Solar Matures With Foxconn Entry

By newsdoug on December 27, 2011

Hon Hai's Foxconn brightens solar picture You know your industry is starting to mature when a big player like Hon Hai (Taipei: 2317), the massive Taiwanese electronics maker of everything from PCs to iPhones, steps in to the picture, a move that should come as both a relief but also a worrisome development for the troubled solar cell sector. Foreign media are reporting that Hon Hai unit Foxconn Technology (Taipei: 2354) is building a massive new solar cell plant in China’s Jiangsu province, adding a major player to a sector already struggling with large overcapacity that has caused prices to tumble by more than 60 percent this year alone and driven nearly every company into the red as their stocks hover near all-time lows. (English article) This development is significant for 2 reasons, both of which should ultimately benefit the sector but will also cause some short term pain in the form of sorely needed consolidation. From a technological point of view, Hon Hai’s entry into the picture shows this sector has long term potential, as major companies like Hon Hai rarely make such investments without careful consideration of their profitability. But big players like Hon Hai are also famous for entering mature industries where margins are traditionally quite low and huge volume is necessary to make big profits, meaning the company believes that solar technology is starting to mature and profit margins will stabilize at low levels. This second factor is key, as it means that only companies with massive scale will be able to survive in the future, and that mid-sized and smaller players will either have to merge or risk going out of business in this bold new solar world. Companies that now have the scale to drive this much needed consolidation include industry leaders like Suntech (NYSE: STP), Yingli (NYSE: YGE) and Trina (NYSE: TSL), while companies that would be well advised to start looking for partners include names like JA Solar (Nasdaq: JASO) and Renesola (NYSE: SOL). No matter how you look at it, this move by Hon Hai looks like a positive development, providing not only a vote of confidence in the struggling sector, but also sending an important message that anyone who wants to play at this game in the future will need massive scale to do so.

Bottom line: Hon Hai’s entry into solar module making shows the industry has long term potential at low profit margins, and should help to drive much-needed consolidation.

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