How Can SunPower’s EMEA Business Get Back On Track?

SunPower’s (NASDAQ:SPWR) performance in the EMEA (Europe, Middle East and Africa) region has been dismal over the past two years with revenues shrinking from around $1.5 billion in 2010 to less than $500 million in 2012.  Most of the decline can be attributed to declining sales in Europe, which accounts for a bulk of the division’s business. The European solar market has been subject to a lot of policy uncertainty relating to subsidies and has also been impacted by weak macroeconomic conditions. In this article, we highlight some of the reasons for SunPower’s poor performance in Europe and the factors that could help the division get back on track. We also examine the firm’s progress in the Middle East and African markets.

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What Is Holding SunPower Back In Europe?

In 2012, SunPower’s shipments to Europe dropped by 42% to around 262 MW. What is surprising is that many other large solar companies haven’t had it so bad. For instance, Trina Solar’s sales in Europe fell by less than 30% while Yingli Green Energy actually witnessed some sales growth in Europe. Most of the decline in SunPower’s European business has been due to lower utility scale projects in the region and lower standalone panel sales.

Lower Utility Scale Projects Revenues And High Fixed Costs: Activity in utility solar projects in Europe has been declining over the last two years. Europe has traditionally been the largest market for utility scale solar, but installations in the region have been relatively tepid of late. For instance, in Germany, new utility scale installations remained almost flat over the last year while countries like Spain and Italy saw new utility scale installations practically vanish. ^[1] The lower utility scale activity has also impacted SunPower’s EMEA EBITDA margins, which fell from around 16% to -20% between 2010 and 2012 as the company continued to incur significant fixed costs related to its on-the-ground operations even though revenues declined.

Pricing: While SunPower’s monocrystalline panels have an edge over traditional polycrystalline panel in terms of efficiency and performance in low temperatures, they are more expensive. SunPower’s panels cost around $1 per watt while most polycrystalline panels cost around $0.70 per watt on average. In countries like the U.S., balance of systems costs are generally quite high due to high installation and soft costs, meaning that panel prices account for a smaller percentage of total systems costs. In Europe, on the other hand, the balance of systems costs are relatively lower meaning that panel prices still make up a larger portion of systems costs and are likely to be a more critical factor in the purchase decision.

What Could Brighten the European Business Going Forward?

While we think the European market could continue to be challenging in the near term, there are some opportunities and factors that could help expand business in the region.

Greater Focus On The Rooftop Market: Given the decline in the European utility scale market, SunPower will have increase its sales to the residential and commercial rooftop markets. SunPower is known as a technological leader in the solar industry with panels that have the highest conversion efficiency and durability, making them ideally suited for rooftops. In early April, the firm introduced its X-Series solar panels which offer an efficiency of around 21.5% which is far ahead of the average 15% to 16% efficiency offered by typical polycrystalline panels. Products like this will be ideally suited for the European rooftop market could help to boost the firm’s brand image.

Extending Leasing and Financing programs in Europe: The response to SunPower’s residential leasing program in the U.S. has been commendable and the firm quickly rose to become the largest solar lease provider in the U.S. Now, the company could possibly extend the leasing program into Europe as well. Leasing helps to cut down on the upfront cost of ownership of a solar power system and could help SunPower gain market share in Europe as governments in the region transition from feed-in tariff market to a more sustainable, long-term policy structure. The leasing program could be a step in the right direction to grow in the residential solar market.

Tariffs On Chinese Imports To E.U.: SunPower’s sales have been hit by low cost Chinese solar panel imports into Europe. However, with the ongoing anti-dumping investigation being carried out by the E.U, there is a rising possibility that Chinese solar products could face import duties. The investigation is expected to complete by the end of this year. If duties are imposed, it would increase the landed cost of Chinese solar products, making them less competitive in the European market.

What Are The Company’s Prospects In The Middle East and Africa?

While SunPower doesn’t report individual country or regional figures, we believe that Africa and the Middle East currently make up a relatively small portion of the EMEA sales and offer significant growth potential. Both regions receive abundant sunshine making solar power relatively cost effective. SunPower’s parent company, Total SA, is Europe’s third largest oil company and has a significant presence in the Middle East and Africa. SunPower could leverage Total’s relationships and brand to improve sales in the region.

Opportunity In Africa: SunPower acquired Tenesol, a French solar company, which also has interests in the South African market. Leveraging this relationship, SunPower recently won contracts to supply around 33 MW of panels to two solar projects in South Africa. ^[2] Africa is generally seen as a very price sensitive market. However, since Tenesol has some panel assembly facilities in South Africa, SunPower could possibly leverage this to bring down costs of its panels in the African market. The mining sector in Africa also looks attractive for solar firms since many of them are off-grid and rely on diesel for electricity generation. Given that diesel prices are quite high in Africa, solar power is viewed as a quick and convenient way to add generation capacity. This could provide additional opportunity for the firm to expand in the distributed generation market.

Middle East: The Middle East looks like a growth market for solar power as petroleum rich countries look for ways to divert their oil and gas production away from domestic consumption (which is heavily subsidized) to the lucrative export market. Many countries in the region have drawn up ambitious road maps and set budgets to build their solar industries. Saudi Arabia for instance has earmarked around $109 billion over the next two decades to build its solar industry. ^[3] There are obstacles to growth however, as some countries in the Middle East have requirements for domestic sourcing of inputs of solar panels and companies interested in participating may have to set up domestic manufacturing facilities.

We have a $9 price estimate for SunPower, which is around 25% below the current market price. The EMEA division accounts for about 6.5% of our price estimate.

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1. Solar Plaza [↩]
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