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Yingli In Trouble: The 'Number One' Curse In Solar Strikes Again

This article is more than 8 years old.

It’s a movie we’ve seen a few times in solar.

A company claws its way up to the top spot in market share.

Then a downward descent begins that’s tough to stop.

Yingli Green Energy Holding Co., which was the number one module manufacturer in the world in 2012 and 2013 before narrowly dipping to second behind Trina in 2014, released its annual report on Friday. And the key line that analysts and competitors are latching onto is:

“Substantial doubt exists as to our ability to continue as a growing concern. We have also incurred significant net losses in recent years… If we become unable to continue as a going concern, we may have to liquidate our assets.”

No ambiguity there. Yingli has accumulated short-term and long-term debt of around $2 billion and hasn’t reported a profitable quarter since 2011.

Yingli’s experience doesn’t prove it’s impossible to make money in solar. Trina and Canadian Solar are profitable. Canadian in fact had a record year last year. But there is an intriguing pattern here. Companies will spend capital and energy to gain market share only to trip soon after because of intense competition and relentless price declines.

Sharp was number one in 2005 and 2006. When Chinese manufacturers like Suntech entered the market, Sharp started to lose ground. The company is now in the midst of a reorganization. Suntech, touted as the most advanced Chinese solar company, came from nowhere in 2002 to become number one by 2010. It narrowly dropped to number two in 2011. Reorganization followed in 2013.

New number one Trina, meanwhile, saw profits drop by 31 percent in the first quarter.

The only company that seems to be able to escape this cycle is First Solar , which topped the charts in 2008, 2009 and 2011.

What’s the problem? Solar panels aren’t commodities, i.e. undifferentiated items that are typically sold by price and price alone. Instead, they are pernicious commodities, i.e. slightly differentiated items where price often plays a controlling factor but that nonetheless cost billions to develop and manufacturer. The difference is that, with a pernicious commodity, you have to spend huge amounts of capital to just to have a chance to break even. Some would call it a bad gambling habit.

We saw the same thing in PCs in the 90s and 2000s. Compaq knocked IBM out of the top spot, only to be up-ended by Dell and its direct model. HP later knocked out Dell through a combination of Dell’s missteps and the acquisition of Compaq. Still, the end-result for HP certainly didn’t set up Carly Fiorina to be the candidate to beat in 2016.

But, like in PCs, some companies have figured out ways to avoid the trap:

  • Vertical Integration. First Solar, SunPower and now SolarCity are seem to be gaining ground on controlling as much of the supply as possible. Vertical integration isn’t a foolproof key to success: Optisolar, the vertical pioneer, went down in flames.  (Side note: Fiorina actually walked away from funding Optisolar, maybe the only wacky concept that she never loved.) Admittedly, SolarCity isn’t profitable, but its accumulated power purchase agreements are setting it up for a long-term revenue stream.
  • Branding. The Apple strategy. What makes the battery packs that SolarCity will install different than others? They are being promoted by a billionaire cult hero. Branding has never been easy in solar. Solar panels almost all look identical, do the same thin and largely sit on your roof, out of sight, for 30 years. Often, companies that try to inject radical technology into the market—Solyndra, Nanosolar, 245 others—wind up dead. Still, you’re seeing a pretty interesting amount of progress in branding by installers like Sungevity and SolarCity. SunPower has always had some strength here too.
  • Be Part of a Conglomerate. A few years back, I predicted that Samsung and LG would become large solar players. That turned out not to be the case. Sharp’s recent trouble is a further indication that maybe this strategy needs some work. But on paper it makes great sense: who better to produce a product like this than a company with process manufacturing expertise to burn.
  • Shoot for Singles, Not Home Runs. Back in 2010, Canadian Solar ranked sixth in the world, but mostly was a source of confusion. Why was a company with most of its operations in China called Canadian? (Answer: HQ was in Canada.) Founder Shawn Qu told me back then that his overall strategy was to slowly gain market share while avoiding price wars. To that end, Canadian would experiment with different technologies and business models, but never get too unbalanced.  Since then the plan has largely been working.

It will be interesting to see what happens next.