SunPower SunPower was founded in 1987 by Dr. Richard Swanson, a professor of electrical engineering at Stanford University. At the time it closed its Series A round of VC financing in 1989, SunPower’s goal was to commercialize solar concentrator™ technology. However, according to Swanson, the company ended up going in a different direction: We realized that solar concentrators were a bad idea. Conceivably, someday concentrator systems could be a lower-cost PV alternative, but they are not now and they have a long way to catch up with continually improving flat-plate systems. Moreover, concentrators are not well suited for many small distributed, remote applications. We wrestled with whether we should give the money back to the VCs or not. Ultimately, we chose not to. Starting in about 1991, SunPower went through a long period of trying to find its way. In the early 1990s, the Honda Motor Company approached SunPower asking if the company, known for its efficient solar cells, could make cells big enough to cover Honda’s solar powered race car. After agreeing to Honda’s request, Swanson realized there was one barrier standing in the way of SunPower’s ability to deliver: “We were all from academia. We argued for about four hours one day about whether we needed two shifts or one shift and realized after a while we had no idea how to figure out whether we needed two shifts or one shift.” After hearing about SunPower’s dilemma, Swanson’s friend T.J. Rodgers had the answer. Rodgers, founder and CEO of Cypress Semiconductors, suggested that SunPower tap into some of his company’s talent that had been recently laid off, particularly his former VP of operations. “He’s kind of a drill sergeant,” Rodgers warned Swanson, but that’s what you academic types need.” Within three weeks SunPower had been transformed from an R&D fab into a full-blown solar cell manufacturer operating 24-hours a day. Powered by SunPower’s cells, Honda went on to win the race across Australia by more than a day over the second place car. SUNPOWER: FOCUSED ON THE FUTURE OF SOLAR POWER Rebecca M. Henderson, Joel Conkling and Scott Roberts After the Honda experience, NASA approached SunPower to provide cells for a solar powered airplane. The plane was called Helios, and it had set a record for highest sustained level flight, at 96,500 feet. SunPower provided a 35 kW array of hand-made solar cells at $200/watt. NASA wanted to order more, but asked SunPower to try to reduce the cost. Based on NASA’s request, it became obvious to Swanson that in order to survive, SunPower would have scale up its production. “We decided that the secret was to do what we know best, and that was calculating things,” Swanson recalled. “We built a factory model, and tried to figure out how much it would really cost us if we made solar cells in volume. Because of the efficiency of our cells which allow us to get more watts for each process step and more watts for each gram of silicon, we believed that we could compete.” While SunPower was unable to convince many investors about its potential, T.J. Rodgers believed that Cypress and SunPower were a match made in heaven, and proposed a partnership to Swanson: “We’ll marry our expertise in semiconductor manufacturing that we have honed over 25 years of world class competition, our understanding of how to run a fab, and our knowledge of how to transfer products from R&D into manufacturing with your technology. Together we’ll create a great solar company.” The partnership with Cypress, which began in 2001, allowed SunPower to begin solar cell commercial production in late 2004, and in November 2005, the company went public on the NASDAQ stock exchange. Resulting from a large investment by TJ Rodgers, Cypress retained a majority stake. Within one year, SunPower produced approximately 20 MW of solar power, and in 2006 the company expected to produce around 65 MW (Figure 5). Revenues rose from $6 million in 2004 to $78.8 million in 2005, and were projected to surpass $220 million in 2006. The second quarter of 2006 was the first profitable quarter in company history. (See Exhibit 7 for financials.) SUNPOWER: FOCUSED ON THE FUTURE OF SOLAR POWER Rebecca M. Henderson, Joel Conding and Scott Roberts Figure 5 SunPower Production Volume SunPower Production Volume 205 125 2000 200 Production Volume Source: SunPower Photon Consulting While SunPower initially focused on the production of solar cells, the firm soon integrated into the manufacture of modules, followed by a move into wafer manufacturing. In July 2006, SunPower signed an agreement with the South Korean company, DC Chemical, to support the construction of DC’s first silicon production facility. In return, SunPower gained a substantial, long-term source of silicon supply, at a time when there was a shortage of silicon. In September 2006, SunPower invested in a joint venture with a Chinese company to manufacture ingots and in December 2006 it acquired Power Light, a California-based installer that specialized in large installations over 100 kWp, for $335 million. SunPower’s Core Capability SunPower produced the highest efficiency solar cells commercially available in 2006. By focusing early on developing cells for solar concentrator technology, SunPower was able to create a differentiated type of solar cell in which the metal contacts and grids were located on the back side of the cell. This design improved efficiency by allowing more sunlight to hit the silicon material in the cell rather than bouncing off the metal grids, and also allowed for a more uniform all black appearance which some customers found aesthetically preferable. Higher efficiency and improved aesthetics, however, came at a cost. SunPower’s manufacturing process required approximately twice as many steps as the typical solar cell manufacturing process. Meanwhile, some of these steps were unique to SunPower, raising capital expenditure per watt. The firm estimated capital expenditure per watt was around $1.00, while the cost of manufacturing a cell was roughly S2/watt. Of that cost, SI 20 was for the silicon wafer, while the remaining S0.80 covered the cost of processing the wafer into a cell. A good portion of SunPower’s process development was carried out in the Philippines in order to take advantage of the increased technical capabilities and low cost of Filipino engineers. Manufacturing, meanwhile, was done in the United States To the extent that SunPower’s processes mirrored the typical production process, the company benefited from manufacturing equipment innovations. Many industry players believed that crystalline manufacturing costs could see cost reductions of 25% by 2010. (See Exhibit 8.) As Werner explained: Generic advances move quite rapidly across the industry as they do in all industries now. We use approximately 2/3 of the same equipment vendors as our competitors. So inevitably vendors sell improvements that we give them to our competition, and vice versa. Manufacturing excellence is partially about how quickly you adapt those advances, and how aggressively you try to find out about the advances. SunPower’s high efficiency cells also gave it a competitive advantage in the systems installation segment of the value chain due to the fact that higher efficiency cells and modules packed more power production capacity into a given space. Therefore a house with limited roof space could install more solar capacity. Fewer modules and less covered area also meant less installation cost, and SunPower’s customers, the installers, were reportedly willing to pay a higher price for the panels. “Our channel checks tell us that [the premium) is at least 10%,” Werner stated. SunPower had publicly committed to increasing the average efficiency of its solar cells from its 2005 level of 20.7% to at least 22% by the first quarter of 2007. Some of these efficiencies, it was hoped, would come from reducing the grams of silicon per watt from its 2005 level of 7.5 grams per watt (the industry average was approximately 10 grams per watt) and reducing wafer thickness from 190 microns to 170 microns or below. But, as Werner noted, it would not be an easy goal to achieve: “I think it’s like losing weight. Those last two pounds are really tough. That could stretch out over a number of years.” Speaking about SunPower’s technology advantage, Werner commented: The great internal debate is how long SunPower’s lead is. Are we Intel where we can focus on this and drive this for 10 years or more, much like they did for decades in the microprocessor industry, or are we like many other industries where you have an advantage that is perishable in a timeframe such that you had better find a new innovation plane…. Downstream, SunPower intended to help squeeze costs out of the residential retrofit installation and integration business, which accounted for around half of the final selling price of an installed system. SunPower believed that the installation segment of the value chain was underscaled, and intended to help its installer partners scale the fixed cost aspects of their businesses. In the industry as a whole, the final assembly and installation of solar systems (the so-called “Balance of System”) had seen dramatic cost reductions. Standardization via the emergence of “cookie cutter” applications, such as a 2 kW standard roof-mounted system, had brought some consistency to planning, mounting, and July 25, 2007 materials use. Improvements in other installation costs was difficult to document, but some solar analysts believed that costs had fallen by at least the same amount as PV modules. The Competition SunPower’s competition consisted of 15-20 established cell manufacturers, a handful of silicon-based cell manufacturing upstarts, and a number of thin film solar companies offering potentially disruptive technologies. Sharp Solar Headquartered in Japan and with significant operations and market share in Germany and California, Sharp Solar was the industry market leader with a 26% market share_427.5 MW of cell and module production in 2005 and 32% year-on-year growth over 2004. Its cell production processes, based on standard technology, were the result of over 40 years of research and development. Sharp operations spanned wafer, cell and module production, and it was pursuing R&D in thin films, concentrator technology, and solar integrated products. Its modules had been characterized as reliable, workhorse solar modules, “the Chevy of the solar industry.” Sharp solar modules were primarily based on multicrystalline solar cells with efficiencies of 14- 15%. Due to standard module efficiency losses, the modules were approximately 13% efficient. While Sharp derived the majority of its revenue from basic modules, it had also introduced a range of low volume, innovative products, including triangular modules to fit in tight corners and translucent solar window glass with integrated LED lights. Sharp had also researched back contact solar cells, similar in nature to the cells produced by SunPower. Q-Cells Germany-based Q-Cells was the industry’s second largest player by market share, producing 165.7 MW of solar cells in 2005, good for 118% year-on-year growth. As the industry’s fastest growing company, Q-Cells primarily produced multicrystalline solar cells with efficiencies of 14.5%-15.5%, as well as monocrystalline cells with efficiencies of 16%-17%. The company had developed large format cells (8″ square instead of the standard 5″ or 6″ squares) in order to reduce processing cost per watt, but, as of 2006, these cells were not in large scale production. Q-Cells had taken a portfolio approach to emerging solar technologies with minority investments in a range of potentially disruptive companies, including a joint venture Evergreen Solar and investments in a number of thin film solar companies. REC Group Renewable Energy Corporation (“REC Group”) was the only fully-integrated solar company, with production along the entire value chain from silicon production to module manufacturing. The company’s silicon and wafer manufacturing volumes placed it among the industry leaders, while its cell and module production was still developing. REC Group was also the only major silicon manufacturer which produced silicon only for the solar industry. REC Group began operations in Norway in 1994 as Scan Wafer. Up until 2002, the company primarily produced wafers, after which time it entered a joint venture with a silicon manufacturer, and eventually bought out its JV partner to fully own the silicon plant. In 2003, REC expanded into cell and module manufacturing and in 2005 it purchased another silicon manufacturing facility, placing it solidly among the top five silicon manufacturers in the world. REC Group produced more silicon than it used to manufacture wafers, and produced more wafers than it used in its cell and module manufacturing, putting the company in the unique position of both supplying and competing with its customers at the wafer, cell and module level. The company intended to reduce the cost of producing a solar module 50% by 2010. First Solar Based in Arizona, First Solar was one of the more mature thin film solar manufacturers in the industry. The company relied on a compound of Cadmium Telluride (CdTe) instead of silicon to produce its modules, and as a result its modules were 8%-10% efficient instead of the 13%-18% efficiencies found in silicon-based modules. In an IPO registration statement filed in the summer of 2006, the company reported module manufacturing COGS of $1.59/watt. Industry watchers and competitors expressed concern over the toxicity of the cadmium contained in its modules. First Solar contended that the concerns were exaggerated, given that the amounts were so small and so unlikely to enter the environment. SunTech In 2005, China-based SunTech was the world’s largest PV producer and by the end of 2006 the company had moved into 4 place with 240 MW of photovoltaic cell capacity. Meanwhile, SunTech’s production topped 160.1 MW in 2006 and was estimated to more than double in 2007 to 325 MW.” While the company exported more than 90% of its products, mainly to Germany and Spain, it hoped that by 2015, 20% of its products would be sold in China. SunTech’s CEO was pressing the Chinese government to start offering incentives for the photovoltaic cell industry Citizenre Industry newcomer Citizenre, based in Delaware, was attempting to disrupt the industry by offering a new business model by which the company would manufacture, pay for, install, own, maintain and operate the solar PV system installation while homeowners would be required to pay for the electricity generated by the PV panels at a fixed rate for a set period of time. Many industry veterans were skeptical about Citizenre’s ability to deliver as the company did not yet have a product to sell nor had it disclosed information on those investors who had purportedly committed $650 million to the company.25 Conclusion SunPower had come a long way from the days when it was making solar cells that powered Honda’s solar powered race car to victory. In 2006, the company found itself competing in an industry experiencing tremendous growth and increasing public and private sector support whether in the form of subsidies or direct investment. However, in light of the varied and continually evolving competitive scenario that SunPower had become a part of, company CEO Tom Werner was aware that the road ahead would likely be a challenging one. The key was choosing and formulating the right strategy. Should, for example, SunPower’s strategy focus on the pricing of modules? Or should it focus more on investing in process improvements? Or should the strategy be some combination of the two? If so, what was the right formula based on the multitude of variables that solar cell producers like SunPower faced?
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