No longer the introvert

There are two conflicting schools of thought when it comes to dealing with a bloody nose: Tilt the head forwards or tilt the head backwards. For Swiss inverter supplier SolarMax, the immediate treatment to the “bloody nose” it received in 2011 when it tried to enter the Chinese market was, well, bloody obvious – tilt backwards and retreat.
“We tried it and we were too late,” Christoph von Bergen, SolarMax CEO told pv magazine at the recent Intersolar Europe conference in Munich. “It was a bad experience. We got a bloody nose. China is a really difficult market, and I don’t know of any western inverter company that is successful there.” SolarMax’s decision to throw in the towel in Asia was predicated on two further pillars of influence – a strategic decision not to enter the Japanese market, while domestically the company had the Swiss market on the ropes with – in von Bergen’s own words – “a wonderful market share.” SolarMax’s experience in foreign inverter markets is far from unique. One glance at IHS Technology’s latest inverter supplier rankings for Asia finds no non-Asian country in the top 10. European and U.S. inverter suppliers have tended to dominate the remainder of the global share of the industry as market tussles for dominance and prominence have been generally fought in other sectors, such as the solar module sector.
But as the cost of solar cells plunged sharply during 2012 and 2013, price pressures began edging along the solar supply chain. In 2011, IHS data showed that there were no Chinese or Japanese inverter suppliers in the global top 10, and just two in 2012. The analysts’ latest research shows that there were four in the top 10 in 2013 (Omron, TMEIC and Tabuchi from Japan, and Sungrow from China), with Japan’s Yaskawa poised to break into that select group this year following its recent acquisition of U.S. inverter company Solectria (see p. 44). Last year, Germany’s SMA swam against the tide when it acquired a majority stake in Chinese inverter supplier Jiangsu Zeversolar, and a number of other notable mergers and acquisitions within the inverter sector have been announced over recent months.
Is this market diversification a sign that inverter suppliers are now feeling the financial pinch? And if global expansion is the best remedy, will leading suppliers be able to achieve the twin goal of high standards and low costs, all while maintaining the same supply chain?
Cormac Gilligan, senior analyst for solar at IHS, believes that the inverter market is already in the throes of maturation and expects that leading suppliers will become more international in their outlook, driven by price pressures and an aversion to singular market exposure. “The Japanese suppliers have mainly focused on the domestic market, which has been booming and taking up most of their capacity,” Gilligan said. “Yet we have already seen the first signs of some suppliers moving beyond Japan – TMEIC has acquired AEG Power Solutions manufacturing capacity in India, and they also have a presence in the U.S.” TMEIC was attracted to the U.S. market thanks to the company’s particular central inverter, an outdoor-rated inverter, which is ideal for U.S. installations. In India, the company benefits from local manufacturing, enabling it to compete on price. With Yaskawa now joining TMEIC in the U.S., it will be interesting to see how many other Japanese inverter suppliers decide to dip a toe in non-Asian markets. “Many leading Japanese suppliers do recognize that overreliance on one market, however strong,can be risky,” added Gilligan. “They will hope to learn from the mistakes of solar companies that focused solely on Spain, Italy and Germany.” In 2013, European inverter suppliers were exposed to price decreases of around 20% in the utility and commercial segments, and while further price reductions of 10 – 15% are possible this year, there is a limit as to how far European costs can fall. “What may occur is that other balance of system (BOS) suppliers may have to begin absorbing price pressures,” suggested Gilligan.

The challenges of expansion

As a medium-price location, the U.S. market has become attractive for European and Japanese inverter suppliers – both of which operate in high-price, high-quality locations. The U.S. market, while perhaps less demanding of the exacting standards that are certainly prevalent in Japan, is nevertheless keen on quality. Many European inverter suppliers entered the U.S. market in 2013, and after investing in marketing and after-sales service, IHS expects their presence to be keenly felt later this year. Their presence has already brought prices down to $0.18/W (from $0.22/W in 2012), and for large central inverters prices may soon fall as low as $0.12/W.
The U.S. inverter market is continuing to grow, however, rising to anywhere between 4.5 GW and 6.2 GW this year, according to Gilligan. “In a growing market, inverter prices do not have to fall as quickly.” With sophisticated after-sales and marketing strategies, European suppliers operating in the U.S. can enjoy a great deal of success provided they operate smartly. “In basing manufacturing locally, it does help European suppliers to have the ‘Made in America’ stamp of quality, and there are marketing advantages to bringing jobs into the state, as well as the obvious benefits of employing a local labor force for the EPC,” said Gilligan.
For U.S. inverter suppliers, outsourcing manufacturing is also an obvious strategy for overseas expansion. Enphase, for example, employs supply chain company Flextronics to deliver third-party manufacturing with huge production lines that help ensure demand response times are rapid and flexible across much of its international operations.
In Japan, domestic market conditions make expansion difficult for both international companies looking in, and Japanese companies looking out. The country has the world’s highest inverter prices (“an anomaly in Asian pricing terms,” adds Gilligan) largely as a result of the JET (Japan Electrical Safety & Environment Technology) certification process, which acts as an almost insurmountable barrier to entry for Chinese and Western suppliers.
“This has created a relatively closed market, although some central inverter suppliers such as SMA, ABB Power-One and Schneider Electric have had some success at utility scale, but nowhere near to the same extent as a local supplier like TMEIC,” said Gilligan. With its strong ties to local integrators and EPCs, TMEIC has well over one third of market share, and their higher inverter prices reflect that. “Because the technical requirements are so stringent, quality is a huge consideration. If a finished product has even a scratch on it, it will often be rejected. The effect of this is that gross margins are not as high as one would expect.” The Japanese solar market is also famously insular, and brand perception is a huge consideration. If a product is clearly Japanese-made, it will sell better. And if it will sell better, it will sell at a premium – another consideration for non-domestic suppliers.

The Chinese market

Not as insular but definitely unique is the Chinese inverter market: strong, expanding, dynamic, completely dominated by domestic suppliers, and cheap – inverter prices there have fallen as low as $0.06/W. Primarily, Chinese suppliers source their components domestically, manufacture their product locally, and sell their inverters internally. Although dominated by Sungrow, which is the market leader with more than 30% share of the Chinese market, its nearest rivals (TBEA Sunoasis, Emerson, Network Power, Chint, and KStar) each hold a market share of more than 4%.
However, there is evidence from IHS that the Chinese inverter market is beginning to fragment. A recent report from the analysts found that the number of companies with more than 2% market share rose from 10 in 2012 to 13 last year. As a result, Sungrow and a number of other suppliers have stepped up their efforts to expand into international markets.
“Sungrow, Samil Power and Growatt are just three Chinese inverter suppliers that have announced expansion plans internationally, chiefly targeting the U.K. and Australia,” said Gilligan. The analyst also expects “one or two big suppliers” to really break out of China, perhaps as soon as during the second half of 2014. “But certainly in 2015 we will see a bigger presence of Chinese suppliers in international markets.” The scale of China’s domestic market has helped maneuver many inverter suppliers onto a strong financial footing, making international expansion the obvious next step. “They will of course have no problem competing on price, but nearly all will have to overcome the Achilles Heel that is typical of many Chinese suppliers – their after-sales service,” said Gilligan.
Historically, Chinese companies operating in foreign markets have tended to neglect this important part of the business, or have failed to adapt the service
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for European or U.S. customers. Call centers located in Chinese time zones and staffed by Chinese workers, a tiny pool of on-the-ground service engineers, and a reluctance to hire local teams have all been negative factors in the past, but Gilligan is confident that such shortcomings will be overcome without any noticeable cost increases.

Scaling up supply chains

The importance of local expertise, local service and local manufacturing in the inverter sector is becoming more paramount with each passing month. The industry has already begun displaying encouraging signs that it understands not only how to target overseas markets, but also how to sustain them.
The merger between SMA and Danfoss earlier this year was a textbook demonstration of confident global expansion. For Danfoss, the alliance opened up a raft of new sales and service locations globally, while SMA will, over time, benefit from greater access to high quality components sourced in cheaper locations. “Danfoss is very successful in the field of automated drives,” said SMA’s Press Manager Susanne Henkel. “This market has been characterized by fierce competition for many years and, accordingly, Danfoss has focused its strategy on continuous cost reduction by using global procurement opportunities and technological innovations. SMA will benefit from this experience, and from economies of scale.” SMA’s acquisition of Zeversolar has also been construed as an attempt to gain greater traction in China, and possibly Japan. Henkel says that the acquisition allowed SMA to widen its ability to source inverter components globally. “One concrete measure aimed at reducing material costs over the long term is the expansion of strategic purchasing,” she said. “With a global procurement process comprising offices in Germany, Poland, China and the U.S., we have created a solid base for the systematic reduction of material costs. Zeversolar’s resources are also being used in tandem to qualify new suppliers and accelerate our measures.” ABB’s $1 billion acquisition of Power-One was another example of a deal that benefited both parties. “That particular acquisition gives global reach to both companies,” said Gilligan. “ABB now has access to other divisions that may be able to supply some of its components, plus the ability to negotiate at scale.” For Power-One, the deal was great for their bankability index because ABB has local manufacturing in India and South Africa, which are rapidly becoming key international markets. For the larger industrial inverter suppliers such as Emerson and Schneider Electric, their wider global portfolio enables them to leverage their other business contacts and develop a more mature, cost-effective supply chain that benefits the inverter business.
The growth of the U.S. market has not been without its casualties, but those pure-play inverter suppliers that have survived, most notably Advanced Energy, are now well positioned for international growth, having gained a big share of the domestic market, believes Gilligan. “But the biggest beneficiaries in terms of market share and revenue have been Japa
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nese suppliers like TMEIC and Omron. Their next big challenge is to recognize and invest in international markets in the future, and the obvious next stepping stone is the U.S.,” he said.

Going local loco

Local manufacturing not only earns these vast multinationals valuable brownie points, but it also helps lower production costs, at least in the longer term. SMA’s Henkel confirmed that the company sets up “market-specific production centers” and develops standardized global logistics concepts in order to reduce transportation costs and waiting times.
And while the preference for local manufacturing in the U.S. and Japan is a cultural thing, in the emerging markets of India and South Africa, domestic manufacturing rules are enshrined into law. “In India a company pays import taxes on the inverters if it does not have local manufacturing,” said Gilligan. “So for large-scale PV projects, the biggest inverter suppliers already support local manufacturing because they would be unable to compete if they were subject to the 27% import tax.” In South Africa, part of the tendering process involves committing to local manufacturing for parts of the project. “However, there are ways around this,” Gilligan adds. “A developer could use local labor during construction in order to offset the lack of local manufacturing.” Looking ahead, the IHS analyst is confident that in all major PV markets (of greater than 500 MW cumulative PV capacity) inverter suppliers will operate local supply chains and oversee local manufacturing. “Not even the largest suppliers can invest in local fabs everywhere, though, but a South African facility can service most of Africa, and a U.S. facility can supply Latin American projects, for example,” concluded Gilligan. In carefully understanding the laws, cultural kinks and expansion opportunities of the leading markets, inverter suppliers can sidestep price pressures, dodge the single-market sucker punch and look to go the distance, avoiding the dreaded “bloody nose” in the process.

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