Q&A: Q.Cells' Oliver Hartley - Part 1

In part one of an interview with Q.Cells Australia Managing Director Oliver Hartley we discuss:

-- Financial difficulties in the solar PV sector and the Hanwha takeover of Q.Cells;

-- Module prices; and

-- Australian solar PV product quality and community perceptions.

A commentary piece referencing the interview can be found here.

Q.Cells and wider solar PV industry financial difficulties

TE: Q.Cells has been a longstanding leader in the solar PV market for some time and I understand you were number one in sales for a period of time – is that correct?

OH: We were number one I think in 2007 and 2008. We were the largest cell manufacturer in the world.

TE: So, what went wrong with Q.Cells?

OH: A lot of solar companies were badly prepared for the global financial crisis. Debt financing was done over very short terms for large projects. And then, particularly in Europe, this finance dried up.  That's where a lot of the problems for Q.Cells started. We had a lot of working capital tied up in these projects.

TE: So, what you're saying is that there wasn't necessarily an issue with the underlying business. But you had probably financed on too short a term and then when the GFC hit you suddenly had difficulty rolling over or refinancing that debt?

OH: I don't want to play it down. It was a mistake that a lot of solar companies made with risk management. We had very buoyant years – 2005, 2006, 2007, 2008 – great years, huge growth rates. And I think at Q.Cells, like at many other companies, we basically neglected some of the housekeeping in terms of cost management, risk management, exactly how these projects are best financed. Obviously the GFC was a difficult one to predict, but clearly we got hurt quite badly, whilst a more mature business in a more mature industry would have been able to manage that better than Q.Cells did. 

TE: So, what's happened subsequently because Q.Cells is miraculously still operating? You've still got the same existing manufacturing facilities?

OH: That's correct.

Basically what happened is that at the beginning of this year it became clear to the board in Germany that the company would not be able to repay its debt facilities that were due this year and in 2014 and 2015. In general terms, if a director is aware that they have problems in repaying the liabilities as and when they fall due, you have to call for voluntary administration and that's what the German operation did on the 2nd of April.

However, in Australia we only had three days where we weren't operational, and the Australian entity was always fully solvent. It was our parent company that filed for administration.

But our factories still continued to produce cells and modules throughout that time. So we still got product and we still sold our modules here in Australia while in Germany they looked for either a way to restructure the debt or to find a buyer.

Out of this, Hanwha, one of Korea's ten largest companies, purchased the assets off Q.Cells. They purchased the German plant, the Malaysian plant and the entities in the US, Australia and Japan. And as part of the deal, the German module and cell manufacturing plants will continue.

TE: So Hanwha has essentially bought the whole manufacturing operation…

OH: Correct.

TE: What's happened since Hanwha acquired the business? What have been some of the major changes since then?

OH: I think the major change really for a company like ours is to gain stability. I think that is the one big change that we have experienced in the solar industry. At the moment the most difficult thing in the market is to predict who is going to be around in a couple of years' time.

I think nobody is denying that a lot of companies will go out of business over the next few years because there is the consolidation phase in process. How quickly it will go is very hard to predict. Will it all happen next year? Will it drag on over the next couple of years?

This is a relatively normal process in a new industry. At the beginning you have a lot of players and then you go through this valley of death and a lot of companies will shut shop or will be acquired or merge and you only have a few large players left. That is creating uncertainty out in the market which is extremely difficult to deal with for players like ourselves, but also our partners and customers. They look back up the supply chain and say well who can I trust? 

We have seen big players like BP Solar and Schott leave the market. We have other pure solar companies that have gone into insolvency. That leaves this kind of uncertainty and it's anybody's guess who will survive.

And all of a sudden with the Hanwha acquisition this is not a risk we have anymore. That's quite a unique position to be in.

TE: Why are you so confident about that? Hanwha as a corporate entity might have solid financial strength but if they're losing money hand over fist in the solar business why would they keep the business going?

OH: Fair question. I think one of the things that gives me confidence is that Hanwha chose to purchase Q.Cells in the middle of a difficult time in the market. The due diligence went on during the  middle of this year, so they are completely aware how much money every solar company is bleeding at the moment.

But Hanwha is now investing at a very, very difficult time, so they're fully aware of what they're doing. That's the first thing. 

Secondly, Hanwha on a corporate level has identified three growth areas. They call it new growth engines and from a very corporate level the three are:

-- Holistic services, which is basically their financial services and their leisure and health services businesses;

-- Biotechnology, providing innovative solutions for the world's aging population; and

-- The third one explicitly is solar energy. It's not just renewable but specifically solar energy – where they want to provide a response to the challenges of energy demand for the future.

And if you have a corporation like Hanwha that is focused on long-term and you have that support from the very top level of management, it gives me a high level of confidence.

Now if the solar business continues to bleed money for the next five years, obviously then we might have that conversation again. But if I look at it from a bird's eye view, I think it's a comparatively comfortable position compared to a lot of the other solar companies.

TE: You mentioned the market has a huge excess of production capacity. Have you got any line of sight on how this restructuring process is going to play out? I suppose everyone's looking and waiting for some major withdrawal of capacity, but so far it hasn't happened. Can you see a light at the end of the tunnel and who's going to be left at the end of it? 

OH: I think you're pushing me a little bit hard here to speculate on the competitors. I obviously expect that Hanwha Q.Cells will be one of the ones that get through. I mean it is one of the largest players already now. I think we are the third largest. The combined entity of Hanwha SolarOne and Q.Cells now has a production capacity of 2.3 gigawatts, so it's certainly one of the top players in the market. 

You need size, that's for sure.

You need a strong balance sheet, which if you look at the top players, there are not that many around that have a strong balance sheet – so I think that also is a plus point for what we do. 

And I think you have to have a strong brand and quality capability and I think with Q.Cells now as part of Hanwha that's also there.

So, I think these things put together put us in a good position. Now, if you go through the other players out there, I leave it up to you to see if they have these three ingredients. I find with a lot of them one of those is missing.

Module prices

TE: Now, while some companies have been going bust due to this overhang of production capacity, customers have seen incredible reductions in prices. So they've been a beneficiary of what has been tough times for the life of Q.Cells and many others. Do you see prices having to rise at all to provide a more sustainable market going forward?

OH: I certainly think that prices can't fall that much further, because at the end of the day the purpose of a company is to make money. On one hand we see that some of the material costs can't go down that further, like the glass and metals for example. The price has probably gone sideways rather than upwards or downwards for a while.

On the other hand I do think there is still a lot of efficiency improvement potential in the industry though. With a growing industry, and with Hanwha coming in, a more professional industry can probably produce the same quality at a slightly lower cost compared to now.

TE: In light of that, solar PV has been a substantial beneficiary of government support globally.  That's often been provided on a basis that with deployment will come lower costs in the future.  Therefore we can scale up this technology to a much larger level and reduce greenhouse gas emissions, while continuing to get low cost energy.

If prices are going sideways rather than continuing to go down, what's the basis for government to continue to support the industry?

OH: Obviously we're talking about the component or module prices at the moment.  With module prices having already plummeted, the other components (inverters; racking; the general cabling; the delivering of systems) now play a much greater role than what they did in the past. A few years ago the module price was the main cost driver and this is certainly still an important part, but it's also now that the other parts of the puzzle need to come down in cost, so there's still a lot of room for improvement or cost reduction.

Australian solar PV product quality and community perceptions

TE: One of the issues I hear some concerns about is that third tier low quality suppliers from China have managed, for one reason or another, to stay afloat even though they're losing money. And Australia has been quite a significant buyer of their product from what I understand.

Can you see on the horizon that we might end up with a lot of dissatisfied customers in Australia who end up with product that doesn't work as well as what it should, and there's no one there to honour warranties. At which point the rest of the industry's left with a bad image that they don't deserve?

OH: That is certainly a risk. I think the entry barriers into the Australian market are very low.  A lot of local retail and installer companies just buy containers off the ship based on whatever is the cheapest product they can get. So I do think there is a risk that we'll have a lot of customers a couple of years down the track that end up with yellow panels or panels that don't perform as they should anymore.

Also it can actually be very difficult to get a warranty claim through. I don't think people really read the fine print on some of the warranty documents.

I hope that by the time these problems happen, if they occur at a large scale in two to say four years down the track (we see them happening already but they're only just starting), that hopefully we'll have such a mature market here in Australia that people will be able to distinguish between the reliable quality players, and the companies that come in and just want to dump product into the Australian market.

So, I'm concerned, but I'm not too worried.