Global strategy for First Solar
By Gregg Gallager, Arnold Jee, David Lembo, Colleen Manley, Eric Moldabayev and Paola Torres
First Solar (FS) was originally founded as Solar Cells in 1984 by inventor and visionary Harold McMaster. McMaster with the help of Jim Nolan made the switch from amorphous silicon to Cadmium telluride (CdTe). This switch in thin film technology allowed Solar Cells to manufacture moderately efficient (7%) and low-cost thin film cells on a large scale.
In 1999, Solar Cells was purchased by True North Partners, LLC (an investment company of the Walton Family) and the name was then changed to First Solar. In 2006, FS became a publically traded company and released its IPO on the NASDAQ to become the first “pure play” renewable company listed on the S&P 500. Since its public offering, FS has never looked back as it ranked 10th in the Fortunes Fastest Growing Companies and sixth as the world’s most innovative companies in 2010. Today FS has remained true to its innovative spirit by being an industry leader in the manufacturing of photovoltaic, thin film solar modules worldwide. As the leader of the solar energy industry, FS has dominated their competition as a result of their innovation in productivity, cost reduction measures, and implementation of environmentally friendly solutions.
FS is currently leading the global battle to dominate the renewal energy market and has remained in the driver’s seat due to its vision, creativity, and adherence to “green” political initiatives. The first to introduce environmentally responsible protocols for the management of their solar modules, FS was the first module manufacturer to break the $1-per-watt barrier. In order to maintain their place at the top of the industry, FS will need to continue their innovation in production efficiency, identifying new opportunities, continue to work within governmental considerations, and mitigate risks as it applies to the technology and the natural world.
Andy S. Grove’s famous quote that “Only the paranoid survive” is one that is appropriate for the solar power business community. A solar energy company can attain great success from profitability and innovation, but to remain at the top is challenging. External threats such as competition and government policies can either change the way FS conducts business today or even insidiously affect their strategy over time. In order to mitigate these risks, FS needs to be sensitive and responsive to future changes in the industry that are likely to occur over the next 10 to 15 years. One possible point of change that will have implications on future sales and profit margins is the decrease or elimination of government incentives for renewable energy initiatives.
These incentives are called feed-in-tariffs (FiT), and currently they are an important contributor to the profitability of the solar power industry. In a recent statistic from the National Journal (Germany), there are more than three dozen countries that have some form of FiT programs today. These programs can include government subsidies, tax credits and incentives for investors to build solar technology and pre-fixed rates for utility companies to purchase energy from solar technology.
An additional benefit FiT programs is that they encourage the purchasing appetites of two very lucrative segments of customers for FS. These customers are the property owners and utility companies (solar developers). Property owners can be households, landlords, businesses or any other facet of an everyday community. As an incentive to install solar panels, the owners are monetarily compensated for the energy they produce and return to the grid. This not only encourages installation and adoption of solar panels, but also potentially yields 8 to 12% energy return annually (ownergy.co.uk).
Governments encourage agreements with solar developers and utility providers by mandating a certain percentage of renewable energy be supplied at a fix rate. This program motivates and mitigates risks for investors in building solar development projects by guaranteeing a certain level of ROI. Of equal importance is the benefit to utility companies in being able to predict revenues over a specific time period.
Economic downturns can cause a compression in federal and local budgets which lead to fiscal cuts. Because FiT incentives are provided by tax revenue, political talks of scale-backs or elimination of FiT programs arise when an economic recession occurs. Countries such as Ireland and Greece have created a ‘snowball’ affect in negative confidence in the global economy. Banks have become very apprehensive in lending unless high interest rates are compounded to hedge risk.
The effects of the economic contraction are affecting FS especially hard in Europe. The most glaring example is Germany, which accounts for 65% of FS sales. “The feed-in tariff made Germany a viable long-term market for us”, said former CEO of FS, Michael Ahearn. However at this moment German lawmakers are discussion potential revisions to FiT agreements. Many discussions are putting more emphasis on roof mounted panels versus leveraging agricultural land free applications. Such a shift would pose a reduction in demand for photovoltaic products and ultimately volume sales for FS. In Spain, which is another major market for FS, initial FiT compensation was so high that it led to an oversaturation in solar panel installations, thereby forcing the country to almost halt renewable energy purchases.
In order to mitigate their dependence on FiT programs, FS needs to explore building incentive plans outside of government policies. The segment that would logically be the best target for incentive programs would be the property owner consumer segment. Many companies from outside industries have successfully created their own customer incentive programs in order to build brand awareness and loyalty as part of their long-term strategy. A good example of this is Amazon, who entices customer ‘stickiness’ by offering rebates for shipping cost if customers sign as members, which requires a nominal fee. Additionally, Amazon offers different delivery ‘perks’ such as ‘Next Day’ or ‘3 Day’ shipping in order to encourage volume purchases (depending on the size of the purchase and cost).
The insurance industry provides another solution that might be valuable to FS’s business model. In the insurance industry a common practice is to reduce a policy holder’s premium as a reward for filing zero claims. By establishing a similar program, FS might consider a dividend payout to consumers based up their meeting certain energy generation or savings goals. FS might also consider creating leasing programs and installment plans for property owners. Such a program might have an advantageous side effect for FS by establishing a barrier to entry for outsiders.
Most importantly, FS needs to position itself for long-term advantages. A Blue Ocean Strategy should be adopted by FS through expansion into developing countries, particularly ones that appear ripe for solar energy and are largely untapped by competitors. Within these markets, FS can again leverage their network of developer and integrator partners, FS could be in a position to move quickly to be amongst the first to penetrate these markets.
The most attractive of the options is India, a country in which approximately 40% of the sprawling population lives without access to energy. Although a leader in wind power, India is a country with abundant sunshine due to its position along the Tropic of Cancer. Last year India announced an ambitious plan to generate 20 GW of solar power by the year 2022 through a project called National Solar Mission.
In order to accomplish the Mission’s goal the central government has budgeted for direct contributions of up to $227 million to the project. In addition they have committed to lowering custom duties and exempting excise duties on PV equipment. According to some estimates, these measures could reduce installation cost by 15-20%. Despite these enticing gestures, FS is unsure how long these incentives will remain in place. If these measures were taken away, FS’s module prices could potentially be adversely affected to the extent that they are priced out of the marketplace.
India also plans to further reduce solar energy costs by promoting domestic manufacturing of PV equipment. Establishing a manufacturing facility in India would work to FS’s benefit as it would allow the company access to the highly skilled work force as well as to locally-sourced resources. Thanks to FS’s Copy Smart manufacturing system, solar module quality can be upheld.
Another alluring market for FS could be Russia, which offers almost limitless acreage that can be committed to solar power. If FS were to target areas in South Siberia and the North Caucasus, they could help establish sources of energy that can supply remote locations that are currently off-grid. Two years ago Russia announced plans for a solar power project in Kislovodsk; however, the project has since been put on hold. Most likely FS would need to appeal to investors and possibly the WTO to ensure funding for such a project.
Two developing countries that FS might want to avoid are China and Brazil. Although China’s rapidly expanding economy thirsts for additional sources of energy, it is a country currently rich with smaller competitors (boasting over 400 locally-owned photovoltaic solar companies). In addition, the Chinese government does not provide formal FiT program incentives, preferring to broker agreements on a one-by-one basis. Without such policies in place, FS is concerned that their modules will be priced out of the market. In addition, federal and local government relationships are crucial to have in China and difficult and time-consuming to establish. In the case of Brazil, it is a country with abundant ethanol energy sources. As a result, there is little interest in expanding solar power.
In closing, FS needs to identify new areas of growth in order to lead the solar energy industry into the future. FS needs to identify countries that have the need and the natural resources to be an attractive investment opportunity. In working with governments to utilize Fit programs, FS is presently in the best position to suit a country’s needs. FS could easily be integrated into the political scene as they are the first major energy renewal company to work with these countries. FS has the opportunity to establish lasting networks and relationships that will help fight off competitive future threats and sustain their leadership role into the future. In consideration of these factors, FS is the best, least expensive, and most environmentally friendly means of converting a natural resource into energy. Solar energy is the key in providing global economic benefits without sacrificing a beautiful environment.
This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.