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Financial Analysis of Suntech Power Holdings

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Financial Analysis of Suntech Power Holdings - February 18th, 2011

Suntech Power Holdings is the world's largest manufacturer of crystalline silicon photovoltaic (PV) modules, which convert light energy into electricity, and is China's largest U.S.-listed solar player by market capitalization.[1] Suntech's competitive niche is in the middle of the PV supply chain. Based in China, the company has been rapidly expanding in a highly competitive market, taking advantage of low-cost production availability and a high-demand Asian market.

Global demand for renewable energy is one of the main drivers of Suntech's business. Many nations, including China and the U.S., have passed or are in the process of passing legislation that mandates greater use of renewable energy and subsidizes its development. Companies like Suntech are highly dependent on these government subsidies to make their expensive technologies economically viable. However, demand for photovoltaic products has declined as a result of the global economic crisis, and PV projects found it increasingly difficult to obtain cost-effective financing for large scale solar project installations in early 2009. Additionally, oil prices, which plummeted to below $50 per barrel in the first quarter of 2009, made solar power less economically viable.

Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Expansion Strategy
1.2.1 Mergers and Acquisitions
1.3 Products
1.3.1 Pluto Technology
2 Trends and Forces
2.1 Suntech Power plans to open manufacturing plants outside of China
2.2 Demand for Renewable Energy and Clean Energy
2.3 Chinese government concerned about overheating solar industry
2.4 The economic viability of solar energy is determined by fossil fuel prices
2.5 Suntech faces commoditization of photovoltaic technology and intense competition in the solar industry
2.6 Governments worldwide increasingly provide financial incentives to solar manufacturers
2.6.1 Weak European Economies Reduce Solar Subsidies in Europe
2.7 Volatile silicon prices determine Suntech's profit margins and selling prices
3 Competition
4 Notes
The falling demand for photovoltaic products comes amid an over-supply of silicon, resulting in reductions in market prices of PV products. Overall, falling sales prices and increased competition reduced Suntech's revenues in late 2008 and into 2009. In response, Suntech has pursued a differentiation strategy with its PV products through features such as high conversion efficiency, quality of manufacture, and warranty in order to secure a competitive advantage in the solar market. However, Suntech expects demand for solar power to rebound in 2011. Suntech has already secured a 17 megawatt supply deal with Canada's Pure energies, and the company expects to secure other large scale deals in 2011.[2]

Suntech is developing solar panels that are increasingly efficient. Its current line of products has an efficiency of 18%, which is significantly higher than its previous 14%.[3] Furthermore, sunlight is available in massive quantities for half the day, and is free, unlike oil. For these reasons, when oil and gas prices rise, solar power becomes a more viable alternative. As solar power's efficiency rises, it becomes more competitive with oil and gas.

Suntech's shipments of solar modules are currently estimated at 2.2 to 2.4 gigawatts in 2011, an increase of 46% over shipments of 1.5 gigawatts in 2010, and 700 megawatts in 2009.[4]

Company Overview

Suntech Power Holdings is a Chinese solar power company specializing in the production of photovoltaic (PV) hardware used to convert sunlight into electricity. It generates revenue by selling PV equipment and services to countries and companies that use solar energy. Its role in the solar power value chain is in the manufacture, distribution, installation, and service of solar cells, panels, and modules. Suntech sells its products all over the world, but is especially well positioned to take advantage of the growing Chinese energy market.

The price of oil has fallen from nearly $150 a barrel in July 2008 to less than $50 a barrel in the first quarter of 2009.[5] Until late 2008 when the price of crude oil plummeted, rising oil and gas prices made consumers more willing to invest in alternative sources of power such as solar energy. Solar power is currently a little less cost efficient than many other energy sources. However, Suntech's R&D division is increasing the conversion efficiency while simultaneously lowering manufacturing costs.

Suntech is developing solar panels that are increasingly efficient. Its current line of products has an efficiency of 19%, which is significantly higher than its previous 14%.[3] Furthermore, sunlight is available in massive quantities for half the day, and is free, unlike oil. For these reasons, when oil and gas prices rise, solar power becomes a more viable alternative. As solar power's efficiency rises, it becomes more competitive with fossil fuels such as oil and gas. Suntech stands to benefit from rising oil and gas prices; however, if oil prices stabilize, Suntech will have to increase solar efficiency greatly in order to stay competitive.


Business and Financial Metrics
Third Quarter 2010 Summary[6]

Suntech Power Holdings reported net income for the second quarter of 2010 of $33.1 million, or $0.18 per diluted share, compared to net loss of $174.9 million, or -$0.97 per share, in the second quarter of 2010.

Revenues for the third quarter were $743.7 million, an increase of 19.0% over the second quarter of 2010 and an increase of 57.2% year-over-year. Total photovoltaic shipments increased 25.3% over the second quarter and 107.1% year-over-year. Gross profit margin for the core wafer to module business was 18.2% in the third quarter of 2010. Consolidated gross profit margin was 16.4% in the third quarter of 2010.

In the fourth quarter of 2010, Suntech expects at least 10 percent sequential growth in shipments. Suntech is targeting shipments of 1.5GW of solar products in 2010, representing year-over-year growth of at least 113%. Consolidated gross margin in the fourth quarter of 2010 is expected to be approximately 17%. Full year 2010 capital expenditures are expected to be approximately $350 million. Suntech is targeting 1.8GW of installed cell and module production capacity by the end of 2010.

Second Quarter 2010 Summary (ended June 30, 2010)[7]

During the second quarter, Suntech Power Holdings reported revenues of $625.1 million, representing 6.3% growth sequentially and 94.8% year-over-year. GAAP net loss attributable to holders was $174.9 million, or $0.97 per share. The company's consolidated gross profit margin for the quarter was 18.2%.

During the quarter, total photovoltaic (PV) shipments increased 11.9% sequentially and 181.7% year-over-year. Suntech achieved 1.4 gigawatts of PV cell and module production capacity at the end of quarter, and also announced new capacity expansions to reach 1.8GW of PV cell and module production capacity by the end of 2010.

First Quarter 2010 Summary
Suntech Power reported revenues for the first quarter of $588 million, up 86.3% year-over-year, and reported net income of $20.7 million, down 59% from the fourth quarter of 2009.[8] Despite the sharp drop in net income, Suntech increased its annual shipment target from 1.25 gigawatts (GW) to 1.3 GW. Total photovoltaic cell shipment increased 11% over the fourth quarter of 2009.[8]

Fourth Quarter 2009 Summary
Suntech reported net income of $49.9 million, up 67% from the prior quarter.[9] Suntech also saw revenues increase by 23.4% quarter-over-quarter to $583.6 million.[9] Highlights of the quarter include a 32% increase in shipments and an increase in gross profit margin of 23.8%.[10] Notably, Suntech strengthened European management with new hires. Europe continued to be Suntech's largest market, with 38% of its business from Germany and 35% from the rest of Europe.[9] Suntech's shipments in 2009 totaled 704 megawatts, and that number is projected to increase to 1,250 MW in 2010.[9]

Third Quarter 2009 Summary
Suntech Power reported a 30% drop in third quarter profit to $29.8 million, or 16 cents per share, down from $42.6 million, or 25 cents per share, in the third quarter of 2008.[1] Revenue declined 20% from the year-ago quarter to $471.1 million.[1] Solar panel makers like STP were negatively impacted by the severe turmoil in the credit market as financial players abandoned U.S. solar energy projects last year and postponed installations into 2009. However, Suntech is raising its guidance for shipments in the fourth quarter to 640 megawatts and 660 MW of solar modules from its original estimate of 600 MW.[1] The company expects shipments to rise 10 percent from the third quarter, which has helped its stock price to rise in the fourth quarter of 2009.[1]

STP Financial Metrics (in millions of USD)[11]
2009 2008 2007 2006
Revenue 1,693.30 1,923.51 1,348.26 598.87
Net Income 85.60 32.40 145.90 106.00
Total Debt 1,679.30 1,457.20 841.84 307.84
Total Equity 1,598.10 1,225.90 888.05 652.46
STP Operating Data[12] 2005 2006 2007 2008 2009
PV Modules Sold (MW) 49.8 121.1 358.8 459.4 675.1
PV Cells Sold (MW) 17.9 38.5 4.5 35.0 6.8
Average Selling Price of PV Modules ($/watt) 3.42 3.89 3.72 3.89 2.40
Average Selling Price of PV Cells ($/watt) 3.05 3.23 3.06 2.84 1.03
Expansion Strategy


[13]
Suntech is focused on expanding by taking advantage of government clean energy mandates all over the world, especially in China. The company has greatly expanded its output, in anticipation of greater future demand. Suntech's commitment to R&D has led to lower cost cells with higher efficiencies; Suntech also has a natural cost advantage being based in China, where production prices are already extremely low. The company went from being an unknown competitor in 2005 to the third-largest PV producer in the world - phenomenal growth in less than two years. Suntech has pursued an aggressive expansion strategy and has focused on growing its business internationally. Major projects as of the fourth quarter of 2009 include:

China (2% of sales)[14]
Suntech announced that it would begin a 1.5 MW rooftop solar project in HuaiAn City, Jiangsu Province, China, the first megawatt-plus rooftop solar system in Jiangsu Province.[15] Suntech is also implementing a 3 MW project for the Shanghai World Expo.
Suntech expects sales in China to rise to 20% of its total sales by 2012.[14]
Suntech has started expanding a plant in Jiangsu Province in order to increase production capacity by 300% to 2000 MW in three years.[16]
The Chinese government's subsidy program to buildings powered by solar energy is expected to stimulate the photovoltaic industry in China[16]
Europe (78% of sales)[13]
Non-European revenue 22% in Q2 2009 vs. 16% in Q1 2009[13]
Germany ~50% of total sales, Italy ~13% of total sales[13]
Quarter-over-quarter growth at or well above 100% in Benelux, France, and Greece[13]
Suntech created the Global Solar Fund (GSF), a European based investment fund, to make investments in private companies that develop projects in the solar energy sector.[15] GSF has invested in companies that have 240 MW of projects and is targeting to finalize permits for another 360 MW by the end of 2009.[15]
Suntech intends to double its sales and marketing team in Europe by the third quarter of 2009 to enhance localized service and support for existing and prospective European customers.[15]
United States (7.5% of sales)[14]
Gemini Solar, a Suntech joint venture with Renewable Ventures, is pursuing a pipeline of approximately 1.1 GW of projects in the U.S.[15] Gemini Solar was awarded a contract by Austin Energy, the municipal electric utility in Austin, Texas, to build a 30 MW PV power plant in 2010.[15]
Suntech continued to expand its national dealer network in the U.S. Suntech's network in the first quarter of 2009 included over 200 dealers, up from 40 at the end of 2008.[15]
Suntech expects U.S. sales of 200 megawatts to 250 megawatts in 2010, compared with 65 megawatts last year. Lower production costs allowed Suntech to cut prices in the U.S. about 10 percent to $1.70 to $2 per watt this year.[17]
Canada
Suntech Power has signed a letter of intent to build a solar silicon manufacturing facility in Ontario, Canada with the only solar-grade silicon manufacturer in Ontario. The plant is expected to start production at the end of 2011. One of the key drivers for Suntech to invest in this manufacturing plant is Ontario's feed-in tariff, which provides contracts to clean tech companies in Ontario.[18]
Japan
Suntech entered into an agreement with House Care Co. Ltd. under which House Care will distribute 30 MW of Suntech solar products in 2009.[15] Suntech targets over 40 MW of sales into Japan in 2009.[15]
Agreement with Yamada Denki, Japan’s most popular consumer electronics and
home appliance chain, to provide sales and installation in 450 stores[13]

Mergers and Acquisitions
The foundation of Suntech's aggressive expansion strategy is its acquisition of several manufacturers and photovoltaic technology companies. In March 2008, it acquired 11.7% interest in Hoku Scientific (HOKU) for $20.0 million.[19] In May 2008, Suntech acquired 5% equity interest in Xi’an Longi Silicon Material Limited for $7.3 million.[19] In June 2008, it committed to acquire 86.0% share equity of Global Solar Fund, S.C.A., SICAR as a limited partner for $364.6 million.[19] In September 2008, Suntech established two joint ventures, Gemini Solar Development Company LLC and Gemini Fund I Manager LLC for $0.3 million.[19] In October 2008, Suntech committed to an equity interest of 24.0% in Yunnan Diantou New Energy Development Co., Ltd. for $17.6 million, and $3.5 million has been paid as of December 31, 2008.[19] In the first quarter of 2009, Suntech Power announced that it is actively looking to build a new manufacturing facility in the U.S.[19] Suntech is looking to expand not only its manufacturing capacity by building new plants, but it is also intending to increase the efficiency of its solar panels by acquiring smaller solar technology companies with the potential to dramatically improve photovoltaic technology.

Products
Suntech produces PV cells and modules, and offers full systems integration services. In mid-2006, Suntech also acquired the Japanese solar power company MSK, which produces its own line of specialized PV equipment.

PV Cells: PV cells are plates that absorb energy (light of any kind, usually from the sun), and turn it into electricity. Suntech produces a number of cell types, sizes, and materials, each with different power capacities; it should be noted that Suntech has recently focused on thin-film cells, which require less material. However, they face competition from First Solar, the current market leader in thin-film cells.
PV Modules: Modules consist of a series of connected cells, designed to provide a higher level of energy output than a single cell. Suntech's modular capacities range from 32 watts (energy release per second) to 100 kilowatts, and can be applied to homes, apartments, military compounds, farms, and even different forms of transportation.
PV System Integration: Suntech provides services to help integrate solar power systems into buildings and compounds, as well as keep the systems properly running. In May of 2008, the company was contracted by Hanau Energies SAS to build a 4.5 MW integrated roof system for a farm in France - the largest building integrated photovoltaic system ever built.
Pluto Technology
Pluto is Suntech's patented, low-cost, high-yield panel technology developed in conjunction with the University of New South Wales. With current conversion rates of 18%, the company has the potential to expand production without using expensive silicon wafers while keeping product utility competitive. Suntech is in the process of retrofitting its manufacturing equipment to shift the majority of its current capacity to Pluto-based panel production.

In early 2009, the Fraunhofer Institute tested a mono-crystalline Pluto PV cell with a conversion efficiency of 18.8% and a multi-crystalline Pluto PV cell with a conversion efficiency of 17.2%.[15] Both were produced using standard grade silicon solar wafers on Suntech's commercial scale production line.[15] Suntech is collaborating with the Swinburne University of Technology in Australia to develop nanoplasmonic solar cells that are twice as efficient and run at half the cost of those currently available.[15]

In September 2009, Suntech announced it achieved a record 16.5% conversion efficiency for its multi-crystalline silicon photovoltaic module.[20] The module is powered by Suntech’s Pluto PV cells, which use solar grade silicon with each PV cell and have more than 17 percent conversion efficiency. This surpasses a record set by Sandia National Labs 15 years ago.[21] The company has initiated commercial shipments of Suntech Pluto solar panels and currently expects to ship 10MW to 15MW of the products in 2009.[21]

Trends and Forces

Suntech Power plans to open manufacturing plants outside of China
Suntech Power Holdings only has manufacturing facilities in China. However, on October 8, 2010, the company opened its first U.S. plant in Arizona. The state has actively promoted and supported clean energy companies with its Renewable Energy Tax Incentive Program, which offers a refundable income tax credit of up to 10 percent and a 75-percent reduction on real and personal property taxes to renewable-energy companies in Arizona.[22] Suntech Power's Arizona plant will be capable of assembling 30 megawatts of solar panels annually.

Suntech is considering setting up more manufacturing facilities globally to tap international markets, ease foreign political pressure, mitigate currency volatility. Suntech is evaluating manufacturing possibility in Europe, Asia and North America. Though it is more expensive to produce overseas than in China, Suntech can compensate by selling the product at a higher price because it is a local product. Exchange rate fluctuations also makes it beneficial to manufacture in the same country in which the products are sold.

Compared with last year, demand in Europe, the world's largest market for solar energy consumption, is expected to grow at a more moderate 20% this year partly due to cuts in government subsidies. But the U.S., Asia Pacific, Middle East, and African markets are expected to double by next year. Consumption in China is also expected to double to around 1 gigawatt this year. In response, Suntech is ramping up production, planning to expand production capacity to 2.5 gigawatts in 2011 from 1.8 gigawatts in 2010.[23]

Demand for Renewable Energy and Clean Energy


PV Market Demand by Geography in 2008[24]
Fossil fuels are limited in supply. As we approach the peak oil quantity, the quantity at which more than half of all oil reserves are depleted, the demand for renewable energy increases. Solar power is a fully renewable source, and power from solar energy does not release pollutants like smog, carbon dioxide gas, and other byproducts of fossil fuel use. As both environmental awareness and worldwide energy demand continue to rise, governments and citizens are concerned with finding more environmentally friendly sources of energy. However, demand for photovoltaic products has decreased as a result of the global economic crisis, and PV projects found it increasingly difficult to obtain cost-effective financing for large scale solar project installations in early 2009.[25] Many of Suntech's key markets, including Spain, Germany, the United States, China, South Korea, Italy, the Middle East, Australia and Japan have entered a period of economic contraction, which lowered the demand for Suntech's photovoltaic products.[25]

However, in 2009, demand for solar energy started to rebound. The majority of the demand is from Germany, the world's largest solar market, which has planned to add three gigawatts of photovoltaic capacity in 2009.[26] The U.S. government is planning to install 2.4 gigawatts of renewable projects in California that qualify for stimulus funding.[26] China could also see a large increase in renewable energy spending, as the Chinese government plans to double its environmental protection spending through 2015 to $454 billion.[26]

Chinese government concerned about overheating solar industry
The Chinese government has expressed concerns about the high cost of solar energy compared to fossil fuel-generated energy. According to China's energy bureau, the Chinese government will not continue to subsidize solar power on a national level. Currently, the government's annual subsidy for solar photovoltaic projects is 7 billion RMB ($1 billion).[27] If the Chinese government indeed cuts its subsidies to the solar industry, domestic solar panel producers could see sharp falls in profitability. Suntech Power is partially shielded from the changing Chinese government policies since China is a comparatively small customer for Suntech. Suntech Power estimates that only 5% of its sales will come from China in 2010, while 85% of sales will come from Europe and North America.[27]

The economic viability of solar energy is determined by fossil fuel prices
The price of oil has fallen from nearly $150 a barrel in July 2008 to less than $50 a barrel in the first quarter of 2009.[28] Until late 2008 when the price of crude oil plummeted, rising oil and gas prices made consumers more willing to invest in alternative sources of power such as solar energy. Solar power is currently far less efficient than other energy sources, even wind. However, Suntech's R&D division is increasing this efficiency while lowering costs by outsourcing manufacturing to China.

Suntech is developing solar panels that are increasingly efficient. Its current line of products has an efficiency of 18%, which is significantly higher than its previous 14%.[3] Furthermore, sunlight is available in massive quantities for half the day, and is free, unlike oil. For these reasons, when oil and gas prices rise, solar power becomes a more viable alternative. As solar power's efficiency rises, it becomes more competitive with oil and gas. Suntech stands to benefit from rising oil and gas prices; however, if oil prices stabilize, Suntech will have to increase solar efficiency greatly in order to stay competitive.

Suntech faces commoditization of photovoltaic technology and intense competition in the solar industry


Megawatts of PV shipped, 1988 to 2005[24]
The rapid growth of the photovoltaic industry is a sign of the intense competition Suntech Power faces. The solar photovoltaic (PV) market doubled to 6 gigawatts in 2008, with PV installations increasing by 110%, compared to 19% in 2006 and 62% in 2007.[29] China and Taiwan were the leaders in PV production, accounting for 44% of global solar cell production in 2008 and 35% in 2007.[29]

Despite a challenging economic climate (solar project financing required around 4 weeks to obtain debt financing in 2008, while in 2009 it takes 8 to 10 weeks), there are many new entrants into the PV market.[29] For example, some start-up companies are beginning to compete with Suntech Power and other established competitors in the PV market. Over a dozen startups are working on ways to use mirrors and lenses to concentrate sunlight hundreds of times onto tiny, highly efficient solar cells.[30] These start-ups are working to provide solar systems at a lower cost per watt by producing as much or more power from the same amount of silicon.[30]

Also, some household names in the technology industry have become competitors in the PV market. IBM announced plans to make thin-film solar panels.[31] Intel spun off a new solar tech company called SpectraWatt, which was born with $50 million in investment capital from Intel, Cogentrix Energy LLC, PCG Clean Energy and Technology Fund and Solon AG (SOO1-FF).[31] Additionally, Hewlett-Packard Company (HPQ) began licensing technology to Xtreme Energetics, Inc. designed to help that start-up company deliver rooftop solar energy systems that produce twice as much energy as conventional solar panels at half the cost.[31]

As competition grows in the market to deliver solar cells, Suntech Power must relentlessly cut costs by improving manufacturing processes, investing in research and development, while its competitors are moving production to low-cost countries. IBM, Intel and HP are well-positioned in the solar market, and could foreseeably commoditize the solar market in the same way they commoditized the personal computer industry.[31] They also have extensive research and development budgets and operations in low-wage countries such as China and India.

Governments worldwide increasingly provide financial incentives to solar manufacturers
One of the most pressing issues associated with energy production is global climate change, caused by the warming of the earth's atmosphere. The vast majority of climate scientists agree that global warming is human-caused and can be stopped by drastically reducing the amount of greenhouse gas (carbon dioxide, ozone, water vapor, etc.) emissions.[32] Education on the issue is creating pressure for governments and energy companies to regulate greenhouse emissions. This movement is having a worldwide impact on energy regulation in the form of increased government subsidies for clean energy sources and global emissions caps. Even China has begun to implement similar standards. Suntech is well positioned to take advantage of this trend in the long run.



[13]
As the public pushes for better climate and energy independence policies, many governments are investing in alternative energy development in the private sector. Solar power companies could reap these rewards through the receipt of subsidies and tax breaks. For example, the election of Kevin Rudd to the post of Australian Prime Minister has the potential to greatly benefit Suntech. The company is already well-established in Australia, donating millions to and doing joint research with the University of New South Wales. The Prime Minister has pledged to achieve 20% renewables by the year 2020, and Suntech appears to have been waiting for such incentives to move forward in Australia. Additionally, Suntech has made sure to comply with all necessary regulations to qualify for the tax benefits of producing solar panels. For example, Suntech was one of the first companies eligible for Arizona's Renewable Energy Tax Incentive program, which provides refundable tax credits and property tax reductions for manufacturers.[33]

Increasing fear of global warming and pollution damage has led to social support for clean energy sources. In response many governments have implemented legislation that could indirectly lead to increased revenues for Suntech. Examples include:

California's mandate that 25% of electricity will come from clean sources by 2020 and 75% by 2050
A bill passed through Congress in 2007 mandating that 20% of the United States' electricity come from clean sources by 2020
The European Union passed a binding target of purchasing 20% of all energy from renewable sources by 2020[34]
China's Renewable Energy Law is planning on raising the total percentage of renewable energy used in the country to 10% by 2020
Weak European Economies Reduce Solar Subsidies in Europe
In Europe, heavy subsidies to the solar industry make business in European countries profitable. However, concerns about weakness in European economies like Spain, Ireland, and Greece have caused reductions in European solar subsidies. For example, Germany reduced subsidies for new solar plants by 16% in May 2010.[35] Solar industry groups in Italy predict the Italian government will reduce subsidies by as much as 25% in 2010.[35] And in Spain, industry experts are expecting reductions in solar cell installation by 30%.[35]

Suntech Power is harmed not only by reduced subsidies which fund solar cell installations, but also by a falling Euro. The Euro fell 14% in the first half of 2010, reducing profitability of sales.[35] If the euro/U.S. dollar exchange rate averages $1.25 this year, Suntech Power would see a 79 percent drop in earnings, according to Barclays.[35] Suntech has partially mitigated the effect of the falling euro by using more European suppliers, the overall effect of a fall in the euro is a fall in European profits.

Volatile silicon prices determine Suntech's profit margins and selling prices
The supply of photovoltaic (PV) products has increased significantly as many manufacturers have expanded PV cell production capacity. Beginning in the fourth quarter of 2008, this state of over-supply has resulted in reductions in the prevailing market prices of PV products as manufacturers have reduced their average selling prices in an attempt to obtain sales.[25] Overall, falling sales prices and increased competition have reduced Suntech's revenues in late 2008 and into 2009. In response, Suntech has pursued a differentiation strategy with its PV products through features such as high conversion efficiency, quality of manufacture, and warranty in order to secure a competitive advantage in the solar market.[25]

From 2003 through mid-2008, rapidly growing demand from the PV industry coupled with shortages in the supply of polysilicon and silicon wafers resulted in sharp increases in the prices of these raw materials.[25] As a result, Suntech's provisions for inventories increased from $1.3 million in 2007 to $50.1 million in 2008, which contributed to a decrease in its gross profit for 2008. Suntech's exposure to price volatility of polysilicon and silicon wafers and its inability to fully pass on to its customers its raw material costs has the potential to weaken Suntech's performance in the event of another silicon shortage.[25] Since the beginning of the fourth quarter of 2008, however, the prices of polysilicon and silicon wafers have fallen significantly as a result of the global economic crisis.[25]

Suntech is trying to mitigate the effects of silicon price fluctuations by making long-term contracts with polysilicon suppliers. In March 2008, for example, the company increased the quantities of polysilicon that Nitol Solar was to deliver to it between 2009 and 2015, as well as increased its stake in Nitol to around $100 million, nearly guaranteeing that the company will deliver (at least to Suntech, if not to other customers).[36] In May of 2008, Suntech also announced a silicon supply deal with Shunda Holdings Co for 7 GW worth of wafers through 2020.[37]

Suntech has also insulated itself against the silicon price fluctuations by acquiring Luoyong China Silicon, a local silicon manufacturer. By acquiring a silicon producer, Suntech can use all of Luoyong's production capacity to produce wafers for its solar panels exclusively, rather than spreading sales between solar and semiconductor producers In June 2008, the company also entered into a long-term supply agreement with Wacker SCHOTT Solar GmBh for the delivery of 220 MW between 2008 and 2015 - with fixed prices and quantities on a declining price curve.[38]

Suntech has publicly stated that it is willing to pay more for high-quality silicon from other manufacturers in order to keep the quality of its products above competitors'; to make up the cost difference, Suntech cuts spending on labor and manufacturing, something it can do because of its Chinese nationality.

Competition

Suntech recently claimed to be the world's third-largest solar manufacturer; ahead of it stands Sharp and Q-Cells. Suntech has stated that its goal is to control 10% of the global market by 2010. The market for solar equipment is highly competitive, with many companies across the world; some major competitors include Kyocera, BP Solar, Shell Solar, Mitsubishi Electric, and Sanyo. There are also a huge number of small competitors that have entered the market, contributing to increased price competition and lower profit margins for Suntech. These smaller competitors include SunPower, First Solar, and Evergreen Solar. In order to raise profit margins and increase revenue, Suntech will have to pursue a course of action that focuses on greater efficiency for their PV cells. It will also have to pursue acquisitions of smaller competitors in order to beef up its product line and competitive strength. Only by reducing the number of competitors and distinguishing its products in a definite and powerful way can Suntech compete effectively.

Comparison to Competitors
Operating Metric Suntech Power Holdings (STP) (2008)[39] EMCORE (EMKR) (2008)[40] Energy Conversion Devices (ENER) (2008) [41] Evergreen Solar (ESLR) (2008)[42] First Solar (FSLR) (2008)[43] JA Solar Holdings, (JASO) (2007)[44]
Annual Manufacturing Capacity (MW) 1,000 N/A 118 85 1,150 175
Average Sales Price Per Watt $2.84 N/A N/A $3 $2.49 $3.08
Number of Manufacturing Plants 6 13 4 3 5 2
Revenue (millions) $434.51 $43.28 $66.01 $55.81 $418.21 $160.02
Net Income $55.8 -$23.74 $1.33 -$64.29 $164.6 $22.03
The most effective way to distinguish solar cells is by their conversion efficiency, though these distinctions are very small, leading to the increased commoditization of the industry. This is a measure of the electrical energy generated from the solar cell against the light energy input (a combination of light intensity and the area of the solar panel).

Industry Conversion Efficiencies
Manufacturer Conversion Efficiency
SunPower(Polysilicon) 23.4%[45]
Suntech Power Holdings(Polysilicon) 18%[46]
Sharp (Polysilicon) 13%[47]
Kyocera (Polysilicon) 18.5%[48]
Solarfun (Polysilicon) 17.2%[49]
JA Solar Holdings (Monosilicon) 17.7%[50]
Trina Solar(Mono & Polysilicon) 16.6%[51]
Evergreen Solar (String Ribbon) 15%[52]
EMCORE (GaAs Concentrated Solar System) 37%[53]
Energy Conversion Devices (Amorphous Silicon Thin Film) 8.5%[54]
First Solar (CdTe Thin Film) 10.5%[45]
DayStar Technologies(CIGS Thin Film) 14% [55]
Ascent Solar (CIGS Flexible Thin Film) 9.5% [56]
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