Can solar-power startup Solyndra harness the sun's power and beat China at its own game?

Trade and job creation
Dec. 16 2010 10:23 AM

Solyndra

Can a California company harness the sun's power and beat China at its own game?

Solyndra panels.

Solyndra, a solar startup based in Fremont, Calif., is a test case of what happens when Silicon Valley know-how and money go up against mass-produced Chinese competition. Founded in 2005, the company has been producing and selling solar modules since 2008; for each of those three years, it has exported between 75 percent and 80 percent of its products, the vast majority of which go to Europe—primarily to Germany, and also to France, Spain, and Italy. But Solyndra executives say this is about to change. How the next few years unfold will determine the fortunes of the company and its roughly 1,000 employees, but Solyndra is also the canary in the coal mine for the future of the American solar industry.

Solyndra caught the attention of venture capitalists because its products don't look or perform like anything on the market today. The "panels" don't look like the typical black rectangles tilted at an angle to the sky. Instead, a Solyndra-outfitted rooftop looks like row after row of flat-mounted black fluorescent light-bulbs. The weird design has several advantages: The modules can be mounted more quickly and cheaply than conventional flat panels; they don't have to be moved to follow the sun, since they'll always be exposed at some angle; and they do double-duty when combined with white roofs (which are increasingly common in commercial buildings), since they capture both sunlight and the light that reflects from the roof's surface. They also hold up to wind and high heat better than most competitors' products. For all these advantages, though, the cylinders have some drawbacks.

The most glaring is that they're expensive to produce, and some analysts have questioned if the company will ever bring its costs down enough to be competitive in an increasingly commoditized marketplace, especially since the cost of conventional solar panels plummeted by 50 percent in 2009. This dramatic drop in price is partially a function of reduced demand as the European economy was rocked by debt crises, including some in countries that had been the solar industry's biggest customers, like Spain. Conventional solar manufacturers in China and other countries are also ramping up capacity in anticipation of increased demand in the future, which keeps prices low for now.

China is a particular bugbear for Solyndra and other solar panel manufacturers in the United States and elsewhere. The Chinese government has taken an aggressive interest in building up its solar capacity with the goal of becoming the world's top solar manufacturer. News investigations charge that Chinese solar factories get deeply discounted land, as well as cut-rate financing, in addition to the country's cheap, plentiful labor. All this is in addition to the central government's voracious appetite for U.S. debt, which keeps its currency below market value.

Solyndra's distinctive design also has pros and cons when it comes to functionality. While ideal for flat, white roofs, it isn't such a slam dunk for the residential market and for what people in the industry term "utility scale"—solar farms backed by power companies. When you think of solar energy, the image that probably comes to mind—acres of black panels spread out on the ground—is a typical utility-scale project. Solyndra says choosing to focus on the enormous amount of real estate on store, warehouse, and factory roofs is a strategic way to set themselves apart from the pack. Its systems can be mounted on commercial roofs relatively easily, so they can be used where there's no space for a large-scale solar farm. Locating the systems on roofs also means there isn't a loss of energy as the juice is transmitted from the source to the point of use. Transmitting power—from any source, not just solar—over long distances saps some of that energy, so putting the source of power and the site of usage literally on top of one another increases efficiency.

It's all very promising stuff, but the company need to start making money—soon. So far, Solyndra has been burning through funding at a clip that would make a tech-boom exec blush. Although the company booked around $142 million in revenue this year, it's still in the red. (Solyndra won't say how much it lost last year, but according to Greentech Media, it had losses of $232.1 million and $172.5 million in fiscal years 2008 and 2009, respectively.) In a highly public failure, the company filed for an IPO in December 2009 and had to scrap those plans in June 2010; auditor PricewaterhouseCoopers issued what's known as a going concern statement, warning that Solyndra had to drum up more funding if it was to survive. President and CEO Brian Harrison says the company's done this. "We'll be cash-flow positive by the end of 2011, and we'll be profitable by 2012," he says. He adds that jumping the gun on an IPO is a mistake that won't be repeated.

There's a lot riding on this prediction of success. Greentech Media says that by the last quarter of 2009, the company had raised just shy of a billion dollars in total. Solyndra has also drawn down nearly all of a $535 million loan to build its new factory and outfit it with machines, an expense backstopped by a loan guarantee from the Department of Energy.

Last month, Solyndra provoked anger when it consolidated operations and shuttered its old factory, shedding around 40 permanent and 130 temporary employees along the way. The new facility is much more highly automated than its predecessor, and the robots that crank out the modules need less human intervention than before. It's a job loss upfront, but it's the only way Solyndra—and the many other American factories competing with products made in countries with low labor costs—can compete and eventually grow enough to bring some of those jobs back. As Martin Baily, a senior fellow at the Brookings Institution, points out, even China is moving toward greater factory automation as it faces wage pressure from even lower-cost locations. Solyndra has been losing money since its inception; management is under intense pressure to slash costs, and one way to do that is to automate.

In July, Solyndra brought in Harrison, a 30-year veteran of the semiconductor industry, to run the show and squeeze as much efficiency as possible out of the new factory. In evolutionary terms, semiconductors for electronics—which are manufactured from the same raw material as the wafers that go into solar panels—are solar cells' closest living relative. While a lot of semiconductor production has moved overseas, the United States is still a viable player in the market. Manufacturing chips and related products is something we've historically been very good at, and we've continued to be good at it even after foreign companies turned up the competitive heat.

Solyndra's uniquely designed solar modules cost more than their flat-panel counterparts, and for most of the company's history, it has taken a loss on every module it sells just to build up enough critical mass to lower its per-unit production costs. (Since the fixed costs of running a factory are so high, more output means those costs are spread across a greater number of items.)

Ben Bierman, executive vice president for operations and engineering at Solyndra, says the new factory and its high-tech robots will go a long way toward lowering costs by increasing the speed of production. The new building was essentially constructed around Solyndra's production line, so everything is configured for the greatest efficiency. They've also got the space to plan ahead by, for example, storing spare parts near the more temperamental machines so they can be fixed quickly if they break down, avoiding bottlenecks.

Over the next few years, Solyndra predicts the dollar value of its exports will continue to rise to roughly $250 million by 2013, but the percentage of revenue from exports will go down to about 50 percent from the 75 percent it's at today. Europe is considered a more mature market for solar energy, whereas the United States has barely been tapped. Shayle Kann, managing director for solar research at GTM Research, says America's percentage of the global market is only 6.5 percent; as a result, Solyndra and other domestic solar manufacturers are primarily exporters right now.

The main reason demand is so strong in regions like Europe is that several national governments have offered generous incentives for adding solar capacity to the electrical grid. Solyndra's Bierman also says that Europe's strict land-use rules make its rooftop-mounted systems an easier sell. By comparison, the United States offers a tax credit to businesses that install solar systems, a much less appealing incentive. (If your business took a hit in the recession and hasn't turned a profit, your tax burden will have vanished, which makes a credit worthless. An alternate incentive that let companies apply for a grant instead of a credit expires at the end of this year.) Incentives at home and abroad have strict cutoffs and deadlines. This gives Solyndra another advantage, since a customer racing the clock to claim a credit or grant can have its system up and running much faster than a conventional solar system could be installed.

There was plenty of debate about Solyndra's huge loan guarantee, which dovetailed in the media and among policymakers into the question of whether the government should offer support to solar manufacturers in general. In the long run, the answer to that question is almost certainly yes. For the moment, solar products are a viable export, and the United States is a net exporter, shipping $723 million overseas last year. We even benefit when solar panels are made in other countries, since the United States is a leading producer and exporter of polysilicon, a solar panel "building block" that's also a core element in the manufacture of semiconductors. The United States' potential to become a solar manufacturing powerhouse is even greater further into the future, at which point domestic demand is expected to rise sharply. According to a new report issued by the Solar Energy Industries Association, about half of the cost of a solar-power system comes from the installation, wiring, and other on-site tasks—in other words, jobs that can't be outsourced. A solar manufacturing sector that grows in an export-led market will be well-placed to satisfy domestic demand at reasonable costs, keeping American homes and businesses from turning to Chinese-made panels.

As for Solyndra, "The big question is can they drive their cost down quick enough to scale," says GTM Research's Kann. Although Solyndra's budget-slashing goals are aggressive, manufacturers of conventional solar panels—especially in China—are also reducing their costs in order to cut prices even further. "It's a moving target," he says

Harrison promises that Solyndra is moving fast enough to catch up to competitors, hopefully with the help of some additional support from the government in the way of incentives to get homes, businesses, and utilities to install solar systems. He ticks off a list of possibilities—tax credits for investing in and using renewable energy that don't expire after only a few years, feed-in tariffs, financing for renewable energy projects—but he says Solyndra is also prepared to fight it out on the strength of its product alone if necessary.

Harrison believes American manufacturers like Solyndra can still compete by focusing on design and technological superiority instead of just on price. The key, he says, is "innovation, creativity, and differentiation, not purely commodity.

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