ArticleThe solar industry is getting more matured in China
--- Shi Zhengrong, founder, chairman and chief executive officer of Suntech Power
Suntech Power Holdings is China’s largest solar cell maker. It was set up by Shi Zhengrong, who was later crowned“China’s Solar King”on February’s Fortune magazine. However, the company reported nearly 70 million US dollars of losses in 4th quarter 2008. Meanwhile, Suntech’s stock prices jumped from a record-high of 85 dollars per share to less than one tenth. China’s New Solar King is no doubt experiencing his hardest time since the company’s startup. Is it just a hard time for Suntech or for China’s photovoltaic industry nationwide? What does the future hold for this industry in China?
Guest intro
Prior to setting up Suntech in 2001, Shi did his doctor degree in solar power technology under the man known as“the father of solar”, Prof. Martin Green. Shi is the inventor behind 11 patents in the photovoltaic industry.
Impact of the economic crisis
A: Suntech, like a lot of different companies, has fallen on hard times, in this global economic crisis. Can you talk a little bit about how the company is doing now?
S: Nobody can immune from this financial crisis. So Suntech, of course, our business operations also impacted in negative by this crisis, is mainly because downstream, our costumers. Actually, market demand is still there. So we sign a lot of contract. Even in the last quarter, in the 4th quarter last year, there was no cancellation of contract. But just we found our customers; they couldn’t pay the product on time. Before it only took maybe 2 days to issue letter of in credit, but now it takes 2 months, or they just can’t do it. So it’s because the bank liquidity is getting bad in Europe, where our major market is. And also lack of trust between banks, so this loan becomes more and more difficult. So, of course, because of that, there’s oversupply issue in the market. Actually, we prepared oversupply situation will occur, maybe in 6 months time. So this financial crisis really moves forward this oversupply situation by 6 months time. So, of course, I mean Suntech, in another sense, Suntech is lucky because our leading position and leading brand in the industry. So, from customers’point of view, before, they didn’t have much choice, because demand is far ahead of supply. But now, they have choice. So generally speaking, customers nowadays, they want leading brand in a high quality product, and also sustainable in the company in the field.
A: Let’s talk a little bit about that oversupply because you, unlike some of your competitors, have quite a large supply right now. Is that on purpose? What brought that about because the economic downturn has really been coming for the last year now?
S: Sure, although economic downturn came about a year’s time, but for industry, we didn’t really feel it until Lehman Brothers’bankruptcy. So the whole industry was actually very hot, especially the first quarter to the 3rd quarter last year. This sudden change is only about 2 weeks’time. That’s something we really didn’t expect and many people ask us how come you guys didn’t prepare. Of course, we all feel financial crisis was there, but on the other hand, the market demand was huge. The company just couldn’t supply enough products; because of silicon supply was also bottleneck. That was really situation, only 2 weeks changed the whole scenario.
Suntech purchased a lot of polysilicon, the raw materials to make solar cells in September and October 2008. Many say the suddenly halved polysilicon price was one reason behind its fast shrinking gross profit.
A: Looking back, do you regret that decision now?
S: No. If we still do that, we would still continue to do that, because actually, we did not intentionally accumulate silicon in the stock, because Suntech, as you know, we were already around 700-800 megawatt production capacity. So we have to prepare for raw materials about 2 weeks beforehand. That’s all we had. But just in Q4, there was a sudden fall of the silicon price, so we have to somehow, to digest this silicon stock we prepared for 2 weeks.
A: So what do you do now? We are in this economic downturn, which a lot of people are hoping we come out of at the end of 09. Do you buy a lot more polysilicon now when the prices are lower and hopes of getting those contracts fulfilled?
S: Well, actually in the last year, last couple of years, we signed some long-term contract, because the reason we did that, we believe this is a long-term business. So we have to long-term partner, and a long-term supply visibility in terms of volume and price. So when we sign these long-term contracts, we made sure the price had to be competitive at the year, even now, most of the long-term contract still below the market price. So we, of course, first fulfill our long-term contract. And at this moment, our long-term contract can almost supply all demand. So if it’s not enough, we purchase some from the market.
A: Let’s talk about your 4th quarter last year.
S: I would say our results were not bad. Because I think when we give the guidance, we give that break even at gross margin level. But actually, at operation level our gross margin was about 13%. So that’s much higher than what we expected. But in any case, results were in red. That’s because we had a lot of down of inventories in the past years. And also, there are some payments of investments we dealt in the last few years. So that sort of put together and gives a bad number in Q4.
A: What’s happening to the photovoltaic industry in China? It’s a small percentage of your actual market, but with the economic downturn, do you see that shrinking at all?
S: People are talking about 70% in terms of numbers; manufacturers close their doors or do not produce products anymore. Or some article say about 350 factories already shut their door. That could be true, especially for small players. But in general, I haven’t seen any major players suffering this problem yet. Of course there are difficulties for every company. But so far I think the survivability is quite good.
A: Do you see that the industry expanding, becoming more popular for the general public here in China? Or has that shrunk at all?
S: I think certainly the awareness of the industry in China has been increased dramatically here. From government level, from general public level, more and more people not only understand the industry, also understand the necessity of promoting solar power even in China. I think it’s a good sign. I think the industry is getting more and more matured in this country.