Fierce competition and declining prices pose threat to German photovoltaic companies

• Competition heating up for German solar power companies – few prepared to face difficult market climate
• More production will be offshored to Asia
• Not every German photovoltaic company will survive
• Success factors: Production volumes that are large enough to facilitate low costs and healthy market access – especially in project business – to fuel high-volume sales

Although photovoltaics (PV) is a growing market, competitors from Asia in particular are stepping up the pressure on German manufacturers. Worldwide, the industry will continue to expand by around 35% per annum. Oversupply and improved cost efficiency will nevertheless cause prices to drop by as much as 15% per year. One consequence of ever fiercer competition is that German companies will offshore production to low-cost regions such as Asia. As a result, German firms that do keep production onshore will face the threefold threat of low-cost competition from Asia, declining sales at home and a dwindling presence in the world's growth markets. These are the findings of a market study entitled "Light and shade – German PV companies in the global competitive arena".

"The photovoltaic market is getting tougher and tougher, even though impending amendments to Germany's Renewable Energy Act are currently driving an extraordinary boom," says Torsten Henzelmann, Partner at Roland Berger Strategy Consultants and green-tech specialist. "The German PV companies have excellent technological capabilities, but they are not properly prepared for the difficult market climate." Henzelmann expects that "only about half of Germany's 50 or so larger solar power companies will survive in the next five years".

Europe remains core market, but growth fastest in US and Asia

When subsidies are abolished following reforms to the Renewable Energy Act, project business in Germany is expected to decline as pressure on margins increases starting in the middle of 2010. Manufacturers must thus become more efficient if they are to stand up to heavier price pressure.
The US market tells a completely different story. Here, utility companies are driving growth with large orders, especially in California. India and China too are boosting the development of the PV industry. India's National Solar Plan has set aside USD 19 billion, while the Chinese government is subsidizing 300 large-scale projects. Overall, global volume growth thus remains around 35%. However, the fastest rates of growth are being realized not in Europe, but in Asia and the US.

Prices below one dollar per watt (peak) in the medium term

Ramped-up capacity and learning curve effects are expected to erode price by between 10% and 15% per annum. As a result, prices will fall below a rate of one USD per watt (peak) in the medium term. Overcapacity caused by the expansion of production facilities is the main source of this price pressure. The math is simple: Despite market growth, annual capacity increases of three to four gigawatts will push capacity utilization down to between 50% and 70% in the years ahead. At the same time, Asia is producing an increasing share of the world's crystalline modules. "In 2010, Asia accounted for 50% of crystalline modules – a percentage that will rise further," according to the Roland Berger study. And while this growth continues, thin-layer technology will increase its share of sales volumes to around 25% by 2012.

Small producers under pressure

Expansion among the market leaders is turning the screw on small and medium-sized enterprises in particular. The top ten companies' combined production capacity already accounted for 47% of total industry capacity last year, and will increase further to 60%. These same top ten companies already have 80% of their capacity in Asia, where production costs are as much as 50% lower, thanks above all to indirect subsidies and lower labor costs. The same factors have also caused the supply industry to shift its focus to Asia.

Innovation and flexibility are the order of the day

Demand for innovative, efficient products is growing while production costs continue to drop. In recent years, efficiency levels have improved across all the most common cell technologies – one major reason for falling production costs. As systemic costs account for an ever larger share of total costs, manufacturers of inverters and frames are likewise having to become more efficient. Necessary investments and fluctuations in demand are generally creating a need for more flexible production. Professional contract manufacturers are thus entering the photovoltaic market, giving individual vendors more options to adjust output in line with demand.

Size is the key success factor in production and sales

The above trends in volume, price and market share are driving sales revenues for European-made crystalline modules down below the previous year's levels – dramatically so for domestic manufacturers. At the same time, sizeable volumes – both in production and in sales – are emerging as the key to lasting success. Since only a few German companies can achieve the necessary critical mass on their own, partnerships in the form of mergers or cooperative ventures make a lot of sense.

Only top performers will survive in global market climate

Of Germany's solar power companies, the experts at Roland Berger believe that the current top performers have the brightest prospects of survival. The study investigated the strategic positioning and financial capabilities of 16 photovoltaic companies. Of these, only two ranked among the top performers with healthy finances and a strong strategic position. Four numbered among the "followers" and have good chances of catching up with the leading group. The remainder, however, occupy undistinguished or even weak positions.
The study reveals two main reasons for this poor strategic positioning. One is a lack of size in production; the other is a lack of comprehensive market access across all sales channels, especially in project business. Production costs and substandard brand positioning are the Achilles heel of many photovoltaic manufacturers. "Few German vendors have a brand that customers recognize," Berger Partner Henzelmann points out. This situation often results from a lack of strategic initiatives.

Short on finance but still in front on technology

Too-thin margins have eroded German PV companies' financial resources in recent years. Between 2008 and 2009, companies saw their margins decline by around 8% on average. Many are dependent on external financing. Indeed, funding is a major topic throughout the industry.
But these companies do have strengths. Most of them have a sales presence in international growth markets and still occupy leading positions on the technological front.
European industrial systems providers, for example, are comparatively well positioned. Many still stand out as global market leaders and therefore have deep pockets. The greatest challenge for them is the growing need to transfer production to Asia.
"To be ready to face the future, photovoltaic companies must adjust their cost structures, achieve critical mass in production, secure competitive market access and acquire sufficient capital resources," is the recommendation voiced by Dr. Guido Hertel, Partner at Roland Berger Strategy Consultants and an expert in photovoltaics.