Inventory Volatility Packs Supply-Chain Peril For Global Solar Market

dical swings in inventory levels for Photovoltaic (PV) solar cells this year are resulting in perilous market conditions that potentially could drive unaware companies out of the market, according to iSuppli Corp.

"The year 2010 represents a boom time for the global solar industry, with PV installations doubling from 2009," said Dr. Henning Wicht, senior director and principal analyst for PV systems at iSuppli.

"However, seasonal factors-amplified by the timing of cuts in government incentives in Germany-are causing demand to oscillate from quarter to quarter this year."

The fluctuations in demand, Wicht noted, will result in even greater volatility in inventory levels for 2010.

"Makers of solar cells, as well as PV installers and other supply chain participants that can't deftly manage these inventory swings, may risk being stuck with bloated stockpiles that could drive up their costs and put them at a major competitive disadvantage that will be impossible to overcome," he added.

This year's solar supply chain volatility comes amid a doubling in new PV system installations. Worldwide PV installations are projected to rise to 14.2 Gigawatts (GW) this year, up from 7.2GW in 2009.

German FIT impact
As is typical in the solar market, the levels of PV installations in 2010 will be heavily impacted by seasonal factors, marked by a slow winter and a robust summer, Wicht noted.

A more important factor in 2010, he added, is the gold rush mentality prevalent in Germany-the world's largest PV market. Immediately before the cut in Germany's Feed-in-Tariff (FIT) in mid 2010, installations spiked as businesses and consumers rushed to take advantage of the government incentives before they were reduced.

A similar phenomenon will impact the market before the next FIT cut announced for the beginning of 2011.

Such ebb and flow of demand will bring major swings in inventory levels, Wicht noted. For instance, Days Of Inventory (DOI) for solar throughout the PV channel amounted to 165 in the first quarter of 2010, up a stunning 110.6 percent from 78 in the fourth quarter of 2009.

In comparison, channel DOI plunged by more than half in the second quarter, dropping 61.9 percent to 63 days. The third quarter is then expected to bring a surge of 66.7 percent to 105 DOI, followed yet again by a drop in DOI during the fourth quarter of 44.8 percent to 58 days.

Such inventory volatility is unheard of in the PV module industry and a direct consequence of the subsidy policy in Germany. Inventory in the PV channel spent all of last year being whittled down from almost six months of supply to less than 80 days. However, the forecast this year reveals a more challenging "W"-shaped pattern.

"PV channel inventory piled up during the end of the first quarter of 2010-a pattern that will occur again in the third quarter, although to a lesser extent," Wicht said. Inventory, meanwhile, fell in the second quarter in light of the summer German FIT cuts as well as price drops adopted by installers to preserve market volume during this time of the year, he added.

The attached figure presents iSuppli's estimate of quarterly DOI levels for PV modules throughout solar channel.

A story of inventory
"Inventory management of the channel presents major challenges in the PV industry," Wicht said. "Unlike the mature supply chain of the electronics space, where the bulk of inventory is held by upstream suppliers such as semiconductor makers, most PV inventory piles up in the later stages of market flow, ending up among sites and installers. This contributes to bloat and inefficient operations."

For companies throughout the PV supply chain, a gaffe at this point could be potentially fatal.

While sunny profits and growth await the successful entity, dark times lie ahead for the inept company-or even one that simply botches up the job. Those unfortunate enough to make a misstep at this point can find themselves left behind, iSuppli believes, relegated to a permanently smaller market position from which recovery is unlikely.