A wave of closures or a wave of mergers and acquisitions?

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A wave of closures or a wave of mergers and acquisitions? Source: Southern Net During the recently concluded 24th Winter Universiade, the street lights along the main roads in the Yabuli area of Harbin were all powered by solar panels. 　　In recent years, solar energy technology has experienced rapid development in our country. In particular, the photovoltaic industry is one of the emerging industries that have experienced rapid development in China in recent years. However, its reliance on the international market for raw materials, markets, and even equipment has made it a hard-hit area in this financial crisis. According to the latest data from the Industry Research Department of CIC Consulting, as of now 350 companies in China’s photovoltaic component industry have closed down, leaving only about 50 survivors. 　　Polysilicon becomes the biggest source of uncertainty. The annual report for 2008 released recently by ChuanTou Energy shows that the company achieved operating revenues of 518.6 million yuan in 2008, a year-on-year increase of 43.0%; its net profit attributable to the parent company was 358.6 million yuan, a year-on-year increase of 487%. However, in light of ChuanTou Energy’s impressive annual report for 2008, Li Gang, a buy-side researcher at BOC International, believes that the company’s performance growth in 2009 was mainly driven by the Tianwanhe and Ertan power stations; the price of polysilicon became the biggest factor of uncertainty affecting the company’s performance. Li Gang even said that the price of polysilicon could turn out to be the factor that undermines the company’s performance growth. ”This is because Sunlight Silicon Industry, in which Sichuan Investment Energy holds a 38.9% stake, contributed the majority of its profits to it in 2008. In 2008, Xinguang Silicon Industry achieved a net profit of 807 million yuan; ChuanTou Energy received 314 million yuan in profits, accounting for 82.4% of the company’s total profit for that year. 　　Xie Hongxian, the secretary of the board of Sichuan Investment Energy, said in an interview with a reporter from Securities Daily earlier that it is still impossible to determine whether polysilicon is sustainable at present. Currently, on a global scale, it is still an emerging industry. As for how many more years it can develop, it is unpredictable. ” 　　Wang Fenghua, an energy industry researcher at Minsheng Securities Research Institute, also believes that ChuanTou Energy’s annual report shows an earnings per share of 0.56 yuan, which is lower than market expectations as well as our previous estimate of 0.69 yuan. ”Due to the international financial crisis that caused funding difficulties for foreign manufacturers, many companies canceled their orders, leading to a sharp drop in international demand for solar cell modules. The price of polysilicon plummeted from a peak of $400 per kilogram to $100 per kilogram. “Affected by this, Xinguang Silicon Industry saw a sharp decline in profits in the fourth quarter of 2008. In the third quarter, Xinguang Silicon Industry generated investment income of 119.18 million yuan for ChuanTou Energy, while this figure dropped to 57.94 million yuan in the fourth quarter, representing a decline of 48.6%. ” 　　In the shift from a polysilicon seller’s market to a buyer’s market, ChuanTou Energy was not the only \"victim\". Wuxi Suntech, the world’s largest solar cell manufacturer, estimated in its fourth-quarter report for 2008 released recently that Suntech’s total production capacity in 2009 would be around 1,000 megawatts. However, by the end of 2008, its capacity had already reached 1,000 megawatts. 　　2009 could become the first year since Suntech’s listing on the NYSE at the end of 2005 in which it does not expand its production capacity. 　　The financial crisis highlights overcapacity. “The main impact of the current global financial crisis on domestic photovoltaic companies is the severe fluctuations in exchange rates.” Since the majority of the end markets for China’s photovoltaic enterprises are in Europe, product sales are settled in euros. With the euro experiencing a significant depreciation, the actual profits of domestic photovoltaic companies have suffered losses. Assuming the euro depreciates by 15%, it means that the euro held by photovoltaic companies loses 15% in value. ”Zhu Yuanhao, general manager of Shanghai Jiao Tong University Taiyang Green Energy Co., Ltd., said. 　　Not only that, but an even greater crisis stems from the decline in demand overseas, a threat that was actually already present during the industry’s frantic capacity expansion over the past few years. 　　A BOC International research report indicates that there was once a shortage of polysilicon used in solar cells, causing spot prices to soar, which in turn led to many new manufacturers entering the market. However, as new polysilicon production capacity is gradually brought online, polysilicon for solar cells has begun to face an oversupply. 　　Displaybank in South Korea has released forecasts stating that the supply of polysilicon in 2009 will reach around 7.9 GW (about 62,000 tons), exceeding that year’s demand of around 7.8 GW. In 2010, the supply is expected to reach around 15.0 GW (about 180 million tons), which will **exceed the demand of around 11 GW, leading to an even greater surplus. 　　“European banks were affected by the financial crisis and experienced credit tightening, which led to a reduction in investment levels in the end markets. The reduction in investment levels means a decrease in orders, and this change in the industry will ultimately affect domestic photovoltaic companies. ”Zhu Yuanhao said. Some foreign markets have already experienced demand saturation, which casts an even darker shadow over the domestic photovoltaic industry, making the problem of overcapacity even more pronounced. 　　A recent research report by the renowned U.S. electronics industry consulting firm iSuppli predicts that the global solar energy market size will be only $12.9 billion in 2009, representing a decline of around 19.1% compared to $15.9 billion last year. 　　In the view of solar industry analysts at this firm, companies from mainland China and Taiwan that have just entered this industry chain will be the ones most severely affected by this economic downturn. This is because these manufacturers adopt a vertical division of labor and invest excessive funds in the oversupplied markets for silicon wafers and batteries; with costs rising continuously, they will suffer severe impacts, facing issues such as losses and net outflows of capital. As for those integrated manufacturers that control the production capabilities for silicon wafers, batteries, modules, etc., they will suffer less damage during this sharp drop in the prices of battery modules and polysilicon, as they have more influence over cost control. 　　A wave of closures or a wave of mergers and acquisitions? Shi Zhengrong, chairman of Wuxi Suntech, said in a previous interview with media reporters that he expects the domestic photovoltaic industry to go through a significant reshuffle by 2010. 　　Recently, market research firm LuxResearch also pointed out in a report that the global solar photovoltaic industry could see a turning point within the next two years, with the bubble that has built up over time bursting. The report states that the oversupply in the global photovoltaic industry in 2009 will lead to a continuous decline in prices, with some companies possibly withdrawing due to being unable to cope. 　　Although China ranks first in the world in terms of solar cell production, 98% of its photovoltaic products are exported. A clear example of this is that the current domestic production of high-purity polysilicon amounts to 4,110 tons, yet less than 30% of this is supplied to the domestic market. 　　In this regard, Tong Xingxue, president of Sevai LDK, believes that for Chinese photovoltaic companies whose 98% of market is overseas, any fluctuation in foreign markets will cause significant upheaval in the domestic market. Not only that, but the bleak economic climate also blocks the pathways for photovoltaic companies to obtain financing abroad. Once both the sources of funding and access to markets are closed off, domestic photovoltaic companies may face mass failures or even collapse. 　　In fact, as early as two years ago, the German Solar Industry Association warned that after years of prosperity, the global solar industry would see a new wave of mergers and acquisitions in the next two to three years. The main driving force behind these mergers among solar companies is their desire to increase their production capacity through such acquisitions, in order to gain an advantage over their competitors in the price war over solar cells by taking advantage of economies of scale. 　　However, judging from the current situation, this life-or-death \"merger and acquisition wave\" may turn into a \"collapse wave\" as large companies struggle to survive on their own. 　　Industry experts point out that the current problem is that solar panel manufacturers have an excessive inventory of silicon wafers that they are unable to process. Even though the major domestic silicon wafer manufacturers urge their contract customers to place orders as required by the contracts, the severe variation in quality has led to a sharp increase in cases where customers return goods or refuse to make purchases. Recently, even though these manufacturers are willing to reduce prices, such reduced prices are still not competitive compared to those in the spot market. Additionally, concerns over the quality of silicon wafers have created sales bottlenecks, forcing the manufacturers to bear the burden of their massive production capacity and resulting in forced shutdowns. Now, these large manufacturers find themselves in a difficult situation; although they may wish to acquire smaller firms, they lack the resources to do so. 　　Recently, Shi Zhengrong admitted in an interview with reporters that in September and October 2008, Suntech did indeed purchase some silicon at relatively high prices. 　　It is explained that in September 2008, silicon materials were still in short supply; while preparing raw materials for production in the fourth quarter, Suntech purchased polysilicon at a price of $350–400 per kilogram, enough to meet about one-third of the production capacity required for that quarter. Starting in October 2008, silicon prices began to plummet, falling below $200 per kilogram by November, a drop of 50%. 　　Shi Zhengrong said that as the global financial and economic crisis intensified, the supply and demand dynamics in the photovoltaic industry reversed in October 2008, with the seller’s market that had persisted for four years giving way to a buyer’s market. In light of the new market conditions, Suntech decided in the fourth quarter of 2008 to suspend its original capacity expansion plans. 　　The domestic market offers hope. However, a significant advantage for the photovoltaic industry, which is currently in trouble, is that the Plan for the Adjustment and Revitalization of the Electronic Information Industry, which was reviewed and approved in principle by the State Council on February 18, explicitly calls for the introduction of policies to support photovoltaic power generation, the development of a domestic market for such power generation, and the implementation of demonstration projects for photovoltaic power generation connected to the grid. 　　Benefiting from this, domestic photovoltaic companies have already taken action. Recently, reports have emerged indicating that several major domestic photovoltaic companies have accelerated their efforts to connect their systems to the power grid. The 10-megawatt photovoltaic power generation project in Dunhuang, Gansu, which is China’s largest such project, is now in its final stages of development. In addition, provinces such as Gansu, Jiangsu, and Yunnan have also submitted several large-scale grid-connected photovoltaic power generation projects to the **National Development and Reform Commission. 　　In addition, Daquan Group’s expansion project for 1,800 tons of polysilicon is under construction, with the second phase involving 6,000 tons set to begin soon. Emei Semiconductor currently has a production capacity of only 700 tons, but it is now building three production lines with a capacity of 1,500 tons each. Sunwoda LDK’s polysilicon project is even larger in scale – by the end of 2010, it will be able to produce over 16,000 tons of polysilicon per year. 　　Until 2007, China’s installation volume of photovoltaic power generation accounted for less than 1% of the world’s total, which is a significant disparity compared to its status as the largest producer of photovoltaic products. These situations are examples of the disconnect between the photovoltaic industry and the market. The launch of the domestic market this time may help drive rapid development in the photovoltaic industry. 　　Peng Xiaofeng, chairman of SVI LDK, believes that duplication in construction occurs in every industry; solar energy remains the most expensive form of energy at present, so controlling costs is of utmost importance. “Once our silicon production project is operational, the cost of polycrystalline silicon will be around $20 per kilogram, which will greatly facilitate the spread of the photovoltaic industry among households. Once the cost of photovoltaic power generation can compete with that of conventional energy sources, or even be lower than that of wind energy, the domestic market will see large-scale development. ”