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First Solar Restructures for Changing Market

Jan. 11, 2012
Excess industry supplies force company to seek 'industrial' business model with lower margins.

First Solar Inc. faces a cloud of uncertainty in 2012. A supply glut threatens to mar gains achieved during the U.S. solar industry's record-setting third quarter last year. First Solar, one of the largest thin-film solar panel producers, has been a leading contributor to industry growth that endured through the recession. But an oversupply of solar modules created by various global factors has driven down industry margins.

First Solar responded to the expected slowdown with cost-cutting and market restructuring measures that were common in other industrial sectors during the last economic downturn.

The Tempe, Ariz.-based company will transition away from government-subsidized markets and focus production on large utility-scale systems as part of a three-year strategic plan, said Mark Ahearn, First Solar's chairman and interim CEO, during a Dec. 14 investor guidance call.

The shift means First Solar will hold off on developing smaller rooftop installation products and off-grid applications, Ahearn says.

The company's new business model will be more reflective of an industrial company rather than a technology provider, according to First Solar CFO Mark Widmar.

First Solar plans to price at levels that increase demand without subsidies by targeting more consistent revenues of 5% to 10% annual growth and cutting gross margins.

"There are compelling reasons for large industrial companies to perform at the levels that they have for decades," said Widmar during the investor call. "They have helped their customers solve their problems as opposed to feeding off depleting subsidies, and they are protected by sustainable, competitive advantages in terms of scale, global presence, learning-curve advantages and returns that add value."

As part of the restructuring, the company cut 100 employees, including 60 at its Santa Clara, Calif., research and development center, says Ted Meyer, the company's vice president of corporate communications.

The R&D center will discontinue research efforts on alternative solar cell technologies and refocus on advancing its cadmium-telluride modules, the company said in an SEC filing.

A thin-film panel moves down the line at First Solar's manufacturing facility in Perrysburg, Ohio.

The restructuring comes on the heels of a record third quarter that saw U.S. solar installations reached 449 megawatts, the largest quarterly total ever, according to a report prepared by GTM Research for the Solar Energy Industries Association.

But government cutbacks in Europe on alternative-energy incentives and massive production expansion in China are the primary driving factors behind the current market imbalances.

First Solar's primary market has been in Europe, which accounted for 80% of the company's module sales in 2010, Widmar says. In 2012, the company expects North America to represent its largest market with 60% of total sales, while Europe will shrink to one-third of its overall market.

First Solar is in the process of prioritizing geographic markets as part of the three-year plan, Ahearn says.

South America and Africa are likely two of the more promising regions for the company's future growth, says Mark Bachman, a renewable energy analyst with Avian Securities LLC.

"For solar, you want two things: areas that have an inordinate amount of sunlight and high electricity costs," Bachman says. "That's what makes solar work."

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