Suntech Power Holdings (STP)– Part 2 – Balancing Global Sourcing & Delivery

Recently in an interview with Motley Fool’s Rich Smith, Suntech CEO Zhengrong Shi confirmed that the company is on track to achieve a production capacity of 1GW by 2010. This translates to a growth rate of about 28% in production capacity in the upcoming 3 years. Further, lowest-cost production and the best relative technology were touted as competitive advantages. Shi was especially bullish in the company’s long-term prospects. His vision of Suntech claiming 2% of China’s energy needs by the year 2020 is indeed high octane. Based on that, SunTech’s revenue from China alone in the 2020 timeframe will be in the $12 Billion range. These claims are overly optimistic given China’s energy strategy is all but clear. Hydroelectric power generation might turn out to be a big part of renewable energy strategy, per the indications from the National Development and Reform Commission (NDRC) in China. A bear-case scenario zeroing in on the potential overcapacity and demand slowdown in Germany following reduction in subsidies is available at cbsmarketwatch.

The following table is a look at the geographical mix of Suntech’s revenues:












Year2004200520062007*
Germany72.14542.554
Spain2820.634
Rest of Europe15.318.47.3NC
China7.82521.7NC
USANCNCNC7
Rest of the world2.83.77.95


*2007 numbers are as of 2nd quarter.

At the EOY 2006, Germany accounted for 42.5% of the revenues and SolarWorld AG singly accounted for 21% of it. German sales based on a percentage of total revenue are down from 72.1% in 2004. Sales in Spain picked up significantly to compensate for part of the German slowdown. The 2nd quarter 2007 financials available at call transcript at SeekingAlpha indicates of a further shift in the revenue base. Germany and Spain together accounts for 88%, USA accounts for 7% and the rest of the world including China accounts for the remaining 5%. The constant shifting is a result of the company attempting to track government subsidies globally.

Pricing power is a big issue for Suntech because the industry relies on government subsidies. Customers largely base buying decisions on the economic feasibility of installing the PV module. The installed cost of the company’s PV modules is upwards of 35¢ per KWh. This is well above the local utility rates in most areas with a few exceptions (e.g Hawaii). Another factor impacting Suntech’s pricing power is the average sunlight. For the business model to remain viable, Suntech needs to factor in these variables when deciding on global expansion initiatives.

Silicon wafer shortage coupled with the company’s dependency on it as the base raw material is another challenge for Suntech. To its credit, Suntech has been aggressive in securing long-term supply contracts. Currently 50% of the supply comes from supply contracts and the remaining 50% from the spot market. This supply is projected to grow to 80% from supply contracts by 2010. This strategy works very well in an environment of increasing raw material prices, but can prove disastrous once the trend reverses. Wafer shortage is expected to ease with the acceleration in large scale production in China. The following table summarizes the projected minimum obligations from supply contracts (taken from Suntech’s 2006 annual report) and is an indication of the significant risk associated with the strategy:













YearMinimum Obligation
2007327,093,000
2008518,089,000
2009$633,120,000
2010$750,496,000
2011$868,622,000
Thereafter$5,118,987,000
Total$8,216,407,000



The MSK acquisition in July 2006 was expected to pave way for Suntech’s entry into the BIPV (Building Integrated Photo Voltaic) space globally as well as for its expansion in Japan. The 2nd quarter 2007 report indicates that BIPV revenues along with sales in Japan are insignificant. The global revenue from BIPV has the potential to accelerate in the coming years, but growth in Japan is a moot point.

Given the magnitude of the issues, it is reasonable to conclude that there is above average risk in the business. The significant role of external factors should not be ignored when making a long-term commitment.

The last part of this article will focus on Suntech’s investment outlook.

Suntech Power Holdings Analysis:
  1. Part 1 - A Solar Industry Behemoth In The Making.
  2. Part 2 - Business Issues.
  3. Part 3 - Preferring Manufacturing Expertise Over R&D.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

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