November 7, 2012 19:27
"A Rare Solar Success Story" trumpets the American version of The Wall Street Journal today in an article about LDK Solar, a Chinese solar wafer manufacturer. We agree with "Solar" and "Story" but the rest of the headline does not match reality. (In fact, the Asian version is a little less over-the-top: "Despite Troubles, China's LDK Solar to Keep Humming.")
First, let's consider whether LDK Solar is rare. As described in the article it has a $500 million government loan guarantee. That sounds like something we remember about Solyndra LLC. Second, it is embroiled in allegations about dumping and production overcapacity, which are attributes that beset all of the solar panel and component producers whether their subsidies are coming from Washington, Brussels or Beijing. Third, while it soared early, it is now struggling, as have many American and European solar "darlings."
Which segues nicely into the question of success. According to the article LDK Solar had a $609 million loss last year (down from a net profit a year earlier of almost $300 million) and its depositary shares have dropped 77%. For those with a visual bent, Barron's does a nice graphical presentation. To stay afloat LDK Solar is renewing its loans, selling real estate and other assets, and accepting investment from state-owned funds. The article concludes, "Analysts said LDK could fall into the arms of a larger, healthier company." These are certainly not the terms we would use to describe a successful company.
But every cloud has a silver lining, and the travails of LDK Solar and its brethren are a large part of the reason for the success of solar panel installers: their raw materials, panels, are available at bargain basement prices. The current darling (number 10 on Fast Company's list of the 50 most innovative companies in the world) in this group is Solar City, which is imminently making its initial public offering to raise $200 million, although Superstorm Sandy has delayed that some.
What does Solar City do? First and foremost, its people think. They have thought deeply about how to build a successful business and reached a few unsurprising conclusions. Consumers want to be "green" but do not want to be bothered with having to contact building inspectors, general contractors, panel manufacturers, lenders, warranty companies, and state and federal tax authorities; they want their solar contractor to handle it all. Leasing to stable and economically secure individuals (i.e., not subprime borrowers) will generate a steady stream of revenue over the long-haul (typically 20 years). Long-term maintenance contracts can do the same, and can also provide opportunities for continued marketing and sales to the consumer. Tax credits, state rebates and leasing and maintenance revenue streams can be bundled together to form the asset base supporting an investment fund, which large institutional investors will invest in. The investment fund can then be used to finance growth. If this sounds like a successful business model, it is (so far).
Second, Solar City executes. The foregoing ideas are the basis for its rocketing success in the last few years. As stated in its S-1, It has raised almost $300 million dollars from private equity. Its revenues have grown year on year. It has come to dominate the residential solar market. It has just entered the commercial utility space with a 12 MW installation in Hawaii. To sum it up, it is seeking "world domination."
Our point? Take heed of these two darlings, one now struggling, the other feasting on the struggler and its fellows. Together they form a parable, not just for the solar market, but for the entire renewable energy space. We counsel our clients where government money is ubiquitous, innovative technology rampant, competition cut-throat, and winners and losers can change overnight. The sun may rise and shine for our clients, but it also sets. Our counsel should reflect that.