Foxconn Entrance Into Solar Could Pressure Solar Margins Further
Trina Solar (NYSE:TSL) and its competitors such as Suntech Power (NYSE:STP) could see margins eroding further with the planned entrance of mobile manufacturer Foxconn into the solar industry. Foxconn Technologies, one of the largest manufacturers of electronic products such as mobile phones, operates at EBITDA margins between 2 and 5% while solar companies are presently operating at margins above 10% even after the steep decline in module prices in 2011. [1] Foxconn’s investment plans and other details are not available at this time, but analysts expect the company to expand the industry’s capacity significantly, exacerbating the oversupply situation.
We have a $10 price estimate for Trina Solar which is nearly 40% above its current market price.
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Low margin game
Industry observers have been expecting Taiwan-based Foxconn’s entrance into the solar PV market for some time now. Trial production is set to begin in May, but the company has not yet released its capacity plans. [1] The entrance of a-low margin player into an industry already struggling with excess capacity is likely to make the price competition even more fierce. PV manufacturers like Trina Solar enjoyed margins around 30% in 2010 as demand from Europe pushed up volumes. Profits have fallen since then, as subsidy cuts in Europe have put a cap on solar projects in construction and firms stuck with ramped up production capacity have triggered an intense price war. We expect margins in the industry to continue to drop over the next few years.
Foxconn operated its contract electronics business at a gross margin of around 5.6% in H1 2011. Its experience operating with these margins is expected to work in its favor in the solar market. The company, which contract-manufactures the iPhone, will be setting up its PV module plant in the Chinese province of Jiangsu, located close to Suntech’s manufacturing facility.
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Notes:- Iphone Maker Foxconn’s Entry Into Solar May Cut Industry Margins, Bloomberg, Dec 2011 [↩] [↩]