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Solar Industry Shakeout — What It Really Means

There’s a lot in the news these days about solar manufacturers going bankrupt. This news is often disheartening, and sometimes used to discredit solar technology and the industry itself. Based on a study I just recently completed, I can tell you that the global industry shakeout is just beginning. Many others have noted, however, that this does not spell bad news for solar technology, its adoption in mainstream society, or the future of solar installation companies. In fact, solar energy is just beginning to take off.

Up until 2011, the industry was still growing in the number of manufacturers.  In 2011, the industry saw its first year of negative net entry. If the solar industry continues to follow the path of evolution that other industries have followed, it seems that 2013 will be another difficult year for solar module manufacturers.

Industry shakeouts, however, are a very healthy part of industry evolution and growth. The solar industry is following the same patterns as previously studied industries, such as the automobile industry, the colored television industry, and the penicillin industry. Even though these industries do differ, they’ve evolved in very similar ways.

Graphs of industry shakeouts. These graphs are not ment to be completely exhaustive. There are likely manufacturers missing due to lack of available information and resources of the author. But they’re a good representation of the overall story. (Source: Keppler, 2001)

A basic tenet of industry evolution is that as the number of manufacturers grows, the increased competition and economies of scale bring down the overall prices.  The solar industry saw this from 2007 to 2011, when average module prices of the largest solar manufacturers decreased by 57%. Many times, the prices will fall faster than companies can lower their costs. This “margin squeeze” drives less efficient manufacturers out of business.

The goal of many manufacturers in a shakeout will be to “out survive” their competitors. Key drivers of survival in past industries has been date of entry and ability to grow. Those who entered into the industry early, gained the valuable experience needed to fully understand their costs. This understanding gave them a more realistic chance of surviving off of low margins. Experience is also important because it allows companies to make process innovations that make their companies more efficient.

This shakeout period should be a time when the larger and more experienced solar companies will begin to dominate innovation that was previously done by research institutes, inventors, colleges, government institutions, and non-solar companies. The companies who can dominate innovation will survive the shakeout. The shakeout of the solar industry can, of course, be subject to changes in technology, politics, and the economy.

Overall, the evolution of the solar industry will be an interesting addition to previous studies because of its international and subsidized nature. The shakeout will undoubtedly claim many more companies, but the future of solar still remain bright.

Reference: Keppler, K. S. (2001). Industry Shakeouts and Technological Change. International Journal of Industrial Organization, pg. 1-30.

 
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