Eyeing China’s Solar Cells and Modules

THIS MATERIAL IS A MARKETING COMMUNICATION.

Eyeing China’s Solar Cells and Modules

The Evolution of China’s Solar Cell and Module Industry  

The manufacturing of solar cells is an intricate and fine business where the evolution of its equipment with technological improvement has been pivotal in product development. In contrast to a solar-grade wafer, cell manufacturing involves much more automation. The ingot is a piece of relatively pure material, typically metal, that is molded into a shape suitable for further processing. The ingot process in the manufacturing wafer needs to be controlled by a skilled technician due to the slight variation in the quality of polysilicon. Generally, the majority of solar cell work is able to be completed by machines as they are part of a standard manufacturing process. As a result, the advancement of equipment or production lines becomes an area of focus. Similar to that of solar-grade wafer producers, many cell equipment manufacturers come from semiconductor backgrounds. For example, Meyer Burger (Switzerland), Tempress Systems (Netherlands), Shenzhen S.C New Energy (China), and NAURA Technology (China) were semiconductor producers who later expanded into cell equipment manufacturing.

The technological improvement in the manufacturing process is directed at advancing the conversion rate. Currently, PERC is the second generation in solar cells. This generation has an improved conversion rate of about 22.5%1 under mass production based on traditional silicon solar cells. It has almost reached the potential limit of the silicon-based solar cell.

Therefore, the next generation of solar cells is working on heterostructures using other materials, as cost-cutting is the key answer for both cell and cell equipment makers. Module manufacturing is more of a replication business, using similar equipment, providing a homogenous product. In the past, equipment providers produced outputs that had been resembling production lines for other industries; therefore, it is a fairly mature business. It has been long known that China has been the leader in the business of replication for many years thanks to comparative advantage in cheap labor and land abundance.

The Drivers of the Industry Dynamics

There are four inputs in the production of solar cells: wafer, auxiliary materials (silver/aluminum), equipment, and labor. Citing the solar cell leader Tongwei’s cost structure in 20192, wafer and auxiliary materials accounted for 84.1% of the total production cost, followed by equipment D&A and others totaling to 11.1% and labor at 4.7%. Similarly, the key inputs for a module are cell, labor, equipment, and energy, which make up 94.8%, 2.8%, and 1.5%, and 0.9%3 , respectively, according to Risen Energy’s report. China leads the solar materials supply chain, which also benefits cell and module production from a cost perspective. There are a few cell and module capacities outside of China that focus on different technology routes. However, in the long-term, the expectation and trend will be for Chinese players to continually consolidate the market.

For the cell business, cash cost and sale price determine whether a business will suspend capacity in the short-term, as adequate liquidity is important for players to survive during a down cycle. However, similarly to the wafer business, besides cost, technology is another key factor that determines success or failure in the long-run. Downstream demand, equipment, and production process innovations drive solar cell developments accordingly. Businesses that are not well prepared for technological changes will ultimately fall behind the curveball and be driven out of the market. Once innovation reaches its potential, the lower the margin an industry has, the fewer new entrants there will be. It is relatively simple to decipher the consolidation landscape if we look at each player’s capacity expansion plan. For module business, the consolidation may be driven by channel, especially to C business. Players that emphasize significance in building up their channels today are likely to succeed in the future.

Forward-Looking

By the end of 20194, the top 5 Chinese solar cell producers comprised of a total market share of 33% in terms of capacity, while the top 5 module makers’ total market share was 35%5 vs. polysilicon (56%) and wafer (70%). We can see from Exhibit 1 that both cells and modules are oversupplied.  However, as technology is improving at exponential rates, the expectation is for costs to be lowered and efficiency to heighten. This will ultimately encourage end-demand and partially offset the oversupply. The current soft demand is likely to stop or delay small/new cell and module players’ new capacity plans and benefit existing leaders, at least from a medium-term perspective.

In the long-term, the manufacturing business offers a relatively stable margin. If there is no special knowhow involved, then the cell and module margin will not be very high as it is with most of the manufacturing subsectors. We are likely to see module consolidation trends earlier than a cell. The reason behind this is that the module manufacturing process is already mature. As the current low margin environment continues, the industry is not attractive to new entrants. Existing leaders are able to build up their capacity and enjoy a large market share with low prices thanks to economies of scale. However, cell technology is on track to fast advancements. Capital could be a moat to stop small private enterprises, but the call for traditional energy SOEs is rising as they have decent access to funding and incentives to change, although, in our opinion, SOEs still have a long way to go. We cannot be assured that solar cell leaders today will be able to survive and consolidate the market in the future as there are still new entrants, and with new technological advancements, it will be a difficult task to predict the outlook of these businesses.

 

Eyeing China’s Solar Cells and Modules

The Evolution of China’s Solar Cell and Module Industry  

The manufacturing of solar cells is an intricate and fine business where the evolution of its equipment with technological improvement has been pivotal in product development. In contrast to a solar-grade wafer, cell manufacturing involves much more automation. The ingot is a piece of relatively pure material, typically metal, that is molded into a shape suitable for further processing. The ingot process in the manufacturing wafer needs to be controlled by a skilled technician due to the slight variation in the quality of polysilicon. Generally, the majority of solar cell work is able to be completed by machines as they are part of a standard manufacturing process. As a result, the advancement of equipment or production lines becomes an area of focus. Similar to that of solar-grade wafer producers, many cell equipment manufacturers come from semiconductor backgrounds. For example, Meyer Burger (Switzerland), Tempress Systems (Netherlands), Shenzhen S.C New Energy (China), and NAURA Technology (China) were semiconductor producers who later expanded into cell equipment manufacturing.

The technological improvement in the manufacturing process is directed at advancing the conversion rate. Currently, PERC is the second generation in solar cells. This generation has an improved conversion rate of about 22.5%1 under mass production based on traditional silicon solar cells. It has almost reached the potential limit of the silicon-based solar cell.

Therefore, the next generation of solar cells is working on heterostructures using other materials, as cost-cutting is the key answer for both cell and cell equipment makers. Module manufacturing is more of a replication business, using similar equipment, providing a homogenous product. In the past, equipment providers produced outputs that had been resembling production lines for other industries; therefore, it is a fairly mature business. It has been long known that China has been the leader in the business of replication for many years thanks to comparative advantage in cheap labor and land abundance.

The Drivers of the Industry Dynamics

There are four inputs in the production of solar cells: wafer, auxiliary materials (silver/aluminum), equipment, and labor. Citing the solar cell leader Tongwei’s cost structure in 20192, wafer and auxiliary materials accounted for 84.1% of the total production cost, followed by equipment D&A and others totaling to 11.1% and labor at 4.7%. Similarly, the key inputs for a module are cell, labor, equipment, and energy, which make up 94.8%, 2.8%, and 1.5%, and 0.9%3 , respectively, according to Risen Energy’s report. China leads the solar materials supply chain, which also benefits cell and module production from a cost perspective. There are a few cell and module capacities outside of China that focus on different technology routes. However, in the long-term, the expectation and trend will be for Chinese players to continually consolidate the market.

For the cell business, cash cost and sale price determine whether a business will suspend capacity in the short-term, as adequate liquidity is important for players to survive during a down cycle. However, similarly to the wafer business, besides cost, technology is another key factor that determines success or failure in the long-run. Downstream demand, equipment, and production process innovations drive solar cell developments accordingly. Businesses that are not well prepared for technological changes will ultimately fall behind the curveball and be driven out of the market. Once innovation reaches its potential, the lower the margin an industry has, the fewer new entrants there will be. It is relatively simple to decipher the consolidation landscape if we look at each player’s capacity expansion plan. For module business, the consolidation may be driven by channel, especially to C business. Players that emphasize significance in building up their channels today are likely to succeed in the future.

Forward-Looking

By the end of 20194, the top 5 Chinese solar cell producers comprised of a total market share of 33% in terms of capacity, while the top 5 module makers’ total market share was 35%5 vs. polysilicon (56%) and wafer (70%). We can see from Exhibit 1 that both cells and modules are oversupplied.  However, as technology is improving at exponential rates, the expectation is for costs to be lowered and efficiency to heighten. This will ultimately encourage end-demand and partially offset the oversupply. The current soft demand is likely to stop or delay small/new cell and module players’ new capacity plans and benefit existing leaders, at least from a medium-term perspective.

In the long-term, the manufacturing business offers a relatively stable margin. If there is no special knowhow involved, then the cell and module margin will not be very high as it is with most of the manufacturing subsectors. We are likely to see module consolidation trends earlier than a cell. The reason behind this is that the module manufacturing process is already mature. As the current low margin environment continues, the industry is not attractive to new entrants. Existing leaders are able to build up their capacity and enjoy a large market share with low prices thanks to economies of scale. However, cell technology is on track to fast advancements. Capital could be a moat to stop small private enterprises, but the call for traditional energy SOEs is rising as they have decent access to funding and incentives to change, although, in our opinion, SOEs still have a long way to go. We cannot be assured that solar cell leaders today will be able to survive and consolidate the market in the future as there are still new entrants, and with new technological advancements, it will be a difficult task to predict the outlook of these businesses.

 

AUTHORED BY
Bingyao Chen, PhD
Investment Analyst – Materials and Real Estate

Date: September 22, 2020
Category: Clean Energy, Themes & Insights

1 Tongwei 2019 annual report
2 Tongwei 2019 annual report
3 Risen Energy 2019 annual report
4 UBS research-“UBS global solar supply & demand model”, 2020.
5 UBS research-“UBS global solar supply & demand model”, 2020.

 

 

The mentioned companies are strictly for educational and fund marketing purposes only. For more information on our product offering, please refer to our website.

Disclaimer
This document is intended for Hong Kong investors only. This material is neither an offer to sell nor solicitation to buy a security to any person in any jurisdiction where such solicitation, offer, purchase or sale would be unlawful under the laws of that jurisdiction. Investment involves risk.
The information in this material is based on sources we believe to be reliable but we do not guarantee the accuracy of completeness of the information provided. This material has not been reviewed by SFC and shall only be circulated in countries where it is permitted.
This material is intended solely for your private use and shall not be reproduced or recirculated either in whole or in part, without the written permission of Mirae Asset Global Investments. This document has been prepared for presentation, illustration and discussion purposes only and is not legally binding. Whilst compiled from sources Mirae Asset Global Investments believes to be accurate, no representation, warranty, assurance or implication to the accuracy, completeness or adequacy from defect of any kind is made. The division, group, subsidiary or affiliate of Mirae Asset Global Investments which produced this document shall not be liable to the recipient or controlling shareholders of the recipient resulting from its use. The views and information discussed or referred in this report are as of the date of publication, are subject to change and may not reflect the current views of the writer(s). The views expressed represent an assessment of market conditions at a specific point in time, are to be treated as opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. In addition, the opinions expressed are those of the writer(s) and may differ from those of other Mirae Asset Global Investments’ investment professionals.
The provision of this document shall not be deemed as constituting any offer, acceptance, or promise of any further contract or amendment to any contract which may exist between the parties. The issuer of this article is Mirae Asset Global Investments (HK) Limited (“we”) which we may or our managed funds may hold the mentioned securities. It should not be distributed to any other party except with the written consent of Mirae Asset Global Investments. Nothing herein contained shall be construed as granting the recipient whether directly or indirectly or by implication, any license or right, under any copy right or intellectual property rights to use the information herein. This document may include reference data from third-party sources and Mirae Asset Global Investments has not conducted any audit, validation, or verification of such data. Mirae Asset Global Investments accepts no liability for any loss or damage of any kind resulting out of the unauthorized use of this document. Investment involves risk. Past performance figures are not indicative of future performance. Forward-looking statements are not guarantees of performance. The information presented is not intended to provide specific investment advice. Please carefully read through the offering documents and seek independent professional advice before you make any investment decision. Products, services, and information may not be available in your jurisdiction and may be offered by affiliates, subsidiaries, and/or distributors of Mirae Asset Global Investments as stipulated by local laws and regulations. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction.
Hong Kong: This material is prepared by Mirae Asset Global Investments (HK) Limited (Mirae HK). Mirae HK is regulated by the SFC (CE reference: ALK083).
Australia: The information contained on this document is provided by Mirae Asset Global Investments (HK) Limited (“MAGIHK”), which is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) (Corporations Act) pursuant to ASIC Class Order 03/1103 (Class Order) in respect of the financial services it provides to wholesale clients (as defined in the Corporations Act) in Australia. MAGIHK is regulated by the Securities and Futures Commission of Hong Kong under Hong Kong laws, which differ from Australian laws. Pursuant to the Class Order, this document and any information regarding MAGIHK and its products is strictly provided to and intended for Australian wholesale clients only. By accessing this document and any information or content contained in it, you represent that you are a ‘wholesale client’ under the Corporations Act. This document is strictly for information purposes only and does not constitute a representation that any investment strategy is suitable or appropriate for an investor’s individual circumstances. Further, this document should not be regarded by investors as a substitute for independent professional advice or the exercise of their own judgement. The contents of this document is prepared and maintained by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Australian Investments & Securities Commission. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission of MAGI HK. Copyright 2020. All rights reserved.