Is the Solar Industry About to Experience Fierce Creative Destruction?

The end is near for most solar-equipment makers. Trina Solar Ltd. (NYSE:TSL), the fifth-largest supplier of solar panels, says plunging prices are eroding margins and driving the weakest out of business. Jifan Gao, chief executive officer says, “This is the decade of mergers and acquisitions. From now until 2015 is the first phase, when about two-thirds of the players will be shaken out.”

This year three U.S. solar companies including Solyndra LLC have gone bankrupt. Companies like First Solar Inc. (NASDAQ:FSLR) and Yingli Green Energy Holding Co (NYSE:YGE) cut sales and margin forecasts, while SunPower Corp. (NASDAQ:SPWRA) and Roth & Rau AG of Germany agreed to takeovers.

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Gao of Trina expects that only about five companies might make it until 2020 in each of the three major manufacturing segments: photovoltaic panels, ingots and wafers, and the raw material polysilicon. Gao said last week in Singapore, “Globally, that would be stable and sustainable.”

Deals for solar companies rose $2.5 billion, totaling more than $3.3 billion this year, according to data compiled by Bloomberg. Trina is fifth for factory capacity of the world’s largest producers of traditional panels from crystalline silicon, behind China’s Suntech Power Holdings Co. (NYSE:STP), LDK Solar Co. (NYSE:LDK), Ontario-based Canadian Solar Inc. (NASDAQ:CSIQ) and Germany’s SolarWorld AG (SWV).

Suntech CEO Zhengrong Shi said, “Customers are flying to quality,” looking for suppliers trustworthy enough for banks to lend to. Up 26 percent last year, the top six manufacturers took 55 percent of the panel market in the second quarter, he also said.

Gao says that Chinese companies having better operational management and an ability to react faster to market conditions, gives them “huge” cost advantage over their European, American and Japanese competitors. For a company to survive it will need strong technology, economies of scale and the ability to innovate quickly, “but also very strong financial performance, very healthy balance sheets,” Gao said.

Several solar-equipment companies are losing money at the operating level. The average operating margin was down 0.1 percent in the third quarter.

At Trina, operating margin dropped to 5.7 percent from 22.5 percent in the second quarter while panel shipments jumped 78 percent.

Fang Peng, chief executive of JA Solar Holdings Co (NASDAQ:JASO), says prices will drop even more which will push the market to expand since solar power will become more affordable across the world. “The industry has a very bright future even if right now we’re in winter,” Peng said.

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