TechPulse 360

The Chinese companies Trina Solar and Yingli Green Energy have a cost equation that works today. Don’t expect the numbers to continue to add up.

The two have achieved the lowest manufacturing and installation costs in the industry by combining the production of photovoltaic wafers, cells and solar panels, and overseeing installation.

Because they don’t have to negotiate contracts with wafer suppliers, such as MEMC or Eversol, or strike deals with cell makers, they can control costs by shaving margins across the supply chain, says Henning Wicht, a principal analyst at iSuppli. They also can better manage inventory, since it is all in house.

Specialization, not integration, is likely to become the solar industry's guiding principle

But the early days of the industry are rapidly coming to an end. Just as specialization took hold in the semiconductor business, where companies developed an expertise supplying equipment, molding wafers, fabricating chips, becoming foundries or providing services, the solar business is headed toward diversification.

Today’s integration will be tomorrow’s burden, especially as equipment costs in the various stages of manufacturing rise over time.

Wicht points out that many companies have some degree of integration today. Suntech, the number two producer by volume, Sharp and SunPower all combine cell and panel production. REC Solar offers wafers, cells and modules. This has been a benefit. Trina’s revenue in the third quarter grew 70 percent from the second quarter to $250 million.

But specialization is on the horizon. Already JA Solar just makes cells. HSC offers just polysilicon. MEMC and Eversol struck a deal today that strengthens their wafer businesses.

Operating in all facets of the business will become too expensive as equipment prices rise, says Wicht. More so, product specialization is going to require companies to focus on a limited number of tasks, such as high efficiency cells for roof tiles, or cells adapted to low-light environments.

Narrowing the focus, not increasing it, will likely pay the greatest dividends.