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Suntech Power Holdings (STP)Stock (Diversified Electronics Industry, Solar Power Industry, Energy Industry, Solar Cell Manufacturers Industry, Consumer Products Industry)
 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. Any shift in energy paradigm could cause a large drop in revenue. While clean energy producers are poised to benefit from rising oil and gas prices and the advent of global environmental issues stemming from oil and coal burning, a silicon shortage has raised the price of solar equipment, making solar power less of a competitor until supply rises. Suntech is partially shielded from this shortage by its recent purchase of a local silicon producer. Suntech is poised to be a key player because of its low-cost, high-efficiency technology and recent, rapid growth, but it will have to contend with intense competition. In 16 months from late 2006 through 2007, over 50 new producers of photovoltaic equipment entered the market. Suntech faces the very real danger of seeing its profits suffer as solar cells become increasingly commoditized. [edit] Company BackgroundSuntech Power Holdings is a Chinese solar power company specializing in the production of photovoltaic (PV) hardware used to convert sunlight into electricity; they make money by selling PV equipment and services to countries and companies that wish to use solar energy. Suntech sells its products all over the world, but is especially well positioned to take advantage of the growing Chinese energy market. In the first quarter of 2008, revenues increased year-on-year by 76%, to $434.5 million, while gross margins increased by 3.2%, to 22.2% and net income increaed to $55.8 million. Production capacity at the end of the period was 540 MW, and the company expects to reach 1 GW by the end of the year. The second quarter of 2008 saw 51% year-on-year revenue growth, to $480 million - $40 over the company's earnings guidance.[1] The company is raising its product shipment target for the year to 550 MW.[2] The majority of revenue was generated in Europe - 26% in Germany and 44% in Spain.[3] The company's monocrystalline Pluto cell efficiencies had 18% efficiencies, while multicrystalline Pluto cell efficiencies had 17% efficiencies.[4] Non-GAAP income was $84.4 million, a year-on-year increase of 33.1%.[5] [edit] ProductsSuntech 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.
[edit] Pluto TechnologyPluto 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% and 2008 expected rates at 20%, the company has the potential to expand production without using expensive silicon wafers while keeping product utility competitive. Currently, Suntech is in the process of retrofitting its manufacturing equipment to shift the majority of its current capacity to Pluto-based panel production. [edit] MSKMSK is a solar power company focusing on solar arrays meant for buildings like homes and skyscrapers. Though its acquisition may have contributed to the slowing in Suntech's growth from Q206 to Q306, growth into Q406 accelerated greatly, as did the percentage of Suntech's revenues that stemmed from MSK's products: 9% in Q306 to 13% in Q406. It should be noted that Japan is the world's largest solar energy market and the acquisition of MSK by Suntech has allowed the company easy entry into the market through a pre-established channel; this may lead to an increase in growth in the future. [edit] Expansion StrategySuntech 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. Though the company is relatively young, its average quarterly growth in 2006 was over 26%, with one quarter reaching 43% (and then tapering off in the next two, possibly because of MSK), and the company went from being an unknown competitor in 2005 to possibly the third-largest PV producer in the world - phenomenal growth in less than two years. Still, the company is relatively unknown outside of Asia, and so must work much harder (that is, spend more money) to achieve the brand recognition and customer retention that competitors like Sharp have. [edit] Trends and Forces[edit] Consumer Demand for Renewable Energy and Clean EnergyFossil Fuels are extremely limited in supply. As we approach the peak oil quantity, the quantity at which more than half of oil reserves have emptied and the resulting scarcity drives up prices, the demand for renewable energy increases. Solar power is a fully renewable source; the sun will not stop releasing light for another 4-6 billion years. Furthermore, current energy production methods release pollutants like smog, as well as carbon dioxide gas, which contribute to the greenhouse effect and global warming. Solar energy production produces little, if any, pollution or emissions, making it one of the cleanest sources of power. [edit] Pollution ControlOil and coal power, the two main energy sources for most of the world, are extremely energy efficient, but release massive amounts of pollutants that contribute to acid rain, asthma and lung problems, and global climate change. As both environmental awareness and worldwide energy demand continue to rise, many governments are concerned with finding more environmentally friendly sources of energy. While clean coal technologies are in development, clean energies like solar energy are increasingly demanded by grassroots movements, especially in the U.S. [edit] Global Climate ChangeOne of the most pressing issues associated with energy production is the advent of 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. Increased popular 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. [edit] Oil and Gas Prices vs. Solar EfficiencyOil and gas prices have fluctuated heavily over the past few years. More recently they have tended to rise. As rising oil and gas prices lead to more expensive commercial electricity, consumers may start to demand new, cheaper sources of power. Solar power is currently far less efficient than other energy sources, even wind. Suntech's R&D focus is on increasing this efficiency while lowering costs, a focus that reflects their ability to produce in China. If Suntech can develop technology that allows more electricity to be produced with less area of land taken up by solar modules, for less money, then solar power will be much more competitive. Suntech is making progress on this front; their current line of products has an efficiency of 18%, which is higher than their previous 14%, and higher than most competitors. 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 (despite the current level of inefficiency) solar power becomes a more viable alternative. Concurrently, as solar power's efficiency rises, it becomes more competitive with oil and gas. Suntech, then, stands to benefit from rising oil and gas prices; if these prices stabilize, then Suntech will have to increase solar efficiency greatly in order to stay competitive. [edit] Objections to Solar PowerThe primary objection to solar energy is that it is not nearly as efficient as coal or oil. Since Europe has shifted its focus from efficiency to environmental impact, and thus is making a transition to more clean energy nonetheless, this is not an issue in Europe. Economics play a much greater role in the willingness of the US and China to adopt any energy solution. Popular support for clean energy is driving a push for solar and wind power in the U.S. The Chinese government has also taken steps, albeit much smaller, to reform its energy policy. Suntech is well placed as a provider for China's clean energy expansion. [edit] Government Regulation of Energy MarketsClean energy companies are highly dependent on government subsidies and support to bring in revenue. Given that oil, coal, and nuclear power are already well-established energy sources and control the world-wide energy market, it's unlikely that utility companies who have established relationships with these energy companies will suddenly switch to solar power; it is more likely that governments will force this change. Given this dependence, many environmental and social movements are focusing on pressuring governments to force the transition to renewables. Furthermore, many governments endorse local renewables as an alternative to foreign fossil fuels, in an attempt to create energy independence. While this process has occurred relatively quickly in Europe, both the U.S. and China are significantly slower to adopt such transitions. [edit] The Kyoto ProtocolThe Kyoto Protocol is an international agreement to reduce greenhouse gas emissions in a global effort to stop climate change. The method by which Kyoto achieves this is by mandating emissions caps and through cap-and-trade systems of trading carbon credits. This indirectly has the potential to benefit Suntech as many countries make the transition to renewable energy and start to look to solar power. It should be noted, however, that the U.S. has not ratified the treaty and has no plans to do so, and China, while part of the treaty, is classified as a developing country and so has no obligation to lower its emissions (even though it will soon be the largest polluter in the world). Thus, for now, the benefits of the Kyoto Protocol are not as large for Suntech as they could be. [edit] Domestic LegislationIncreasing 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:
Legislative mandates like these benefit renewable energy companies because they force utilities companies to turn to other power sources, allowing companies like Suntech to enter a crowded energy market. Also, such legislation usually leads to government support for renewables companies in the form of fiscal incentives. [edit] Government Investment in OilGovernment policy on oil can also be influenced by oil companies. In the U.S., for example, oil companies are major contributors to the political process; they donate hundreds of thousands of dollars to different election campaigns. These contributions make it harder for elected officials to push for a transition away from oil, as they are in debt to oil for helping them get elected. [edit] Government Investment in Renewable EnergyAs the public pushes for better climate and energy independence policies, and oil prices continue to skyrocket, 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 recent 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 new 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; the company is now in the process of establishing a division down under, in order to take advantage of expected future incentives to promote solar development. [edit] Fiscal PolicyBecause clean energy companies depend so much on the government, fiscal policy is often extremely important in determining the revenues of businesses like Suntech. For the most part, the current government subsidy trend is beneficial towards Suntech. An example would be California's Solar Roofs initiative, which subsidized the building of a million solar roofs in California (which happens to be one of the world's largest economies despite being only one of the 50 U.S. states). China, because it is partially a command economy, will probably implement its clean energy legislation through fiscal incentives for clean energy producers, among which Suntech will be well-placed. [edit] Commoditization of Solar CellsAside from production efficiency, there is very little that distinguishes solar cells produced by one company from those produced by another. Since differences in efficiency are so small, the solar cell industry competes primarily through price competition. The increasing number of market entrants is exacerbating this effect. As PV cells become more commoditized, Suntech's product prices could drop, leading to lower profit margins and lower profits. [edit] Silicon SupplySuntech uses silicon for the majority of its products, as do most solar power companies; currently, there is a worldwide polysilicon shortage. This shortage has been caused by a lack of silicon refining capacity. In the past, companies like MEMC Electronic Materials (WFR) produced silicon wafers for the semiconductor industry; silicon wafers were useless for anything else. Now, with the advent of solar power and its rapid growth, demand for polysilicon has increased greatly, leading to its undersupply as previous production capacity is not enough to meet current demand. This undersupply has led to rising prices for solar equipment, leading to the product looking very inefficient in the face of cheaper energy production technologies. Suntech is trying to mitigate the effects of these price fluctuations by making long-term contracts with polysilicon suppliers. In late March of 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)[7]. In May of 2008, Suntech also announced a silicon supply deal with Shunda Holdings Co for 7 GW worth of wafers through 2020.[8] While the shortage is predicted to end by 2010, Suntech has started to insulate itself against the shortage's effects 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.[9] 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. While this strategy could bring in new customers who are looking for higher-efficiency panels, in 1Q07 the company saw the negatives of this approach, as some silicon manufacturers didn't deliver and profitability dropped to 19.9%, compared with the phenomenal 30.7% margin for 2006. [edit] CompetitionSuntech 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.
While Suntech appears to have lower revenues and profits than competitors, one should note that Suntech is exclusively a solar power company while competitors are broad-range electronics manufacturers, making such statistics inaccurate comparative measures. 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).
 Suntech Power Holdings2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] Notes
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