A few weeks ago I caught up with the chief executive of Sunpower, Tom Werner, and its Australian division’s managing director, Chris O’Brien.
Silicon Valley-based Sunpower has been a top 10 producer in the global solar PV market for a very long time and is considered one of the key pioneers of mass market solar panels, having been established in 1985.
Throughout much of the time, it's been thought of as the gold standard in solar panels.
It has always produced the world’s highest efficiency solar panel that you could get your hands on, which allowed it to charge a premium over every other supplier. I remember back about 10 years ago if you wanted the best solar panel and didn’t care about price, you got Sunpower.
But just like the other established solar panel manufacturers in Japan and Europe, it was severely challenged by the rapid emergence of huge Chinese solar producers. It suffered big losses and, ultimately, had French oil company Total come to the rescue, making a large injection of capital while acquiring ownership over about two-thirds of the company.
It's now managed to emerge reasonably healthy out of that Chinese overcapacity bloodbath.
But it seems as if the rise of the Chinese producers is unstoppable. They seem to have ambitions for production scale that are limitless and the finance available to achieve these ambitions while only achieving low margins. At the same time, they’ve managed to squeeze down costs to levels that were previously thought unobtainable.
During our interview I asked Werner:
How the hell do you compete against those guys [the Chinese]? How is Sunpower going to survive against guys that can mobilise such a huge amount of capital it seems at such a low cost?
Werner’s answer was simple:
"I think the key is to not stand directly in front of the competitor and compete. It’s to change the game."
For Sunpower, this initially meant vertically integrating down the supply chain into directly developing utility-scale solar PV power projects, particularly in the United States. While margins were pretty appalling in manufacturing solar panels in the last few years, margins in renewable energy power project development in the US have been quite good.
In addition, the value of their superior quality and conversion efficiency panels can be difficult to explain to relatively unsophisticated customers in the small-scale rooftop market. They tend to focus predominantly on price per watt rather than price per megawatt-hour. So for Sunpower it could avoid this by developing its own utility-scale projects where you receive revenue on a price per megawatt-hour, rather than a price per watt of capacity. In addition bankers financing utility-scale projects put a premium on proven reliability.
At the same time Werner said they’ve had to up their game in terms of scale and cost while investing to maintain their technological advantage. He notes that “we keep piling money into R&D so that the panel differentiation persists”. They’ve also expanded production to 1.7 gigawatts of annual production capacity (Australia’s entire annual demand for solar PV last year was about 0.8 gigawatts).
Now they are taking this to the next level. They are looking to offer the rooftop segment not just solar panels or solar energy but, instead, a product to take care of their entire energy needs via a comprehensive energy services solution of solar panels plus batteries plus energy management information technology.
Essentially, they could end up directly competing to push aside the big power retailers and big generators.
Of course, this prompts the obvious question: if the value is downstream in customer service solutions, why even bother making solar panels? Apple, as an example, doesn’t own the factories that make and assemble the components to create iPhones and iPads.
Werner noted that solar panels are a bit like the Trojan horse at this stage. They form a way to start the engagement with customers about an alternative model for how they might meet their energy needs. However, Werner surprisingly acknowledged this outsourced Apple model may be appropriate down the track:
“Well, there’s a time I think where it won’t make sense to make solar panels. I just don’t know when that is….And because, as you pointed out earlier, it’s very capital intensive and, you know, we’re five to ten, maybe fifteen years away where either we’ll licence our technology or we’ll use other people’s product as well, but it’s not imminent.”
The US economy has shown itself to be incredibly innovative at changing the nature of competition in the face of fierce overseas competition. They have often ceded industries to other countries but they usually find a way where they can capture the knowledge-intensive high-value segments.
Sunpower may just manage to do the same thing in solar, in spite of a fierce assault from the Chinese solar behemoth.
*Read the full transcript of the interview with Tom Werner here.