Will the Sun Still Shine for First Solar?

This was an assignment for class and is unrelated to entrepreneurs.

As global issues continue to hinder the solar energy industry, first generation technology along with an overly optimistic outlook may be more to blame for First Solar’s problems than macroeconomics.

For years, First Solar was deemed the low-cost alternative to the more expensive polysilicon panel. It banked on continuing to gain traction with businesses and the government even when its more efficient counterparts made headway with customers by dropping the price to mirror First Solar. The company’s rosy outlook turned into reality this week.

On Tuesday, CEO Rob Gillette was asked to step down after failing to reinvigorate First Solar. (FSLR) Since becoming CEO in 2009, shares have fallen over 60% and some speculate Gilligan not disclosing negotiations about a project sale that fell through for Enbridge, a Canadian based company focused on crude oil, natural gas, and green energy, may have been the last  straw.

Gillette’s approach of expanding First Solar’s market of first generation technology was not conducive when the world was demanding second generation. Initially, building its empire using cost-effective but less efficient thin-film solar panels provided a niche market for customers looking for a less expensive solution in comparison to costly polysilicon panels.

As technological advancement progressed, the cost to produce polysilicon decreased eliminating First Solar’s competitive advantage and leaving FSLR with a heap of low-efficient panels and little demand.

With Gillette stepping down, First Solar’s stocks plunged 25% in a day, but rebounded after the company’s early release of third quarter earnings showing $1 billion in revenue.

The tactical move provided short-term relief for investors but as the European market is stalling and the U.S. and other markets are growing, FSLR must prove long-haul strategy in order to stay in the competitive game.

“Europe has accounted for 70 to 80% of solar panel sales in recent years, driven by generous payments from governments encouraging renewable energy. Current austerity measures have forced governments to reduce those payments sharply,”  Paul Torgerson, an analyst at Harbinger Capital, said. “The uncertainty in the region has prevented banks from lending to projects.”

As Europe’s market may be slowing down, the U.S. is looking to gain traction. According to the Solar Energy Industries Association, the demand forecast shows solar panel installation growth will triple by 2015 in the U.S. As California has lead the pack, both Oregon and Mississippi are looking to create more renewable energy sources.

The increase in U.S. demand appears promising for the solar sector, but the competitive landscape doesn’t look promising for FSLR or its U.S. counterparts, as China is seen as the forerunner.

The U.S. has not only seen Solyandra go bankrupt but also Evergreen Solar and SpectraWatt—both Q-Cells and Rec Solar are also on the road to bankruptcy. China has also seen its share of headlines with Suntech writing down bad investments. Yet Suntech, Yingli Green Energy, and Trina Solar have all posted sales increases in the second quarter.

“The biggest issue facing the solar industry is overcapacity, mostly driven by expansions of Chinese companies. The Chinese are able to build capacity much cheaper than anyone else because of land grants and low to no interest loans from local banks,” Torgerson said.

With new markets emerging in warmer climates like Saudi Arabia, India, and Australia, FSLR may be able to beat out competition by capitalizing on their lower cost option because efficiency would play less of a role in hotter temperatures.

Even with quarter four projections down from past estimates, First Solar is still expecting to make it through next year and swing up in 2012, according to analyst reports.

“FSLR will be around in some form but what that form is remains unclear,” Torgerson said.

Tags: First Solar, FSLR, Rob Gillette, Solar Energy Industries Association