IntroductionFirst Solar is an Americanphotovoltaic(PV) manufacturer of rigid thin film modules and solar panels toconvert sunlight into electrical energy. It uses Cadmium Telluride(CdTe) as asemiconductor to produce solar panels that are vying well with conventional silicontechnology.
First Solar was the first company in the Solar industry thatlowered its manufacturing cost to less than a dollar per watt (Thompson andBallen, 2017, pg. 1). Instead of being only a component manufacturer, in 2007,First Solar did series of acquisition and ventured in to the systems business tocontrol the engineering, procurement, construction, operations, maintenance,and development of solar power plants, and at times, project finance (Thompsonand Ballen, 2017, pg. 7 & 9). During this period, Chinese manufacturerswere largely absent from the systems business (Thompson and Ballen, 2017, pg.9).
In contrast to their competitors,First Solar pursued a low leverage strategy, borrowing less than itscompetitors to have a strong balance sheet to provide confidence to buyers thatthe company would be able to sustain in their business for the long-term(Thompson and Ballen, 2017, pg. 9). Even after coming up with the best businessstrategies, as per the case study, in 2011, there is a financial slump in thecompany. In the early 2010s, faced a series of challenges: expanding productionby subsidized Chinese PV manufacturers (Thompson and Ballen, 2017, pg. 11);declining purchase subsidies in important European markets (Thompson andBallen, 2017, pg. 4).; and, declining prices for silicon as shown in Exhibit 2on the case study (Thompson and Ballen, 2017, pg. 2 & 14), the key inputraw material for its competitors’ panels.
These challenges threatened FirstSolar’s competitive advantage and overall profitability, and it needed todecide how to respond.ContextThis case focuses on the early 2010’swhen First Solar faces a profound threat from subsidized Chinese PVmanufacturers. The purpose of this case study is to determine where a firmmaking solar panels has competitive advantage by looking at its costs andcustomers’ willingness to pay; understand whether such an advantage can bemaintained in the face of substantial market shifts; and, illustrate thecomplexity of the energy industry, particularly PV solar power, including thebarriers to entry, market segments, government subsidies, and internationalcompetition.Thecase study was written to provide the student an insight into:SolarIndustry attractiveness, competitive advantage and First Solar’s key challengesFirstSolar’s capabilities and strategiesRichdata to analyze whether First Solar’s capabilities are sufficient to maintain acompetitive advantage (Thompson and Ballen, 2017, pg. 14-31).Q1. Is the Solar industry anattractive industry? Why or why not? Be specific. Use Exhibit 9 to calculateROA, ROIC, and Porter’s Five Force Model to respond to the questionA1.
Thefive competitive forces described in Porter’s five-forces model helps to assessthe overall profitability and competition of a business within the Solar industry.Let us analyze each competitive force of Solar industry and its competitors tounderstand the intensity of Solar industry. Competition:The solar PV market is competitive and rapidly evolving. EuPD Research in 2008 enlightens,the annual growth rate of solar energy in worldwide market exceeds 30% and a lotof competitors within Solar energy industry globally (EuPD Research, 2008).
Sinceenough subsidies are given by the governments to encourage renewable energy,many new entrants are coming into renewable energy industry (not specificallyon the Solar industry) and proven as a big industry player in the energymarket. The competition is coming from various domestic and internationalfirms. The new rivals react more quickly to new or emerging technologies orchanges in customer requirements, because they have greater financial, technical,human, marketing and purchasing resources. The competition mainly arises fromrenewable technologies (also called substitutes) like wind or geothermal andother power generation sources that burn conventional fossil fuels. Solarindustries should compete with other renewable and fossil fuel energy firms onprice per watt, maintenance and support.
Since there are more options andalternatives, competition is really high. SupplierPower: Supplier power is usually measured by how easy it isfor suppliers to increase prices and is driven by factors such as the number of suppliers who manufacture eachkey materials, the exceptionality of suppliers’ productor service the cost of switching from one supplier toanother. Sincethe raw materials and components required for the Solar industry are suppliedby fewer suppliers (and small companies), greater the Solar industry need helpfrom suppliers (First Solar 10k, 2009). Most of the components and rawmaterials are customized and sole source, hence if the suppliers fail to supplyunder their contract for some reason like equipment failure or materialsshortage, it would disrupt the production. Since the suppliers are smallcompanies, most of the time, the supplies are based on a purchase order and notby a long-term contract. Based on all these reasons, the suppliers have morepower and it could impact the price and contractual agreements. Buyer Power:In the solar industry, the products are mainly distinguished on the basis ofits cost per watt efficiency, which empowers buyers to be very discriminant(Balayan et al, 2009).
For example, consider the solar company First Solar. Bothwithin and outside of United States, First Solar has its marketing,distribution and manufacturing operations. The international customers putFirst Solar at a number of risks including unfavorable political, regulatoryand tax conditions in their country. Even though First Solar’s long-termcontracts with customers gives power to the company than buyers, once the contractexpires, the buyer power would increase as the renewable energy market willhave further developed and it would impact the revenue and net income whengetting new customer contracts or renewing existing customer contracts. Thattells buyer power in the Solar industry is relatively strong.Threat of New Entrants:One of the main barriers to entry into the Solar industry is robust R tomanufacture a competitive technology at a competitive price. Even though manycountries encourage green technology, either their government don’t givesubsidies or in some cases begin to cut back existing subsidies. Hence cost toenter Solar industry will rise and may become less attractive to new companies unlessany new upcoming technology innovation makes it cheaper (Harlin, 2011).
Threat of Substitutes:There is a strong competition within Solar industry among the producers of crystallinesilicon solar modules, thin-film solar modules, and solar thermal andconcentrated PV systems. For example, the thin-film solar panel industry suchas First Solar has several substitutes including silicone based photovoltaiccells and other types of photovoltaic cells. Increasing popularity of otherrenewable energy technologies, the companies of the Solar industry could stronglybe impacted.
For example, hydrogen fuelcell based on natural gas is economically attractive and it produces low carbonemissions and generates high levels of electricity (Nail et al, 2011).Table 1 below shows summary of the significance ofeach force in the Solar industry. Force Internal Rivalry Supplier Power Buyer Power Entry and Exit Substitutes Strategic Significance High Medium Medium Medium High Table 1 Significance of 5 Forces in theSolar IndustryAnalysisBased on Exhibit 9, ROA and ROIC: The prudent investor recognizes thatsolar is in a deflationary market, prices are falling across the board e.g. rawmaterials and manufacturing cost per watt.
It is both a blessing and a curse.While falling prices opens up new opportunities by making solar morecompetitive with other sources of energy, they also expose producers to intensecompetition and can erode margins. The larger problem by far, however, has beena fundamental weakness in many solar companies’ business plans. This has beenhighlighted by a series of high profile bankruptcies, such as those of Solyndraand Evergreen Solar (Thompson and Ballen, 2017, pg. 12-13). These companieswere all beset by strong market headwinds, but their business strategies leftthem without the margins of safety required to survive. Thus, when favorableassumptions about the market proved unfounded, they lacked the means tomaneuver into a safe harbor.
This is not true of all solar companies, however.First Solar especially has done an excellent job of navigating the solarmarket. As shown in Fig. 1 in Appendix, the average return on assets and returnon invested capital of First Solar between 2007 and 2011 is far better than itsrivals.
Q2. From 2007-2011, First Solar wasconsistently more profitable than its major competitors: SunPower, Suntech, andYingli. What are the sources of First Solar’s competitive advantage? Are theysustainable? Quantify where you can.A2a. FirstSolar’s competitive advantage is strategic assets through the resource-basedmodel of the firm.
The resource-based model describes, the organization is madeof tangible and intangible resources, and capabilities, which can be puttogether to offer a competitive advantage. This section depicts First Solar’sstrategy through the resource-based model.Financial Resources:From a financial standpoint the stronger a company is the less risky it is.
The “current ratio” is one of a keyperformance indicator(KPI) to measure how the company is financially secure anddefensive. Total current assets divided by total current liabilities is theformula for current ratio and the calculated value must be greater than orequal to 2, which means that the company holds current assets equal to twice ormore the amount of current liabilities. As per the analysis is shown in Fig. 2in Appendix, First Solar scored high value in this benchmark compared to itscompetitors and confirms it is financially secure and defensive. First Solarpursued a conservative financial strategy, borrowing less than its competitors.
Table 2 in Appendix clearly highlights that First Solar was having enough cashin hand, limited liability and consistent growth by reaping the fruits fromR&D investment during the period 2007-11, that is the competitive advantageof First Solar. Other KPIs, like Y-to-Y growth, ROE, ROIC and ROA in Table 2 alsoclearly shows how First Solar is sustainable on its financial resources thanits competitors. For more details, please open the attached excel doc inAppendix.Physical Resources:Physical resources include manufacturing plants, and solar panel products.
FirstSolar currently has 4 high-tech manufacturing plants: one in Ohio, UnitedStates; one in Frankfurt, Germany; and two in Kulim, Malaysia (Thompson andBallen, 2017, pg. 8). Two more plants were under construction in Arizona, USAand Ho Chi Minh City, Vietnam.
As per 2011 annual report, FS Series 2 PV Module,and FS Series 3 PV Modules are the two photovoltaic modules used by First Solarduring this tenure (First Solar, 2011). Human Resources:As per 2011 annual report, the following is the details of First Solar’s humanresources comprise its executive management, the board of directors andemployees. Rob Gillette, Chief Executive Officer, TK Kallenbach, President ofComponents Business Group, James Zhu, Chief Account Officer and Chief FinancialOfficer, Bruce Sohn, President, Operations, David Eaglesham, Chief TechnologyOfficer, and Carol Campbell, Executive Vice President, Human Resources, are theexecutive members of the company. First Solar is dependent upon the services ofthese individuals and others who are part of the senior management.
The totalnumber of employees in First Solar is 6,100 in 2011 (First Solar, 2011). Technological and IntellectualResources: First Solar’s intellectual propertyresources are those aspects of their technology, designs and methodologies, andprocesses that provide significant advantages of differentiation fromcompetitors. Technological resources include the company’s innovative thin filmsemiconductor technology (Investor First Solar, 2007). First Solar depend on acombination of patents, trademarks and trade secrets, as well as employee andthird-party confidentiality agreements to protect their intellectual properties(Zahringer, 2011).
Within the United States, as of 2008, the company held 23patents, with expirations between 2009 and 2026, and had 37 patent applicationspending. In foreign jurisdictions, First Solar held 17 patents and had over 70patent applications pending (First Solar 10k, 2009). As of December 29, 2007,First Solar held two trademarks, “First Solar” and “First Solar and Design” inthe U.S. and has registered “First Solar and Design” mark in China, Japan andthe European Union, and seeking registration in India and other countries(Investor First Solar, 2007). Capabilities:Financial: FirstSolar’s good cash in hand is an indication of its capability to develop newtechnologies and manage supply/demand fluctuations better than its competitors.
Its financial low risk will attract capital investors.Operations and Manufacturing:The operating and manufacturing capabilities of First Solar are, engineering,procurement and construction services, operating and maintenance services andfinance (Thompson and Ballen, 2017, pg. 7). Also, it has component segment aswell as systems segment. Systems segment of operation provides a solar powersystem for the commercial environment.CoreCompetencies:Using above mentioned resources andcapabilities, First Solar gained core competencies like knowledgeable R&Dscientists, low-cost production, continuous and scalable production, replicableproduction and long-term supply contracts.
These competencies enabled FirstSolar to have a sustainable competitive advantage.A2b.Are they sustainable? Notall above mentioned competitive advantage resources are sustainable.
Forexample, the patents will expire at a certain date. The board of directors andexecutives are not permanent and they may go away for some better opportunity. Inaddition, we should recognize that the Solar industry is in a deflationarymarket, prices are falling across the board, there is a possibility offinancial instability. First Solar has a history of operational excellence,industry-leading technology, continuous innovation and a healthy balance sheetby adopting a slower-growth strategy and reducing debt, that helped the companyto have sustainable sources. Q3. Looking forward, what are thebiggest threats to First Solar’s strategy? What recommendations would you maketo Tymen deJong to guide First Solar? A3a.
ThreatsHigh competition and Substitutes: There are morethan 150 solar PV manufacturers worldwide (Thompson and Ballen, 2017, pg. 12),and there are few competitors they sell solar panels near the cost of their productione.g.
Chinese producers, which can impact net contribution margins and growth ofFirst Solar. Also, any breakthroughs in alternative renewable energy solutions(solar thermal, wind, geothermal, tidal, hydro, biomass) might make thin-filmcells obsolete.High risk on raw material Tellurium(Te) and in need of more innovation:Oneof the raw material called Tellurium used by First Solar is quite rare,existing in concentrations in the crust similar to Platinum.
It is a mainlyproduced as a by-product of copper refining. While a great deal of materialrecycling can occur, there is always the possibility of a supply bottleneckthat could erode First Solar’s price advantage. There is the possibility for anadvent of a breakthrough in solar technology, such as a new manufacturingtechnique could produce new low-cost thin film cells e.
g. Tin Sulfide (CZTS).First Solar should come up with a replacement for Tellurium and bring newinnovations from their R&D to produce low-cost thin films with moreavailable raw materials.Volatile market:Any careful investor would recognize that Solar industry is in a deflationarymarket, that means, prices are falling across the board.
Falling prices wouldopen opportunity for new entrants and make the Solar industry stronger thanother energy industries e.g. fossil fuel. But it would also create toughcompetition within the Solar industry and can erode margins.
Political factors:Poor political responses include new policies, legislature, and tax incentives toboost the growth of an investment in renewable energy in order to cut greenhousegas emissions can change the game plan.A3b. RecommendationsFirst Solar should do the followingthings overall to sustain and become a leader in the market.Innovateand further develop technologies, especially find more cost-effective PV cells bynot using Telluride e.g. use copper indium gallium selenide (CIS/CIGS) whichhas more solar module efficiency than CdTe.
Continueto expand overseas instead of just focusing on very few countries.Growand develop domestically across all statesKeepproduce strong balance sheetUseavailable cash for more R&D and M&A, to be a leader in the marketSecure trade secrets and increase thenumber of patents to safeguard the intellectual property.ConclusionThe business of solar remainsvolatile even though it has an explosive growth and enormous potential. It willalways be a calculated risk to invest in an industry with such characteristics.Focusing on quality would only help the company to become a leader in themarket. Based on the analysis of this case study, there is no solar company inthis space of higher quality than First Solar. As discussed above itsresources, capabilities and competencies, it has a history of operationalexcellence, industry-leading technology, and a healthy balance sheet. For anynew entrant in the Solar industry, First Solar strategies are the best examplesto follow.
By adopting a slower-growth strategy and reducing debt, First Solar hassustained well enough in the green-energy industry. It is still making profitsbetter than its competitors.Based on this case study data, FirstSolar is significantly more adept than its competitors.
but as the SEC knows,”past performance does not necessarily predict future results.” The economyis coming back well from 2008 crash, positively more residents and companiesshow interest to spend money on renewable energy especially in solar in thecoming years. Since First Solar has to restructure and do asset impairment, itlost its net profit contribution in 2011, but it would help the company to dowell in the coming years. Doing a surgery to live longer and healthy would benecessary not only for the human being, even for business.