Evergreen Solar's Failure Amid Solar Market's Success - Seeking Alpha
Who killed Evergreen Solar (ESLR)?
The company’s String Ribbon technology -- which emerged in 1994 from research conducted at MIT -- promised to reduce the cost of solar panels AND increase power output. Payback could be achieved in 12 months, it claimed. A successful IPO in 2000 dovetailed with the subsequent explosion in solar. In 2008, it opened a factory in Devens, Mass. with the help of $58 million in state money.
This week, the company announced it would shutter Devens and lay off 800 of 925 employees. The firm lost $54 million in the first nine months of 2010. A European joint venture limped offstage last year. All this amid a booming solar market.
The company isn’t quite dead -- it plans to reposition itself as a wafer maker -- but the future looks cloudy.
Conventional wisdom blames Chinese solar panels, which began to emerge in notable numbers in 2006 and 2007. But it’s not a fully adequate explanation. First Solar (FSLR), the largest solar module maker in the world, has led the industry in driving out cost. It comes from Arizona and runs factories in Europe and Malaysia. It doesn’t exactly take advantage of Chinese labor rates or all that cheap capital.
SunPower (SPWRA), meanwhile, makes some the world’s most expensive silicon solar modules. Yet it has managed to defy predictions about its impending death for years. Suntech (STP), a Chinese company, has a new factory in Arizona.
How come they -- and others -- are surviving?
Blame it on the Rogue Ripple, or a series of small, seemingly sound management decisions that have a massive and unforeseeable impacts on the destiny of a company.
Back in 1994, serial entrepreneur Jerry Kaplan formed an online auction site that quickly gained buzz with the business press and web consumers. Legendary VC firm Kleiner Perkins backed it.
It wasn’t eBay. The company was called Onsale -- eBay emerged the following year. Onsale specialized in selling PCs and other remainders from manufacturer and distributor warehouses. Ebay trafficked in used goods from consumers. Ebay exploded. Onsale held a dot.com IPO, tried a merger with Egghead, and ended up on the scrap heap of history.
"If you don't get the model exactly right, capitalism can be unforgiving," Kaplan, laughing, told me once.
The same happened to Direct Hit. Who? What? Back in 1998, Direct Hit, backed by Draper Fisher Jurvetson, was the next big thing in search. (At CNET, my old job, the first reference to Google (GOOG) comes toward the bottom on a story about Direct Hit.)
What happened? Direct Hit based its back-end on servers from Sun (JAVA). The company soon maxed out its ability to index the web. By contrast, Google built itself around cheap, replaceable Intel (INTC) servers.
"We spent our entire hardware budget for the year, and we quickly reached its limits," CEO Gary Culliss once told me. "They were able to focus on other things.”
String Ribbon wrings waste from wafer manufacturing. Traditionally, silicon manufacturers create a round log of pure silicon and saw off thin wafers, sort of like a butcher slicing mortadella. Square solar cells are then cut from the round wafer: silicon sawdust and the moon-shaped wafer edges need to be recycled.
In the String Ribbon process, two strings are placed in molten silicon. Gradually, as they are pulled apart, a thin sheet of silicon forms. No sawing, no lost corners, no waste. Brilliant idea.
Unfortunately, in the early version of String Ribbon, the silicon could only be stretched so far, leading to square wafers with a narrower X dimension than the diameter of traditional wafers. Unusually sized wafers led to unusually sized solar cells, which in turn required tweaks to solar modules.
Third-party module makers -- faced with the prospect of having to retool factories to adapt to Evergreen -- passed. Instead of selling wafers, the company’s module group became Evergreen’s captive customer.
When solar demand outpaced supply, the company could garner a profit (24.4 percent gross margin in 2007). Then the recession hit. Silicon dropped from a few hundred dollars a kilogram to $45. Module prices, goosed by an influx of suppliers, plummeted.
Suddenly, weird wasn’t a virtue. (Interestingly, Luminus Devices, an MIT alum with an odd-sized LED, is also undergoing challenges.)
Evergreen began to outsource module manufacturing and opened a wafer factory in China. It got the cost of its modules down from $3.18 per watt in early 2009 to $1.88 toward the end of 2010. Unfortunately, some are now selling modules for under $1.40.
Under the current recovery plan, Evergreen wants to sell its now standard-size wafers and cells to third parties. It could work, but the company carries debt and a whiff of failure. What kind of volumes can it achieve? What is the efficiency roadmap? What are the warranties and reliability test results? Evergreen needs to answer all of these questions.
Worse, many solar companies have gone vertical. What do we do with all of the factory equipment we bought last year if we adopt a third-party module?
China’s impact can’t be ignored. Everything costs less there and the government's programs to invigorate new industries are more consistent than ours. At times, the company has bought glass from China instead of nearby New Hampshire to cut costs.
Nonetheless, human decisions played a part in the drama. Think of it: if solar was really exclusively just about cost and losing out to emerging nations, you could replace executives at the VP level and above with rhesus monkeys.
When First Solar ventured into cadmium telluride, it went against the conventional wisdom that it could be done at scale. SunPower engaged in consumer advertising -- something other module makers ignored. It also pursued its development projects, a strategy Sharp (SHCAY.PK) and others are subsequently adopting.
AQT Solar got into commercial production of copper indium gallium selenide (CIGS) solar cell with $15 million. Others spent several hundred million. AQT guessed correctly that it could be done with standard factory equipment.
And look at Innovalight. The same year Evergreen opened its module factory, Innovalight decided not to build one -- instead, it retrofitted its business to just sell solar ink to established manufacturers. It now has five customers, all Chinese.
Innovalight CEO Conrad Burke tells me that the company made the decision before the 2008 crash. Luck or better foresight? Maybe you need a bit of both.
