MEMC Electronic Materials Inc.: Power Struggles

Despite a recent plant blackout, MEMC executives and shareholders have sunny future prospects.

This past August, a plant expansion at MEMC Electronic Materials Inc.'s Pasadena, Texas, polysilicon facility went horribly awry.

An electrical subcontractor hired by the St. Peters, Mo.-based silicon wafer maker and 2007 IndustryWeek 50 Best Manufacturer botched an attempt to tie the plant's system into a transformer, resulting in the entire facility's power system being knocked offline for a day, according news reports.

Since such unplanned power disruptions at technologically sophisticated plants like MEMC's mean a long startup and recalibration process both the short- and long-term repercussions were severe .

In its Sept. 4 earnings statement the company noted, "Although the power was eventually restored later the same day, the unplanned and abrupt shutdown of high temperature and pressure chemical operations caused considerable complications. The facility is now in the late stages of recovery, but the abrupt nature of this incident, combined with the rain and thunderstorms in Pasadena, Texas, over the last few days, has hampered the facility's ability to recover operations expeditiously."

Because of the subcontractor's error, the plant's production fell about a week behind schedule, and more significantly for shareholders, the blackout led to an immediate drop of 5% in both stock price and third-quarter revenue guidance.

However, now that the plant is back online, executive expectations are for a speedy recovery.

"We believe we will have an opportunity to recover some of this lost production in the fourth quarter and thereby potentially reduce the impact on the full-year targets," Nabeel Gareeb, the company's president and CEO, said in a statement.

Despite the accident and subsequent stock dip, Gareeb and his team have reason to smile. MEMC is a powerful player in its markets, with all the major semiconductor makers as customers and manufacturing practices that have won it an IW Best Plants award as far back as 1995 for process improvement programs (including kanbans, empowered work teams, and a just-in-time manufacturing process) that it started back in the mid-1980s.

This forward-thinking wafer manufacturer is also well positioned to take advantage of a scarcity that is being driven by a different kind of power struggle -- that is, the rise of silicon-based photovoltaic solar cells as a clean energy source.

MEMC Electronic Materials, Inc.
At A Glance

MEMC Electronic Materials, Inc.
St. Peters, Mo.
Primary Industry: Computers & Other Electronic Products
Number of Employees: 5,500
2006 In Review
Revenue: $1.54 billion
Profit Margin: 23.97%
Sales Turnover: 0.87
Inventory Turnover: 8.51
Revenue Growth: 39.12%
Return On Assets: 32.17%
Return On Equity: 51.91%

Government subsidies and envelope-pushing energy regulations (such as renewable portfolio standards), both in the U.S. and Europe, have made for a bullish solar cell manufacturing marketplace. And because these plants take years to build and involve large capital outlays and a strong technological knowledge base, a company in MEMC's enviable position already has a head start in capturing a market that many see as about to catch fire.

MEMC's step into solar power has made for some sweet deals to rival those of its semiconductor business, such as a late 2006 sales agreement with Taiwan's Gintech Energy Corp. that is expected to generate between $2.5 billion and $3 billion in revenue over a 10-year period. Additionally, MEMC signed a deal in April to supply solar-grade wafers to Motech Industries worth more than $1.6 billion over eight years.

Analysts say that the high-grade polysilicon needed for solar cells could soon account for a third of MEMC's sales, and even though the computer chip market isn't exactly slackening off itself, many think solar will continue to deliver significant revenue gains in the bright photovoltaic future to come.


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