The world’s largest contract manufacturer of semiconductors, Taiwan Semiconductor Manufacturing Co. of Taiwan, announced this week it will enter the solar cell business.
The firm said it would pay $6.2 billion for a stake in the solar cell producer Motech Industries, hastening its ability to pursue this fast growing market.
Will profit margins of 10% before taxes lead solar cell makers to contract manufacturers?
Trouble is contract manufacturers already work on thin profit margins. The solar business could tax even their lean operations.
According to Broadpoint AmTech analyst John Hardy, the industry has a slim profit margin of about 10 percent even before it pays taxes. And his calculation is based on an average solar cell selling price of $2 a watt, a number likely to decline at least modestly in 2010.
Hardy studied the finances of six producers to reach his conclusion, including Canadian Solar, JA Solar Holdings and several other Chinese manufacturers. He said solar producers have it tough right from the start.
Raw material and processing costs add up to $1.58 a watt, most of the $2 selling price. That equates to a gross margin of a slim 21 percent.
Add in operating expenses, interest on financing and tax and the companies struggle to make a buck. The big observation from all this may be one few analysts yet expect.
With big contract manufacturers such as TSMC now showing interest in solar, the industry could poised to follow in the footsteps of the computer chip business to a fabless, or factory-less, model.
The advantage is lower costs, since a company the size of TSMC can negotiate better poly-silicon costs with its enormous clout and spread the fixed cost of manufacturing over a large base of customers.
The downside is that solar cell production is not yet standardized the way semiconductor manufacturing is. As it moves in that direction, companies are likely to begin thinking twice about operating their own plants.
And cell makers will mirror their semiconductor cousins and go factory-less.
Posted by Mark Boslet 
