity” with fossil fuels providers. Put simply, grid parity is achieved when an alternative source of energy can produce energy at a cost that is equal to or lower than the price at which one can purchase energy from the electricity grid. In other words, it is the point at which an energy technology becomes potentially competitive as a standalone supplier relative to traditional energy sources. According to research by Deutsche Bank, by 2015 Solar PV in 30 out of 60 countries sampled had reached grid parity. Additionally, the solar industry as a whole has become a more viable and potentially profitable one to the extent that, in recent years at least, the cost of panels has plummeted, thanks in large part to the entrance into the market of major Chinese manufacturers. Of course, this downward pressure on prices has presented a challenge to European and other PV manufacturers, and as noted in the pre-seen, while the price-drop has fuelled demand and opened up new large potential markets, it also put significant pressure on margins for competitors within the PV manufacturing business. We will return to this point in the next section.

Economic Environment

It's worth noting that, despite some prominent bankruptcies and little to no profitability between 2011 and 2014 in the solar industry, the overall growth rate of the industry to date has far outstripped earlier predictions. In 2007, for example, it was projected that solar would grow to a 74$ billion industry. However, already in 2016 solar is estimated to be a 100$ billion dollar industry. Of course it will be crucial for the purposes of the case study to determine the extent to which that growth is dependent on government investment and subsidisation, and how much can be attributed to “natural” growth in demand, which we will come to below.

In terms of regional growth, by the end of 2015 Europe was still the cumulative leader for MegaWatts of solar energy produced (i.e. it had the highest total solar output) and so at least in terms of replacement and maintenance capacity, remains the major market (see graph below). However, since 2011, China and the Asia-Pacific region have seen the largest growth rates in the solar energy market, with the European growth rate falling in the same period. As of 2015, China was the largest purchaser of PV products, with Japan in second and the USA in third.


Several agencies and companies have compiled short-term forecasts of solar industry growth, running to 2020. These forecasts range from the IEA's relatively conservative cumulative capacity of 403GW by 2020, to the rather more optimistic prediction from the GTM research group of 696GW by the same year. Taking the average of 13 estimates from various prominent research groups and agencies, we can expect somewhere in the region of 528GW total solar capacity globally by 2020. Using the year beginning 2015 as our starting point, when global cumulative PV capacity was around 237GW, this would imply an averaged annual additional capacity of 58GW to reach the 2020 averaged forecast. However, in April of this year (2016), Mercom Capital Group predicted an additional capacity for the year 2016 of 66.7GW. We might therefore be well-advised to revise the average upwards closer to GTM's short-term forecast, which implied an averaged annual additional capacity in the region of 86GW. However, we must again bear in mind that these projections often rely upon the assumption of continued government support and subsidisation.

India is an interesting case, as their official policy stance on solar has become notably more favourable in recent years. Indeed, India has just completed construction of what was claimed to be the world's largest solar farm on September 21st 2016—the Kamuthi Solar Power Project (whether the claim to the world's largest title is justified is another matter, as Longyangxia Dam Solar Park in China boasts a capacity of 850MW, compared to Kamuthi's verified capacity of 648MW). However, despite official commitments, India has had a checkered recent history. PV installation declined from 1,115MW in 2013 to 616MW in 2014. Nevertheless, by July 2015 added capacity in India far surpassed projections, with the country exceeding 4GW as against the targeted 2GW. Assuming such trends continue, India along with China is potentially one of the largest and fastest growing SV markets in the world.

Finally, we should consider growth rates and trends for the solar industry in Europe specifically, which is Marici's most immediate concern economically. Although as indicated above Europe has seen a slower growth rate in the last 4 years, some European nations have shown positive growth during that period. Countries such as the Netherlands, Switzerland, Austria and France had growth in solar capacity of 54%, 42%, 22%, and 20% for the year 2014 respectively. The UK also had massive growth in the region of 80% for the same year, 2014, though a massive cut of 65% to the solar Feed-In Tariff at the end of 2015 will continue to have a huge dampening effect on demand from the UK. By April 2016, there was a whopping 75% decrease in solar panel installations in the UK in the first 3 months of the year compared to the same period in the previous year. At least a significant proportion of this reduction can plausibly be attributed to the tariff cut at the end of 2015. Given that in the pre-seen, Freeland has also recently introduced a massive FIT cut of 60%, we might expect roughly the same immediate rate of decline in domestic installations. Moreover, this will feed into any decisions about Marici's medium-to-long-term strategy, given that, again as noted in the pre-seen, there is a decision to be made about whether to focus more on “utility-scale” production or distributed installations. In addition to the increasing “cost-competitiveness” of utility-scale solar power, the dramatic effect of the FIT cut on demand for distributed installations will likely tip the scales further in favour of utility-scale production. This is of course very important to bear in mind going into the case study exam!

Technological Landscape

As covered in the pre-seen, Marici manufactures PV cells in a manufacturing plant in Freeland. It should be noted that Marici's brand depends heavily on a reputation for producing “sophisticated and efficient solar panels” (p. 3), with their cells being created at “one of the most advanced solar cell production facilities in the world” (p.6). Therefore, despite increasing competitive pressures from Chinese manufacturers in terms of price, Marici's whole identity is based on the production of high-quality, cutting-edge solar cells, rather than low-cost or budget alternatives. With this in mind, a laser focus on technological advances within the industry will likely be front and centre for the company's directors, with Marici being well-placed given its advanced produciton facility to adapt to recent technological innovations. There are two key recent advances that are particularly interesting—one pertaining to efficiency, the other to energy-storage innovations.

In the first instance (efficiency), recent advances in the relative efficiency of a new PV technology could usher in fundamental changes to the industry. Solar cells made from “perovskite”, as opposed to polysilicon, have made huge strides in terms of power conversion efficiency in recent years. Polysilicon cells have been stuck at a conversion efficiency limit of about 25% for 15 years. Perovskite cells have seen a 5-fold improvement in efficiency in just 7 years of R&D, and are now commercially competitive with polysilicon cells. More importantly, there is no indication that the technology has reached its efficiency limit, in contrast to polysilicion technologies, which are relatively mature and may have hit a wall in terms of efficiency. And given the breathtaking speed of progress for perovskite cells, there are reasons to think that there is more to come. Additionally, perovskite has another advantage over polysilicon—namely, the relative cheapness of the production process. Whereas silicon dioxide—the natural resource from which polysilicon is produced—is abundant, the process of converting it into polysilicon is highly costly in terms of energy input and technological infrastructure required. Perovskite is relatively cheap to produce. Of course, due to the maturity of the polysilicion production industry, it will be years before perovskite makes any serious inroads in terms of mass production. However, given Marici's brand identity, and their recent acquisition by a major global supplier in Wala Solar, there is perhaps potential enough that increased R&D in perovskite is justified—especially when we consider the bargaining power of Marici's polysilicion suppliers and the potentially difficult position this puts Marici in.

A second key technology is, of course, storage batteries. These are especially important for distributed installations for domestic and commercial consumers (though keep in mind the effect on potential demand in this area from domestic FIT cuts). One of the most forward-looking and innovative companies in this area is Tesla Motors, with the company recently announcing a change in the model of lithium-ion battery to be used in forthcoming electric car models. The new 100-kilowatt per hour battery has a new architecture and cooling system, reducing risk of fire and other malfunctions. Though Tesla has recently merged with SolarCity, giving the latter a competitive advantage in utilising these technologies for the produciton of solar power systems, it is certainly an area that Marici, as a self-styled leader in technological sophistication and innovation, ought to keep a close eye on and consider R&D investment in.


The key suppliers for Marici Power are of course the aforementioned manufacturers of polysilicon. As Marici is a relatively small company, it is heavily reliant on these suppliers, and highly sensitive to any changes in their fortunes. Unsurprisingly, two of the major suppliers are Chinese and East Asian manufacturers. Some of the biggest in the sector are GCL-Poly from China, Wacker Chemie from Germany, OCI from South Korea, Hemlock Semiconductor from the United States, and REC from Norway. From the pre-seen we know that Marici sources its polysilicon from third parties, and manufactures the solar cells and panels in Freeland. One open question then is whether the current suppliers, whoever they are, are offering the best price available, and will continue to do so. As such, trying to anticipate forthcoming changes and trends in the supply sector is important for Marici. Though Chinese manufacturers have huge economies of scale advantages and have been the source of drastic drops in the price of polysilicon in recent years, two points need to be borne in mind.

Firstly, there are obvious advantages associated with having a relatively local supplier, e.g. Wacker Chemie, in terms of reducing the risks associated with potential logistical issues, responding efficiently to potential short-term spikes or drops in demand, and lower transport and shipment costs. Secondly, some analysts have recently suggested that prices for Chinese polysilicon are about to reverse and rise in response to regulatory changes in China's own FITs.

Overall, however, Marici is in a relatively weak bargaining position relative to these suppliers whatever way one cuts it, as their financial clout far outstrips that of Marici. Wacker Chemie, for instance, in 2015 alone generated €5.3 billion in sales. These are serious economic powerhouses, and so Marici's bargaining power in terms of striking a better deal with suppliers as a way of reducing costs may be seriously limited as a result.

Competitors, Major Players and Bankruptcies

As noted in the pre-seen, the solar industry, despite growing revenues, was highly unprofitable in the years 2011 to 2014. With growing demand from China and India, however, there are signs that this trend is reversing globally.

As of today, there are roughly 39 listed public companies involved in producing PV technologies, though not all of these companies are necessarily competing with Marici Power. Some of these companies, for instance, specialise in the production of capital equipment for the manufacture of PV cells and panels, rather than producing PV cells and panels themselves as Marici do. Of the top ten PV solar module producers at the end of 2015, seven were Chinese manufacturers. Not one was based in Europe. As such, though pressure from domestic competitors for Marici is limited, imports from Chinese and US competitors could threaten in the future should the regulatory setting change. It will be worth our while therefore to consider the other big players in the industry.

The two biggest in the field are Chinese giant Trina Solar, and US company First Solar. Trina Solar captured approximately 50% of market share in PV module supply by 2015, and clocked net revenues of over $3 billion for the same year. Trina Solar is a behemoth, and has a vertically integrated supply chain—put simply, they themselves manufacture almost everything they need in the supply chain from start to finish (excluding polysilicon). As such, comparing Marici and Trina Solar is a bit like comparing apples and oranges. Moreover, after pulling out of the EU's MIP (Minimum Import Price) duty at the beginning of 2016, Trina has shifted its focus to the US and emerging Asian markets and away from the EU. Nevertheless, given its size and influence, students ought at least to be aware of its existence!

First Solar is another major presence in the industry, and along with SunPower, is one of the US's biggest producers of PV cells and, increasingly, utility-scale installations. First Solar has benefited substantially from the US government financial support however, in the form of $3 billion of loan guarantees to date! This has facilitated greatly in First Solar positioning itself as a producer of some the lowest cost-per-unit solar panels in the world—at a rate of just 40 cents per watt, 15% lower than Trina Solar. This has been made possible by an aggressive investment and cost-slashing strategy in the past 5 years, as First Solar has shifted increasingly to the market for utility-scale installations. First Solar is an interesting reference point for Marici in at least this respect—insofar as Marici is striving to achieve economies of scale and make further inroads into the “complete solar power solutions” business (p. 7), they can perhaps learn some lessons from First Solar's aggressive cost-cutting methods in the manufacturing process. Two important differences, of course, are the extent to which First Solar has relied on government support, and how Marici's brand identity is geared more towards sophisticated, high-quality, high-efficiency products rather than low-cost or budget alternatives.

Finally, without wanting to end on too sour a note, it is worth taking a moment to reflect on just how volatile an industry this can be, by considering one of the most high-profile and dramatic bankruptcies to occur in recent years--namely, the infamous case of SunEdison. Without a doubt, this was one of the most spectacular reversals in fortune of any company in recent history, let alone in the solar industry! Less than a year before filing for bankruptcy, SunEdison's stock price was at a record high of $33 per share, and its total market value was estimated to be in the region of $10 billion. A year later, on the eve of bankruptcy, the share price had plummeted to near $0.30. The question of why exactly SunEdison tanked so dramatically remains a somewhat controversial one. While it is obvious, based on mapping stock price trends against the company's activities, that the decline began when SunEdison acquired Vivint Solar for the considerable sum of $1.9 billion, it is not clear why exactly that acquisition precipitated so fatal a decline. Some suggest that shareholders merely overreacted, or misunderstood, and then triggered a runaway, panic exodus without good reason. Even if this is true, however, it underlines the extent to which this remains a generally nervy industry, if not in terms of fundamentals, at least in terms of investor confidence. This is, again, something all companies, large and small, within the industry need to bear in mind--especially when considering acquisition or expansion strategies into new or emerging markets! Fundamentals must be sound, and investor and shareholder confidence in those fundamentals should be assured!

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