Memorandum
To:
From:
Date:
Subject:
CEO and Board of Directors, First Solar
Caroline Way, Dakota Wolff, and Alexandra Snyder
May 20, 2015
Industry and Company Strategic Analysis
Industry Overview
The solar power industry has been growing exponentially since 2000 (Figure 1.1), and is
expected to grow by at least 30% next year. It consists of three key technologies: photovoltaics
(PV), which converts light into electricity, concentrating solar power (CSP) which converts
thermal energy into electricity for utilities, and solar heating and cooling systems, which use
thermal energy to heat water and provide air conditioning. Both First Solar Inc. and SolarCity
focus solely on photovoltaics acquisition and storage of solar energy.
Since 1999, First Solar Incorporated has been the leading low-cost photovoltaic solar
power provider. First Solar’s vertically integrated power plants enables them to operate some of
the world’s largest PV plants at low costs as compared with SolarCity which still imports their
solar panels from a third party; however, in 2014 SolarCity purchased solar panel manufacturer
Silevo in order to begin their vertical integration process. First Solar’s use of thin-film cadmium
telluride solar panels, as opposed to crystalline silicon technology, has made them a leader in the
solar power industry: in 2014 they set a world record in solar cell conversion efficiency. While
their largest market is in the United States, First Solar has recently expanded globally, installing
the largest PV power plant in South America and the Middle East, and shipping large orders to
Europe and Australia. Historically, First Solar focused on producing solar power for commercial
accounts and large scale utilities; however, they have recently picked up residential projects,
putting them in line with SolarCity. The fact that SolarCity’s only market is the United States
puts them at a disadvantage.
First Solar Inc.’s Competitive Analysis
First Solar Inc. (FSLR), has a cost leadership and product differentiation strategy
associated with their manufacturing of PV (Photovoltaic) solar panels, and their construction of
large scale solar farms. Their foremost strategic goals of operations are market diversification
and operational expansion. On the other hand, SolarCity (SCTY), founded only in 2006, can be
considered a relatively new entrant into the solar energy market. Their strategic goals hinge
upon two important factors. The first being the necessity of obtaining new customers at a rapid
rate. The second being the reduction of cost for installation and maintenance of the solar panels,
which First Solar is excelling in. Instead of manufacturing their own solar panels, SolarCity
instead leases and installs solar panel systems using material produced by a third party; however,
they purchased panel manufacturer Silevo in 2014. This shows an aggressive move towards
vertical integration where SolarCity aims to control manufacturing, installation, and
maintenance. This can be seen as a direct threat to First Solar who will have market share taken
away from them (see figure 2).
Market diversification has typified First Solar’s foreign market expansion. Their 2014
annual report stated that the US accounted for 90% of net sales, and Europe only accounted for
4%. This imbalance results from countries like France and Germany, who have cut back on
government backed incentive programs, and “Feed-in” tariffs. Due to this change in the
European market regulations, First Solar is looking to diversify by entering markets in China and
India, both of which have massively growing economies with a large demand for energy to
satisfy population growth. If successful this expansion should counterbalance the decline in
European markets.
In 2010 First Solar was able to secure two partnerships in China, one with Guandong
Nuclear and another with China Power International New Energy. This along with an
announcement of the partnering with the Chinese government to install 2GW of solar power in
inner Mongolia, demonstrates their ability to overcome barriers to entry, and secure new and
profitable markets. SolarCity on the other hand works solely within the United States. Economic
and political policies in the US have continued to impose tariffs on solar panels entering from
China. This is due to the Commerce Department discovering that they provide unfair subsidies
from the Chinese government, which put the price of solar cells below costs. First Solar can
continue to manufacture solar panels without much competition in price. In contrast, SolarCity
buys and leases their solar panels, so even as overall prices of solar panels and solar energy are
continually dropping, they will still have to pay more upfront costs.
First Solar looks towards operational expansion as a strategic goal. This will entail
increasing production and expanding capacity, which will increase the firm's growth and drive
down costs. This approach should expand production of solar panels, and improve expanding on
the design, construction, and operation of their installations. They are expanding existing solar
plants, manufacturing new ones, and growing through mergers and acquisitions. They have
acquired the following companies in the past few years: RayTracker Inc, OptiSolar Inc, and
NextLight renewable power. Recent capacity additions have been developed in Germany,
France, Malaysia, and Ohio. These steps will boost annual manufacturing capacity to nearly 500
MW.
First Solar tends to produce solar power for large-scale utilities and solar farms.
However, in 2014 First Solar developed a partnership with Clean Energy Collective in order to,
“Develop and market community solar offerings to residential customers and businesses directly
on behalf of client utilities”. This puts First Solar in direct competition with SolarCity. SolarCity
serves individual and commercial customers including, Walmart and Google, through long term
leases of the panels. Through their lease programs customers purchase the solar panels, and
installment for around 20,000 dollars. With the Power Purchase Agreement (PPA) option,
SolarCity pays the majority of the upfront costs, and the customer signs a 20 year contract.
Within that time the company receives monthly energy payments, which tend to be 5%-15% less
than typical energy bills. SolarCity’s business model provides a sizable moat for direct
competitors because it requires extensive short term investment, along with long-term
commitment.
First Solar’s Economic Moat
Efficient Scale:
First Solar has succeeded in achieving economies of scale, which has helped them keep their cost
lead. In the last three years alone, they have reduced their cost per watt by 33%.
Intangible Assets:
First Solar has over 337 patents and patent applications that protect the company’s technology
leadership. These patents allow First Solar to compete with large manufacturers, as they are the
only company to use cadmium-telluride technology.
Cost Advantage:
In the U.S. market, First Solar has a cost advantage in comparison to other U.S. companies.
According to Morningstar, First Solar maintains a 20% cost advantage over their competitors.
However, while First Solar is the leading PV supplier within the U.S. (Figure 2), they make up
only 4% of the world market (Figure 3) due to Chinese module efficiency. If First Solar can
increase their module efficiency to surpass the Chinese manufacturers’ $0.50 per watt, they
could increase their presence in the world market.
Our Stock Choice
SolarCity has only been around since 2006 and it is not yet a profitable company. Their
stock prices are higher than First Solar ($62.51 vs. $56.72), however, SolarCity is losing money
for each share of their stock. Thus, both their P/E and P/E/G ratio cannot be calculated.
However, using price to book value and return on equity, we can determine which company
would be a better investment. SolarCity has a P/B ratio of 8.08, which shows that their stock
costs 8.08 times more than their assets are worth, and investors may be overestimating the
company’s value. We cannot look at the P/B ratio alone. SolarCity’s ROE is -39.12%, meaning
that they are not very good at generating profits. On the other hand, First Solar has a lower P/B
ratio, 1.14, but has a positive ROE, 4.63%. This suggests that First Solar may be undervalued
and more efficient at generating profits, and thus a better investment option.
Conclusion
First Solar has intangible assets that make them the leader in the solar industry. In the
U.S. solar industry they lead in price and operation of PV plant. They use higher rated
technology to create the best quality conversion efficiency and operate on a global scale. Their
cost leadership and product differentiation strategy allows them to increase revenues by taking
advantage of a constant increasing demand for solar energy. They take advantage of global
expansion by entering new markets and establishing strong relationships with other energy
companies. This diversification strategy has led them to be the leader in the global solar market,
in comparison with SolarCity, which has yet to expand abroad.
Through operational expansion, First Solar is acquiring plants and merging with
established companies, and has been steadily growing in the U.S. Due to the similarities in solar
technologies, each company has to consistently create innovative technologies to differentiate
themselves. In regard to non-market methods, they have extensive involvement in charitable
endeavors that create a lasting impact on the consumer and the community, which creates a
positive brand image and addresses their “social” and “corporate responsibility”.
SolarCity is a new company and has a contrasting strategy, which is creating a solar
installation and leasing business. SolarCity has an advantage through working with large
corporations and banks that are consumer friendly, to create a business that appeals to the
majority of people in the U.S. They do not however have an global presence. Though SolarCity
has increasing upfront costs, their lease contract ensures a steady stream of revenue for the 20
year period of the lease. Overall SolarCity has a strong presence within the residential solar
market, which will soon be challenged by First Solar recently entering the same market. In
regards to the non-market methods SolarCity is the laggard in creating outreach to the
community.
First Solar is clearly a strong company that was established first and created strategic
operations that allowed it to become the low cost leader. They continue to innovate in both
economic and non-market fields. SolarCity has potential to grow and become a renewable energy
leader, but currently have a very narrow ability to step out of the residential market, or to become
a global brand. In conclusion First Solar has the most potential for continuing to grow, increase
revenues, and benefit investors.
APPENDIX A
Porter’s Five Forces Analysis
Competition:
SolarCity operates within an industry which is highly competitive and rapidly evolving, with
annual growth rate exceeding 30%. First Solar faces direct competition from a variety of firms
who are looking to capitalize on the current government subsidies, and the overall boom of the
solar panel production market. Failure to sustain competition could mean price reduction
resulting in reduced margins, and market share. Another factor driving competition is the lack of
product differentiation. This is where First Solar exceeds. They use cadmium-telluride
technology in their solar panels as opposed to their competitors’ use of crystalline silicon.)
Supplier Power:
First solar purchases a variety raw materials from a small number of suppliers, this means that
due to the critical nature of the material and the small number of suppliers that the suppliers have
power, and could ultimately drive up prices. However, they are constantly interviewing new
suppliers and try to use suppliers that, “Can provide a raw material supply source that is near
[their] manufacturing locations, reducing the cost and lead times for such materials”.
Buyer Power:
Buyer power in the solar energy market is quite strong due to the fact that product differentiation
is primarily on cost per Watt produced. First Solar's major international business can leave them
susceptible to unfavorable regulatory, tax and political conditions. Although they maintain long
contracts, once those run out the power will shift to the buyer who will have more choice due to
more growth within the industry. In order to renew contracts they will have to negotiate on
price.
Barriers to Entry:
There are many barriers to entry in the solar market, one of which is the vast amount of research
and development required to create a competitive product at a competitive price. Luckily for
First Solar, they have generated enough cash flow to heavily invest in their research and
development. There is lots of cultural and political interest in green energy; but, as countries like
Germany and France start to cut back on subsidies and incentives, the barriers to enter new
markets will grow wider.
Threat of Substitution:
First solar faces direct competition from the manufacturers of other solar technologies including
crystalline silicon solar models, solar thermal and concentrated PV systems, so a growing
popularity in another technology could negatively affect their business. Also it is projected that
the market for hydrogen fuel cells in natural gas will emerge as a new source of distributed
power by 2020.
APPENDIX B
Non-Market Competitive Methods
Involvement in the community and charitable acts create a connection between
consumers and large companies such as First Solar and SolarCity. Through these initiatives
companies improve their reputation and thus increase consumer confidence. Non-market
methods can be equally as important and First Solar is the leader in this area.
The non-market methods regarding First Solar and SolarCity include charitable giving,
involvement in the local community and abroad. First Solar has the “First Solar Corporate
Charitable Fund” which helps to improve quality of life around the world. The fund finances
programs that have a focus on “green” education, gives access to clean energy and water in
developing areas, and increases the development of sustainable technologies. These community
giving projects take place throughout the world including, Australia, Chile, India, Malaysia,
Thailand, South Africa, Germany, and the U.S. They are committed to responsible sourcing of
resources that are free of “conflict minerals”. They are also involved in many projects within the
U.S., to support sustainability and a positive environmental impact on the earth. They have very
clear set values including “Safety First” and “Environmental Sustainability”.
First Solar created a recycling program as a part of their clean energy initiative. The
program’s intent is to ensure that, “Solutions to clean energy don’t pose a waste management
burden for future generations”. First Solar ensures their recycling is both cost effective as well
as globally available, as they have started projects on six continents now.
Region
Organization
Activity
Global
WWF
Clean Energy Ambassador/Solar Atlas Project
Global
Atlas Project
Helping schools reduce their carbon footprint through low carbon services, technologies and
expertise
S. Africa
Village of Joy
Module donation to a children’s home
Thailand
Panels for Progress
15-25 kW donation to reduce costs of an orphanage’s rising electricity demand and educate the
community on green initiatives
Australia
Oasis Centre
5kW rooftop donation to a homeless youth center
India
Sir Ratan Tata Trust
Pilot project to deliver clean energy and safe water supply to off-grid villages
Germany
DUH Utilities Best
Practice
Donated Community Climate Award prize- a 30kW rooftop installation
USA
College of the Desert
Donated solar equipment, training, and a curriculum
USA
Antelope Valley College
$140,000 endowment to fund up to 10 scholarships / year
USA
Buddy Bison Project
$48,000 grant to promote nature conservation
Chile
Fundación Chile
Module donation for a PV installation training program in the Tarapacá region
Chile
Solar Energy
International
Providing education and training in solar energy at a technical school
First Solar Corporate Charitable Fund Activities
In comparison with SolarCity, First Solar is the clear leader in charitable endeavors and
non-market methods. SolarCity has the GivePower foundation, in which for every megawatt of
power they install they donate a solar power system and battery to a school or community in
need. Though they have similar values and objectives like First Solar, they lack in having a
diverse and strong presence in their charitable actions. First Solar’s involvement in non-market
methods gives them an advantage over competition, while appealing to their corporate
responsibility.
The political environment surrounding solar energy is one that Solar companies, as well
as investors need to keep a constant eye upon. We have seen how Europe, and specifically
Germany, has drastically decreased subsidies and incentive programs which First Solar was
effectively able counterbalanced by penetrating new and growing markets in Asia, and the
Middle East. Growing support and demand globally for clean renewable energy draws
companies like First Solar and SolarCity to compete with one another. With political incentives
to support the green energy movement in the United States, it is clear that annual PV installations
(Figure 1) will continue to rise, and companies like SolarCity will continue to receive
government contracts to build and install their solar panels. First Solar on the other hand has a
competitive advantage in foreign markets where their political influence is greater than within
the united states, and construction of solar farms will thrive in places where capital is in
abundance, and energy is in demand.
Figure 1
Figure 2
2013 PV module world market share
Figure 3
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