MEMC Electronic Materials (NYSE:WFR) supplies silicon wafers to semiconductor and photovoltaic cell companies. Its success is deeply rooted in the success and growth of the market for semiconductors, which is in turn fueled by a growing demand for mobile phones and solar power. Solar power in particular has been growing quickly as oil prices, environmental concerns, and government support for clean and renewable energy have all increased.
Silicon wafers are commodity goods, meaning they are difficult to differentiate in any way other than price. Thus, while a worldwide silicon shortage is currently lifting the fortunes for all players in the industry, in the long run, price competition with competitors like Hemlock, Shin-Etsu, M. Setek, and DC Chemical can undercut MEMC's profit margins. To try and reduce this threat, MEMC has hedged some of its positions against falling semiconductor prices, including a multimillion dollar agreement to supply China's Suntech Power Holdings (STP), a solar power company, with silicon wafers over the next 10 years. In 2011, Suntech terminated its contract with 5 years left. It agreed to pay MEMC Electronic Materials Inc. $67 million and relinquish a $53 million deposit to cancel its 10-year wafer supply contract.
MEMC Electronics is a silicon wafer manufacturer whose majority shareholder, Texas Pacific Group--a prominent private equity firm--acquired a 72% stake in 2001, after the company nearly filed bankruptcy. Since then, MEMC has made a remarkable recovery and now generates a free cash flow and has far higher profit margins. TPG, however, has been selling off chunks of the company during industry upturns ever since 2001 (right now, it owns 7.3%, but is still considered a major shareholder). This is significant because when TPG sells at a stock peak, MEMC's shares plummet, making the company extremely vulnerable to TPG's actions.
In 2009, WFR earned a total of $1.16 billion in total revenues. This was a significant decline from its 2008 total revenues of $2 billion. As a result, this had a severe negative impact on WFR's net income. Between 2008 and 2009, WFR's net income declined from a net profit of $387 million in 2008 to a net loss of -$70 million in 2009.
As a silicon wafer producer, MEMC Electronics' products are used in semiconductor technology and in photovoltaic cells; semiconductors are used in computer technologies, like memory chips and integrated circuits, and photovoltaic cells are used to produce electricity from light energy. MEMC produces five main categories of silicon wafer.
While these wafers appear to be significantly differentiated, the reality is that the silicon wafer industry is essentially a commodities industry: products cannot be differentiated enough for different companies' products to be competitive by feature. As long as a wafer is pure enough to work without causing signal malfuntion, customers will purchase based on price, making the industry subject to low profit margins.
This is just the perfect ansewr for all of us
It has been established that there is very little that can be done to differentiate silicon wafers; thus, MEMC competes with other firms through pricing. There are fewer than 10 major competitors in the industry, including companies such as Hemlock, Shin-Etsu Chemical, M. Setek, and DC Chemical. The activities of these companies play a major role in reducing MEMC's profit margins through output expansion and price reduction.