Solar battle pits Chinese efficiency against US innovation

October 17, 2011
Solar battle pits Chinese efficiency against US innovation
By John Bourdreau | McClatchy-Tribune News Service

SHANGHAI — The recent high-profile implosion of Fremont, Calif.-based solar manufacturer Solyndra can be traced to sprawling cities in China, where low-cost manufacturers have come to dominate the global industry by pushing down the price of solar panels to a point where most U.S. companies can't compete.

China now claims three-fifths of the world's solar panel production capacity. Chinese solar panel manufacturers such as JA Solar, now the world's largest, say companies from Silicon Valley and elsewhere blundered by betting on new technologies instead of focusing on making panels cheaper to produce.

"It's not a pure technology business," said JA Solar CEO Peng Fang, whose workforce grew from 4,000 to 12,000 last year. "If you invest in it as technology first and (cost reduction) second, you miss it. You need to reverse that."

But some industry experts disagree. They say the failure of some U.S. solar panel manufacturers - with more collapses likely to follow as panel prices continue to fall - does not mean the sun has set on Silicon Valley's solar ambitions. Ultimately, they say, breakthrough technology from Silicon Valley and elsewhere will be needed to drive the solar industry forward.

While "you can't beat the Chinese at their own game (of low-cost manufacturing), it is possible to go against the Chinese if you develop alternative technologies," said Shyam Mehta, a solar analyst with GTM Research, a renewable-energy market analysis firm. "You can disrupt the current production landscape. It's all about intellectual property, which is what the U.S. does."

In the past half-decade, venture capitalists have pumped more than $7 billion into dozens of solar startups developing cutting-edge technology, most of them in the San Francisco Bay Area, according to data compiled by GTM Research and Ernst & Young. Those investments make many analysts hopeful about the U.S. solar industry over the long term, even if it has lost ground over the short term.

Chinese solar manufacturers - some backed with an array of government assistance, from subsidies to free land - were in a stronger position to react to plunging prices in polycrystalline silicon, a main component of mainstream solar panels. By doing what the Chinese do best - low-cost manufacturing - these companies helped to slash the prices of solar panels by 50 percent or more.

Many U.S. solar panel manufacturers, assuming the cost of polycrystalline silicon would remain high, pursued new technology based on costly alternatives, and then were blindsided by the sudden price collapse. Just as Solyndra and other Silicon Valley companies were ramping up, the price of polycrystalline silicon plunged 80 percent.

"You can't base your business model on high-priced polycrystalline silicon, and that's what happened," said Ming Yang, vice president of business development at JA Solar, which is based in Shanghai but was started with capital from U.S. investors.

U.S. solar companies were also hurt by banks and other institutions that finance solar projects becoming "extremely risk-averse" since the 2008 financial crisis, making them much more prone to support projects using traditional solar panels, not cutting-edge alternatives from Silicon Valley companies, said Gartner analyst James Hines.

"It may be game-over for a lot of them," Hines said of some of the new-technology solar companies.

But even JA Solar's Yang said breakthrough technology - "true innovation" - will be needed for the industry to advance.

What gives the Chinese companies their advantage - an intense focus on incremental cost savings in manufacturing - leaves them dependent on game-changing technology from companies in Silicon Valley, according to Mehta.

"The Chinese don't really add much value in terms of intellectual property," he said.

Indeed, at a time when the United States' role in the global solar industry is being called into question, many companies are thriving and others are working on technology that could transform the industry.

James Bickford is putting in 100-hour workweeks selling sophisticated solar equipment made by his Los Gatos, Calif.-based company, Tigo Energy, to some of the world's largest panel manufacturers. The startup, which is expanding quickly, makes a palm-size printed circuit board based on wireless technology that monitors and controls the flow of electrical current on solar panels and can boost energy output by as much as 25 percent.

Tigo, which has a small office with a handful of cubicles and two conference rooms in Shanghai, underscores the gap between the repetitive work being done in acres of panel factories across China and the risky but potentially high-payoff research occurring in the U.S.

Waving a circuit board in the air, Bickford said his product represented "the difference between grunt manufacturing and innovation."

Tigo is not the only Silicon Valley company prospering in the solar industry. Applied Materials, the Santa Clara, Calif.-based semiconductor equipment manufacturer that operates a massive research and development center in the central Chinese city of Xi'an, is a major supplier of sophisticated machines to solar panel manufacturers in China and elsewhere. Last year, Applied Materials reported about $1.5 billion in orders from its division that makes up its solar equipment business - up nearly 58 percent from the previous year - and it expects sales of $2 billion this year.

Another active player is San Jose, Calif.-based SunPower, acquired by French energy giant Total this year, which leads the industry in the efficiency of its cells to convert sunlight into electricity, though they are more expensive than Chinese panels.

"If it was all about Chinese scale, Silicon Valley would have gone away a long time ago," said Julie Blunden, SunPower's executive vice president of public policy.

Still another example of U.S. innovative might in the solar industry is Arizona-based First Solar, a "thin-film" solar panel manufacturer that uses different technology from the Chinese and even beats Asian competitors on price, though its panels are less efficient at converting sunlight into electricity. The company's market value - about $5.6 billion - is more than twice that of the six largest Chinese solar companies by production capacity combined.

Last year, the United States was a net global exporter of solar equipment, recording nearly $2 billion in sales, according to the Solar Energy Industries Association and GTM Research.

"There are huge opportunities to participate in the solar market, which is growing at double digits per year and will continue to grow for many years to come," said Conrad Burke, CEO of Sunnyvale, Calif.-based Innovalight, which has an office in Shanghai. Innovalight makes "solar ink," a proprietary solution based on nanotechnology that can boost the efficiency of solar cells, and was recently acquired by chemical company DuPont.

Eventually, China's low-cost advantages will diminish, said Robert DeLine, vice president of marketing for Santa Clara-based startup MiaSole, whose solar panels are made of different materials from those in mainstream solar panels and which competes directly with Chinese solar power giants.

Tim Harris, CEO of San Jose-based solar panel startup SoloPower, a veteran of the disk-drive industry, said that about two decades ago it was assumed Japan would dominate the disk sector. Today, the world's top disk drive companies, Seagate and Western Digital, are based in California. He sees a similar dynamic taking place in the solar industry, with a number of Silicon Valley companies carving out important slices of the solar market.

"Some will try to innovate and manufacture here," Harris said. "You will have people like us designing and innovating here and going to low-cost manufacturing (areas of the world). You will have people licensing technology to someone else."

And at some point, Mehta said, the technology Chinese companies use to slash costs will plateau.

"We are miles away from where we need to be to compete on a subsidy-free basis with dirty energy," he said. "There still needs to be more innovation. Who will provide that leadership? That's where Silicon Valley comes in. Maybe the solution for the world is for Silicon Valley companies to provide the technological innovation and equipment and Asia to provide the production lines. To me, that is a winning model."

John Bourdreux writes for the San Jose Mercury News.

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