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China’s Dominance in Solar Inverter Industry
Ten years ago, German company SMA Solar Technology (SMA) claimed 30% of market share in solar inverters, but now Chinese companies Huawei and Sungrow dominate the business. What happened to the solar inverter industry in the last decade? How did Chinese companies gain market share? Are they able to continue the dominant position in the future? We will try to explore the answers in this article.
China replaces Germany as top solar inverter maker
Solar materials and inverter industries emerged in China after global solar market switched from Germany and Italy to China at the end of last decade as we mentioned in the polysilicon article that China has pushed to take over the global supply and demand since 2013. Germany used to be the key supplier of solar inverter inheriting from its electric technology advantages. Inverter is essentially a manufacturing business that assembles several electronic components together to realize the target function which are predominantly changing direct current (DC) to alternating current (AC) and optimizing power tracking. Cost of inverter could be broken down as: raw materials, labor and others (electricity, D&A). Raw materials include printed circuit board (PCB), integrated circuits (ICs), capacitance, inverter cooler and solar inverter control box, transistor, sensor, inductor, etc. Ginlong’s IPO file showed that raw materials accounts for over 92% of its total cost and labor about 4% . Raw materials are commodities that are made from labor and energies, of which China is the key supplier and has cost advantages in production. Meanwhile, the industry cluster along China’s east coastline consists of cell, module, inverter and other auxiliary materials makers. It helps inverter players make prompt responses to solar farm investors’ request and turn to suppliers and module makers to upgrade the products efficiently. The cluster also helps improve supply chain stability and lower the transportation cost. All these contribute to Chinese inverter producers’ cost advantages compared with German makers. More importantly, Chinese players have accelerated gaining market share as demand grows in China, as shown in Exhibit 2 that Huawei and Sungrow, the top two Chinese inverter makers’ total market share rose from 3.8% in 2012 to 37.8% in 2018 while SMA’s fell from 21.9% to 7.9% during the same period.
There are no major technological changes in solar inverter industry in the past years. Chinese companies’ moat locates in 1) cost advantages; 2) fast product upgrade; 3) sales channel; 4) authority qualifications. For example, Sungrow, the second largest inverter maker in China, provides Engineering, Procurement and Construction (EPC) service for solar farm investors to develop channels for inverter sales. Qualifications, such as CE (Conformité Européene) in Europe, ETL (Edison Testing Laboratories) in the US, SAA (the English Standards Association of Australian) in Australia, are needed before sales in each market to guarantee construction and operation safety, which takes time and money for approval.
Chinese companies’ leading position to sustain in the future
Solar inverter is a typical manufacturing business, where innovation takes place more in product mix rather than significant technology changes. Manufacturing business needs to be close to market and customers, and to keep cost low is the core competitive advantages. As Exhibit 2 shows, the top five Chinese solar inverter producers took up a total market share of 50% in terms of global shipment in 2018. Since China is one of the most important solar markets, Chinese inverter producers are proactively expanding capacity, production and sales not only in China but also overseas markets. In the long run, capacities out of China, for example, India, South America and Middle East, may create some local makers which can ultimately compete with the Chinese. However, inverter business is not about inverter itself, but the collaboration of electronic components suppliers and module makers. It will take a very long time for other countries to cultivate the whole supply chain and become cost leaders. As a result, we believe Chinese inverter players will keep gaining market share in the foreseeable future.
In conclusion, Chinese inverter players have made great progress in the last decade, and we believe they will continue to benefit from growing solar demand in China and the rest of the world for a long time. Chinese companies are likely to become more aggressive in overseas expansion to consolidate their leading positions in the coming years.
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