Suntech Power (NYSE:STP), the world’s largest manufacturer of solar panels, suffered setbacks in two promising markets last week. The firm announced last Thursday that it will cut back on production at its US manufacturing facility due to the effects of tariffs brought on Chinese solar products by the US government.  Separately, news also broke that a large utility scale project that the firm had proposed to construct along with Infigen Energy in Australia will be scaled down due to lack of funding from the Australian government. 
US Manufacturing Restructuring
The US market contributed to about 23% of Suntech’s revenues last year. The firm has been counting on the US to offset flattening sales in Europe, where subsidy programs that drove industry growth have reached their funding limits. The firm’s Goodyear, Arizona facility manufactures photovoltaic (PV) modules for commercial and utility scale applications. As part of the restructuring plan, the firm will idle two out of three production shifts and lay off 50 workers at the plant which will decrease its annual production volume from about 45 MW to 15 MW.
PV cells are a primary component used in the manufacture of solar modules. Earlier this month, the US International Trade Commission voted to impose tariffs on Chinese PV cells imports citing dumping and unfair subsidies provided by the Chinese government. Suntech’s cells will attract among the highest tariffs (about 36%). Although the tariffs could be circumvented by sourcing cells from abroad, it may be difficult for Suntech to do so in the near term since all of its 1.8 GW of cell manufacturing capacity is located in China. Given that solar cells constitute a bulk of module costs, it would significantly drive up costs for the firm’s US operations.
We believe the closure will not have a significant effect on Suntech’s revenues given the relatively small decline in output in comparison with its global capacity. However, since the products manufactured at this facility complied with the “Buy American Act,” which gives priority to American-made goods for government purchases and contracts, a ramping down in capacity from this plant could possibly impact the firm’s ability to supply to government-backed solar projects.
Suntech’s Australian business has grown fourfold between 2009 and 2011 to about $133 million. Australia’s utility scale solar sector is particularly attractive as it is largely under-penetrated compared to many other developed countries. The industry has tremendous scope to grow as the Australian government targets renewable energy to contribute to about 20% of the country’s energy mix by 2020.
Suntech was a relatively early entrant into the Australian utility solar space as it forged a partnership with Infigen Energy to build a 150 MW utility scale power plant. However, the firms failed to receive funding from the federal government under its Solar Flagships funding program. The project has now been drastically scaled down to 35MW, about a fourth of its original planned size.Notes: