A transformative tipping point

For a technology that deals with the rapid conversion of direct current (DC) to alternating current (AC) at lightning speeds, actual change in the global inverter market appears glacial in comparison. At the end of 2012, a disintegration of the sector supplier stranglehold was not so much on the cards but already happening: Germany’s SMA had seen its global market share slashed from 40% in 2010 to 24% by the end of 2012 – a huge, game-changing contraction that was set to open the floodgates for a fragmentation of the market.
But at the apex of the industry, that rapid pace has slowed. By the end of 2013, SMA’s global revenue share was, according to IHS, down to 16%. To understand what has been happening, it pays to look at SMA’s leading competitors in the inverter space. Growth in general has proven elusive over the past 18 months as the plunging cost of solar cells and modules has forced price pressure over into the inverter market’s back garden.
Alongside SMA, ABB (after its 2013 Power-One acquisition) endured suppressed revenue share in 2013, as did Kaco New Energy, Schneider Electric and Advanced Energy. Reduced solar demand in European markets last year saw the balance of revenue share tilt from West to East – confirming the predictions made by IHS in pv magazine (Issue 11/2013, p. 38) 12 months ago. And as Japanese and Chinese inverter suppliers shuffle up the top 10 for global revenue share, their European and U.S. counterparts have had to make room.
As fragmentation of the inverter market takes hold, internationalization has emerged as a smart survival tactic. Local markets can still drive revenues for the leading Japanese and Chinese inverter suppliers, but elsewhere Europe’s largest names have begun to – perhaps reluctantly – ramp up their overseas footprint. The story is the same for U.S. suppliers, and even some leading inverter suppliers from China and Japan have knocked down the walls of cultural insularity in order to test the waters of the global market. The result? According to IHS, average inverter prices have fallen by around 10% globally in the past year, while the democratization of supply and manufacturing has spurred greater growth in Latin America and other parts of Asia and southern Africa.
“Historically, Germany and Italy were the two largest markets. Now it is China and Japan. These two markets account for 50% of the global demand for inverters,” said Cormac Gilligan, senior analyst for solar at IHS. Such a shift has altered the balance of which suppliers have gained – and lost – market share.
The theme of demand shift is the dominant narrative arc in the inverter story of 2014. The subplot, says Gilligan, is price pressure. “Some suppliers have been more affected than others, depending on which companies have chosen to update their portfolio, and those that have waited for next-generation products to be released.” The reluctance of Western suppliers to enter the Asian market has been predicated on such price pressures. China, for example, is an extremely competitively priced market for inverters: at $0.07 per watt it has the lowest prices globally. Japan is the most expensive ($0.25 per watt), but both tend to prefer local suppliers, which represents a barrier for Western companies.
Times are changing, however. In China, the solar subsidy is now paid on a kWh basis, meaning EPCs and developers are placing greater emphasis on quality of materials. “This is quite a big change that will prove advantageous for large U.S. and European inverter suppliers,” said Gilligan. “An important development will be the maturation of the after sales service, which is likely to bring further opportunities in China.” While Chinese companies seeking rapid expansion stripped back or even curtailed their after sales service, European and U.S. suppliers are banking on their traditional strengths to gain a surer foothold in China. Conversely, as the inverter market becomes more commoditized and prices become a key driver, Asian suppliershave an opportunity to expand first and improve second. At utility and commercial scale, an IHS PV Inverter Customer Insight Survey found that integrators and EPCs remain wary of Chinese products and prefer Western inverter suppliers – a fact that goes some way to explaining SMA’s and ABB’s preeminence at the top of the global revenue charts. However, large Chinese suppliers like Sungrow and Huawei are not only growing in size, scale and scope, but are also catching up with their Western counterparts in terms of quality and service – a development that could make for a very interesting 2015.

SMA: Lead cut

According to the latest quarterly data from IHS, SMA’s global revenue share of the inverter market had decreased to just 11% at the end of Q2, 2014. From 40% in 2010, 24% in 2012 and 16% at the end of 2013, this fall has been more dramatic than most, and is indicative of the market’s fragmentation.
“The reason for SMA’s performance in 2014 is firstly because their home domestic market of Germany has experienced suppressed demand this year, and is forecast to decrease further in the remainder of 2014,” said Gilligan.
Beyond Germany there is some growth for SMA in the U.S., but increasingly the company faces strong competition from European, Chinese and Japanese suppliers vying for a larger slice of the price-competitive American pie.
“SMA’s exposure to China and Japan has been slower than perhaps the company expected in terms of market penetration,” added Gilligan. “The acquisition of Zeversolar has given them a two-brand strategy in Asia, but to date, because there is serious price competition in China especially, it is proving quite a challenge.” The large residential solar markets of both China and Japan represent a good opportunity for SMA, but current realities have stymied expansion. Most single phase inverters sold in Japan and China are packaged in so-called PV Kits, says Gilligan, and sold via module suppliers rather than as standalone inverters. This market requires a fair bit of groundwork to break, and can take years to develop a lasting relationship with local module suppliers. Indeed, IHS’ Sam Wilkinson warned as much last November following SMA’s then-noteworthy acquisition of Zeversolar. “Regardless of who you are, breaking the Chinese and Japanese markets can take years, so you are talking of 50% of the current global inverter market that is proving difficult to gain market acceptance in,” added Gilligan. Such circumstances are not unique to SMA, but the German giant certainly has more to lose than most if it cannot overcome these barriers. Looking ahead to 2015, pv magazine publisher Karl-Heinz Remmers wrote in September (Issue 9/2014, p. 99) that SMA “should not fall into the trap of dying virtuously, a victim of over-engineering at excessively high prices.” With a 10% reduction in its R&D budget, perhaps the company will seek out greater quantity at the expense of quality, but a balance somewhere between those two stools could prove SMA’s best strategy. Next year will continue to be challenging, based on the assumption that decreased German demand will continue, and competition in the U.S. will intensify. “Building out in China and Japan will be important,” said Gilligan, while the potentially lucrative markets of Taiwan and South Korea could also be in the company’s cross hairs.

Omron: Homegrown success story

Japanese inverter supplier Omron has enjoyed a strong 12 months, easing up the table to claim 7.5% of global revenue share, placing the company second at the end of Q2 2014. Its rise to prominence has been swiftly impressive. In 2011 Omron was 14^th in terms of global revenue share, but rose to sixth place in 2012 and was third at the end of 2013 when it had cornered 6% of market revenue. Omron’s emergence has coincided with the solar boom occurring in its domestic Japanese market – a boom that accelerated in the wake of the 2011 Fukushima Disaster, when Japan turned its back on nuclear power.
“Omron’s growth has been driven by its success in Japan and boosted by a
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strong Japanese quarter for solar,” said Gilligan. Noted for its expensive inverter prices, cornering the lucrative Japanese market has boosted Omron’s bottom line, inching its share of global revenue upwards. “Allied to higher shipments, Omron’s revenues are among the highest in the world, and this is also the main reason why a lot of Japanese inverter suppliers have above average global prices going into the final quarter,” said Gilligan.
While a rising domestic Japanese market has lifted all local inverter players, Omron is best positioned to capitalize on other Asian markets such as Thailand, Taiwan and India, although expansion farther afield seems unlikely. “Omron has a presence in Europe, but Japan will remain its main focus in the near future,” added Gilligan.

ABB: Interesting times

Described by Gilligan as experiencing a “reasonably similar situation to SMA” in 2014, Switzerland’s ABB has seen its share of global revenue fall to 7%, putting the company in third place. The $1 billion acquisition of U.S. rival Power-One midway through 2013 gave ABB leverage globally, but the company’s expansion is a work in progress. As Power-One, the company ranked second for market share in 2012, with 10% of global revenues. That share reduced slightly to 8% by the end of 2013, and now as ABB, the company has fallen further back.
“ABB’s key markets have been impacted by the wider decline of solar deployment, particularly Italy and elsewhere in Europe,” said Gilligan. “Additionally, some of the new markets in which ABB has manufacturing facilities – such as India – remain volatile, leading to quite patchy revenue.” Despite this, ABB is seen to be performing well in most of the markets it has a sizeable presence in, with the company’s most pressing challenge to find a way to take advantage of the Chinese and Japanese markets where it currently has limited exposure. Another challenge, adds Gilligan, is to capitalize on the supply chains and skill sets the expanded company now boasts. “Power-One was previously focused on the residential and commercial-scale markets, whereas ABB was more focused on utility-scale. The challenge is to broaden that expertise across all markets.”

Tabuchi: On the up

Long tipped to form part of the Eastern clutch of inverter suppliers to elbow out their European competitors, Japan’s Tabuchi is fulfilling its long-promised potential. Sneaking into the global top 10 for revenue share in 2013 in seventh place (with more than 2% market share), Tabuchi is now in fourth spot with 6.8% of the global market. “This is a good increase on last year and serves as a reflection of the strength of the Japanese residential market,” said Gilligan. A true competitor domestically to Omron, Tabuchi is zeroing in on ABB internationally, at least in terms of market share. However, the company has shown little interest in developing its international footprint, preferring to capitalize on the lucrative Japanese market. This single market strategy proved damaging for SMA and Power-One in the past, which suggests that Tabuchi may soon seek international expansion.

TMEIC: Lessons learnt

Speaking of overreliance on one market, TMEIC appears to have acknowledged that such a strategy is not conducive to profitability. The Japanese giant has slipped down the ranking in 2014, falling from fourth place in 2013, when it had 4% of revenue share, to fifth place at the end of Q2 2014. TMEIC still boasts 4% global market share, but has seen its grip loosened. However, flat growth can partly be attributed to the traditional Q2 dip that happens in Japan after Q1. “Although TMEIC remains the leading inverter supplier in the utility-scale market in Japan, it has realized the errors of an overreliance on its domestic market,” said Gilligan.
A strategy the company has employed to stem the flow of business to competitors has been the purchase of India’s AEG Power Solutions, which will help TMEIC gain market access quickly in India, and a concerted effort to pursue the Chinese and U.S. markets. “In September TMEIC announced that it will begin local manufacturing of its large central inverters in the U.S. in order to reduce shipment costs,” said Gilligan.
A similar strategy has been employed in India, where local manufacturing enables the company to avoid paying import taxes. “The Japanese market has traditionally been the key market for TMEIC,” added Gilligan. “But to reduce the risk of overreliance on this single market, the company has built significant manufacturing capabilities in threeof the top 10 other largest PV markets – India, China and the U.S.”

Advanced Energy: slow and steady

U.S. inverter manufacturer Advanced Energy had 3.5% of global market revenue at the end of Q2 2014, which is similar to last year and sees the company sit comfortably in sixth place – again, the same as last year. At the end of 2012, Advanced Energy was in fifth place but with only 3% of market share. In a landscape that has seen inverter revenues shift inexorably East, this stability represents something of a win for the company. “Advanced Energy is focusing on maintaining market share in the U.S. right now, which is intensifying in the commercial and utility-scale sectors as new entrants are attracted to this high growth market,” revealed Gilligan. The company acquired REFUsol in 2013 to enable it to access new markets in India and Europe, a strategy that is proving fruitful.

Enphase Energy: seventh heaven

The U.S. microinverter manufacturer has enjoyed the aftereffects of the booming residential sectors in the U.S., U.K. and Australia, and has seen its share of global revenue increase accordingly to 3.5%, placing the company seventh overall, and making it the largest microinverter specialist in the top 10.
At the end of 2013 Enphase Energy was in 10^th place with around 2% of global market share, having fallen from eighth place in 2012. A placing of 13^th in 2011 suggests that the company is impacted more than most by market fluctuations. Whether the company can take greater control of its own destiny remains to be seen. In securing a three-year supply deal with solar leasing giant Vivint Solar in August, Enphase Energy’s growth in the U.S. market appears stable for now, while a 1 MW supply deal in the U.K. in September could prove the first of many if the British solar market tilts more towards the rooftop sector.

Schneider Electric: contented

Despite having a sizeable reach in most major solar markets, Schneider Electric’s 3.3% of Q2 market share in 2014 is similar to its performance in 2013 and 2012, when the company ranked eighth and fourth respectively. Over the past 24 months its share of global revenue has consistently been around 3% – a figure the company appears happy with.
“Schneider Electric’s global reach means it can ramp up or begin production in new markets when they emerge; this is one of their main strengths,” said Gilligan. With good sales support and plenty of branches worldwide, the electrical engineering group is held in high regard and differs from its pure-play inverter rivals in that it has the capacity to develop new markets, but opts not to.

Huawei: an emerging force

In ninth place with 3% of the global revenue share is Chinese manufacturing giant Huawei. Like Schneider Electric, the company has entered the inverter market with admirable effervescence in the past few years; but unlike Schneider, Huawei’s ambitions are far greater. “Having just crept into the top 10 as of Q2 2014, the company is planning something bigger,” said Gilligan. “They are building up market share in China, and will then gradually increase across the leading international markets. They are a real competitive force in China right now, and have an extremely strong R&D sector.”

SolarEdge: a new entry

Israeli-headquartered inverter and power optimizer company SolarEdge is a new entrant into the top ten, claiming 2.7% of inverter revenue thanks to a solid performance in the U.S. residential market. “The company is used by many of the leading solar lease providers in the U.S. – and if you are on that approved vendor list then it really opens up access to the very large, and growing, residential solar sector,” revealed Gilligan.

Outside the Top 10, for now

The most noteworthy omission from the top 10 is China’s Sungrow, which had been in fifth place with 4% of the global revenue share in 2013. Faced with competition from Huawei, the company has not performed as well as it might have expected in 2014, but the silver lining is an anticipated strong second half for the company. “Sungrow’s shipments were lower in H1, but until we see the full year average it is hard to say just how much share the company has lost to Huawei,” said Gilligan. “China’s domestic market is going to be the largest in 2014, where Sungrow has always been strong, so it is likely they will have a good year overall.” Similarly absent is Germany’s Kaco New Energy, which fell from third place in 2012 (with 3% revenue share) to ninth place in 2013 (with just over 2% of revenue share). “The decrease of core European markets has impacted Kaco’s revenue,” said Gilligan. “The company does have a presence in the U.S. and Asian market, particularly Japan and South Korea, so it has at least recognized the need for international expansion.”

The shape of 2015

Price pressures will continue to shape the market next year, but it will also be interesting to note how pure-play inverter companies respond to the threat of larger manufacturing firms such as Huawei, said Gilligan. “It can be challenging for the pure-play companies to expand; there can be investment risk involved that can prove off-putting.” Many inverter specialists do not have quite the same level of resources as some of the multinationals, so that is a challenge they must overcome.
With SMA’s majority share being acquired by Danfoss, and some of the smaller microinverter companies looking to IPO to raise funds, many of the pure-play companies are aware of their limitations and are taking steps to address them. “Yaskawa’s acquisition of Solectria was a good example of a Japanese company undertaking a M&A to expand globally, and gives us a hint of what may occur more regularly in the future,” concluded the analyst.