Since the stage high point on August 19, the photovoltaic concept index (CN:BK0478) has fallen 20%. For photovoltaic investors who have been used to eating meat in the past three years, such a pullback is inevitably afraid: Is the cyclical turning point of China's photovoltaic industry already coming?
In order to figure out this problem, we have carefully reviewed the development of the photovoltaic industry, hoping to achieve a long-term view of the future development of the industry by respecting history.
The strength of the photovoltaic industry does not end in one go. The latest market has been remembered fresh in memory. Since the cost of power generation is always high, after the decline in industrial subsidies (531 New Policy), the market was once full of doubts about the future of the photovoltaic industry, and the overall valuation of listed companies fell to historical lows.
Figure: Photovoltaic concept index (CN:BK0478) weekly trend, source: Snowball
However, with the continuous improvement of industrial technology, photovoltaic power generation efficiency continues to improve, coupled with the huge demand released by energy changes, the growth rate of the photovoltaic industry has been rapidly released. Behind the fruitful harvest of photovoltaics, technological maturity is a prerequisite, and demand release is the direct motivation. With the resonance of technology and the times, investors' expectations are fully reshaped.
Looking at the overall situation, the rise of new energy is just the beginning, especially in the constant tension in overseas geopolitical situations, it has increased the certainty of the global market demand for the photovoltaic industry. The decline in valuations of related companies is more like the decline in investor confidence caused by external factors. The core driving force of the industry is still there, indicating that photovoltaic companies are far from over and there are still stories to tell. After the photovoltaic power generation is parity-based, the competitiveness of photovoltaic compared to traditional energy begins to appear, and the weight of the impact of technical factors on the photovoltaic industry will be reduced. However, the so-called "parity" is not the end, and cheaper and cleaner electricity is still people's eternal pursuit. How will the industry's development meet the growth of demand in the future?
In this context, we believe that the photovoltaic industry will enter the 2.0 era: the era of vertical integration.
01 Industry Trend: Integration becomes inevitable
First of all, we need to take everyone to think: What is the first principle of photovoltaics? In fact, the answer is very simple, that is, cost reduction. Because the final product produced by all power generation methods is electricity, and electricity is the most typical standard product, no one will care whether the electricity charged on my mobile phone today comes from thermal power, hydropower, photovoltaic, wind power or nuclear power, and a lower price is the only competitive rule for the ultimate standard product.
So the history of photovoltaic development is a history of price reduction. However, the core drivers of price reduction are gradually moving, and it is precisely this turning point that we have divided the development stages of photovoltaics into 1.0 and 2.0.
1) Technological innovation is the main theme of the photovoltaic 1.0 era
Since the establishment of Wuxi Suntech in 2001, China's photovoltaic industry has experienced at least 20 years of great waves and sand washing era, and finally formed a strong supply chain system with detailed division of labor. Whether it is upstream polysilicon , midstream battery , or downstream components, the main market share is firmly occupied by Chinese companies.
Looking back at the rise of China's photovoltaic industry, the new technology driven by innovation is the key to success, and the story of latecomers' catching up and overtaking has become a business story that everyone talks about.
Figure: Technology progress in all links of the photovoltaic industry chain, source: Industrial Securities
For example, after Longi Green Energy Technology Co., Ltd. introduced diamond wire cutting technology into the single crystal silicon wafer cutting field, the entire cutting rate was increased by 2-3 times, and the cost was greatly reduced. In 2015, my country issued the "Implementation Plan for the Energy Efficiency Leader System", which clearly defined the main tone for promoting the application of advanced photovoltaic technology products and industrial upgrading. The single crystal silicon technology with higher conversion efficiency has become a breakthrough technology, subverting the previous pattern of polycrystalline silicon dominating the market. To this day, single crystal silicon wafers with higher power generation efficiency and lower single-watt cost have surpassed and become the mainstream.
For example, Tongwei began to optimize and verify the polysilicon production process and devices in 2007. By 2014, four technical transformations were carried out, and its comprehensive energy consumption dropped significantly from the initial 180-200 degrees per kilogram to about 60 degrees per kilogram in 2015. With the continuous innovation of technology, production indicators such as comprehensive power consumption, steam consumption, and silicon powder consumption continue to decline. At present, the production cost of Tongwei polysilicon has dropped to 30,000-40,000/ton (excluding the influence of industrial silicon market price factors, calculates at a constant price), which is equivalent to 1/3 of the mainstream market price in 2015.
In addition, there are new technologies such as cold hydrogenation, anti-dispersion, high boiling cracking, continuous straight pulling technology, RCZ single crystal growth, single crystal PERC, double-sided power generation, and multi-main gate, which has continuously reduced the cost of photovoltaic power generation and promoted China's photovoltaic to the forefront of the industry in an all-round way.
Figure: 2012-2020 photovoltaic power generation kilometer-to-kWhlb cost downward trend, source: Tianfeng Securities
It is not difficult to understand that the reason why China's photovoltaic industry can lead the world from catching up all the way is its driving force behind technological changes over the past 20 years - new technologies promote the industry to continuously reduce costs and increase efficiency, the downward cost has brought up demand, and sales have increased back to technology research and development. It can be said that this is the 1.0 era of the photovoltaic industry.
In the era when technology is king, what is the most efficient business model? It is that every enterprise concentrates all its forces to overcome difficulties at one point and ultimately completes innovation in the industrial chain together. This model is still taking place vigorously in today's semiconductor and innovative drugs.
2) Vertical integration has become the keyword of the photovoltaic 2.0 era
Although future technological development will still serve as the core driving force of the photovoltaic industry, the technical routes in all links except battery cells are relatively clear, and the technological momentum has begun to show fatigue. This is also why, in recent years, the photovoltaic industry, which once changed its flag, has always had a few old faces.
The pursuit of cost reduction will never stop. We see that after the rapid iteration of technology, the vertical integration strategy driven by leading enterprises has gradually become a new trend in the development of the industry in recent years.
talks with the data. According to Solarzoom data, Longi Green Energy, Trina Solar Energy , Jinao Technology, Jinke Energy , and Artes Solar Energy are the top five companies in the world's photovoltaic module shipments in 2021, with a total market share of 61.8%, while all other manufacturers account for only 38.2%.
Figure: Component industry structure in 2021 (by shipment volume, GW), source: Solarzoom, Soochow Securities Research Institute
Among these five component leaders, without exception, they regard the vertical integration strategy as the focus of future development.
LONGi Green Energy, JAO Technology and JSK Energy have made an early integration layout, with the current integration rate exceeding 50%, and the proportion of external procurement has successfully dropped significantly. Originally, Trina Solar was the only professional component leader that did not carry out integrated layout, but on June 17 this year, it announced a high-profile investment in the construction of Qinghai (Xining) Zero Carbon Industrial Park, fully embracing vertical integration.
and Trina Solar's "integration" is very thorough. It not only layouts silicon wafer upward, but also covers polycrystalline silicon and its raw material industrial silicon , but also layouts component auxiliary materials downward. It is reported that Trina Solar will invest in Qinghai to build an annual production line of 300,000 tons of industrial silicon, 150,000 tons of high-purity polycrystalline silicon, 35GW single crystal silicon, 10GW slices, 10GW batteries, 10GW modules and 15GW module auxiliary materials in Qinghai.
In a sense, Trina's transformation is a landmark event in the 2.0 era of the photovoltaic industry has entered an accelerated period.
Figure: Comparison of component production capacity and integration rate (GW, %), Source: CPIA, Soochow Securities Research Institute
Through the vertical integration strategy, the company's strategic autonomy will be significantly improved. It can not only effectively control terminal costs, but also further ensure the timely delivery of orders, which has positive significance for the company's capacity planning and business development.
More importantly, vertical integration can effectively ensure the company's position in the industry and future revenue stability. Judging from the current results data, component companies with high integration rates have significantly stronger single-watt profitability in their component businesses than companies with low integration rates.
Figure: Profits of single t of component business (yuan/W) in 2020-2021, Source: Wind, East Asia Qianhai Securities Research Institute
02 Corporate response: How to deal with it in the 2.0 era?
1) Strategic adaptability transformation
The wheel of industry development is rolling forward, and achieving strategic adaptability transformation in the 2.0 era is a problem that every enterprise needs to face.
Take Tongwei Co., Ltd. as an example. Since the integrated layout has not been completed, although it has made a lot of money in the past two years, its business territory must consider two issues:
single pressure brings natural high volatility. Many investors have seen the prosperity of silicon materials in the past two years and think it is a profitable industry. But in fact, in the past decade, silicon materials were a business that was not very profitable, and even fell into serious losses for a while. Tongwei's high profitability is due to bold countercyclical investment. For example, from February to March 2020, due to the impact of the epidemic, domestic polysilicon prices fell to the lowest point in the past 10 years; however, Tongwei made a countercyclical decision at that time to expand production capacity and build a 37,500-ton silicon material project of "Baoshan Phase I" and a 50,000-ton silicon material project of "Yongxiang Phase II". In essence, it is a high volatility industry, similar to the lithium ore in the lithium battery industry.
The hidden concerns about the long-term excess of silicon material. The photovoltaic industry is most short of silicon materials at present. Now there is too much talk, and some people probably think it is a worry. In fact, this is not the case. With the trend of integration of the photovoltaic industry, this will lead to an outcome - many upstream silicon material companies may not have so many buyers in the new capacity.
Figure: Silicon material quotation: Special grade dense material (yuan/kg), source: Solarzoom, China Galaxy Securities Research Institute
How to adapt to the trend of industry 2.0? If you take the initiative first, you will be controlled by others. Since downstream components are integrated upstream, upstream companies can also extend downstream. It is driven by this underlying logic that Tongwei, which is still guarding the "gold mine", began to actively enter the component market. We believe that in the future, we will see more and more news.
2) Discussion on strategic rationality: From whether the threshold of components is high or not,
extends to the upstream or downstream of the industrial chain, which is easier said than done. With the direction, photovoltaic companies need to do feasibility study. An example of an analogy is whether it is easy to build a car in Huawei , or is it easy to build a chip in NIO ?
For the photovoltaic industry chain discussed in this article, we discuss the component link that is most controversial in the market.
is the only industrial link to deal with end customers. The components were not valued by everyone at the beginning to being considered by the market to have strong user stickiness and brand power. Before Tongwei entered the component business, the short-term consensus finally formed in the market was that this field had a very high entry threshold (so the capital market also gave a high valuation).
But what investors did not expect was that after Tongwei fully entered the component business, it immediately triggered a continuous decline in the share price of component companies, and the market's belief in the leading component moat was instantly wiped out.
On August 17 this year, Tongwei became the first candidate for the China Resources Power 3GW centralized procurement order, less than one month apart. On September 6, Tongwei won the bid for the largest component order of nearly 400 million yuan for Guangdong Electric Power Development Co., Ltd. as the first candidate.
Picture: Tongwei Co., Ltd.'s photovoltaic module winning bid, source: Dongwu Securities
This makes people wonder whether the threshold for components is high?
As we all know, photovoltaics mainly rely on battery cells to generate electricity, but the output voltage of a single battery cell is too low and cannot be used independently. It must go through a certain number of series and parallel connections; at the same time, the battery cell is easily corroded by the external environment, has poor tolerance, and is prone to decline.In order to ensure the regular production of the battery cell, it is necessary to ensure the smooth operation of the battery cell through the packaging process. The
component is not only the smallest unit that can provide DC output and is indivisible, but also the direct carrier of the downstream terminal, so it is regarded as the core of the entire photovoltaic power generation system.
splits the photovoltaic module structure, and it is not difficult to find that it is mainly composed of battery cells, photovoltaic glass , adhesive film, back plate, welding tape and other components. Unlike the efficiency competition between silicon wafers and battery cells, the core purpose of the components is to ensure the stability of battery cells' power generation efficiency through packaging, which further tests the enterprise's engineering technology.
Figure: Schematic diagram of the main and auxiliary materials industry chain of photovoltaics, source: Haiyou New Materials Prospectus, East Asia Qianhai Securities Research Institute
Overview of the entire photovoltaic industry chain, the component link is one of the few light asset businesses, and the core business is mainly encapsulated. Therefore, traditional business models mostly rely on external procurement. Although the profit margin itself is not high, it has a high asset turnover rate . Given such industry characteristics, the core competitiveness of component companies mainly includes three aspects: engineering capabilities, brand effect, , and supply chain capabilities.
Tongwei is a latecomer in the industry and does not have the brand premium advantage of traditional component manufacturers. However, over the years of silicon material production, it has accumulated mature engineering capabilities, technical reserve capabilities, recognized as the best-in-class enterprise management style in the industry, etc., coupled with its already strong upstream supply chain capabilities, it has brought Tongwei sufficient capital to grab the component market.
In addition, in the entire photovoltaic industry chain, the shortest expansion cycle of components is only 6 months, and the higher the industry, the longer the expansion cycle is. Although component manufacturers have already started vertical integrated layout, Tongwei, which is layout from top to bottom, is obviously faster and more efficient.
Figure: The production expansion cycle of all links of the main photovoltaic industry chain, Source: Company announcements, East Asia Qianhai Securities Research Institute
To sum up, although photovoltaic modules have certain entry thresholds, for veteran players like Tongwei with strong supply chain advantages, and Tongwei's 40-year strong brand building, construction and communication integration capabilities, you can catch up or even surpass them without spending too much time and expenses. That is to say, for Tongwei and others, the barriers to components are not high, which is why the market is bullish on new entrants Tongwei and bears traditional component companies.
Let’s talk about the company’s strategic choices, we believe that integration of is the correct strategic direction. At the same time, we must ensure that our extended tentacles are still within the scope of our ability circle, both of which are indispensable.
03 The story of the future is still worth looking forward to
1) The market will eventually recognize the industrial value of the entire chain
After completing the incubation between 0 and 1 and 1 to 10, the photovoltaic industry will actually face the growth process from 10 to 100 in the future. With the continuous deepening of the vertical integration process of the industrial chain, the future competitive targets of the photovoltaic industry chain have actually changed quietly.
Integration Theory was first proposed by American economist Paul Krugman in 1981, which focused on the internalization of all aspects of production and operation of multinational companies.
, that is, from the production of raw materials and parts to the pricing of the final product, they are included in the enterprise, and then by scattering all aspects of production in different countries and regions around the world, using comparative advantage combinations and convenient communication and transportation means, the purpose of lower costs for intermediate products in each production link is achieved.
vertical integration has the organization of improving internal control and coordination, saving transaction costs and economics of . Many times, through vertical integrated layout, the development of technology can be accelerated, the core competitiveness of enterprises can be enhanced, and the purpose of being excluded by other enterprises can be prevented. In essence, vertical integration is not only a way to improve economic benefits, but also a means to cultivate one's own competitiveness, enhance risk resistance and proactive strategic planning.
Figure: Integration strategy classification and advantages, source: Industrial Securities
We might as well look at the examples of two new energy vehicles, and perhaps we can better understand the importance of "vertical integration".
The first example is the national car benchmark BYD . In the automotive "chip shortage" in 2021, why did BYD's sales not be affected by chip shortage, but instead hit a new high? The reason is that BYD is the company with the highest independent rate - batteries, motors, electric drives, electronic controls, battery BMS systems, and even some automotive chips are designed and produced by themselves, and even car seats are produced by joint ventures.
Figure: BYD's new energy industry chain layout, source: Oriental Securities
The second example is the smart car benchmark Tesla . Tesla not only develops its own research in the field of intelligent driving, but also personally builds 4680 batteries and extends its tentacles to battery recycling. It even plans to make a move at the top of the industrial chain: optimizing the mineral mining and refining process. In Musk's eyes, only in this way can he better control the cost of the vehicle and have more full competitiveness.
In summary, BYD and Tesla, which are developing rapidly today, are ostensibly attributed to policy-driven and marketing, but in fact they are both examples of vertical integration. Behind this success is inseparable from their many core technologies such as batteries and electronic controls, as well as their accurate analysis and judgment of industry trends.
However, as the industry leader, CATL delivered a report card with "double revenue but decreased by more than 20%" in the first quarter of this year. The answer is also well known that the sharp rise in upstream raw material costs is the main reason. Faced with the extreme situation where the price of lithium carbonate soared to 500,000/ton, even "King Ning" could do nothing.
Speaking of which, CATL is actually a supporter of vertical integration. After all, CATL's industrial chain has been deployed in the fields of positive electrode precursors, lithium battery equipment, etc., but the lack of upstream layout ultimately affects the whole body. Other second-tier power battery companies that are weaker in vertical integration are even more wailing. For example, Guoxuan Hi-Tech 's revenue hit a new high in the first half of 2022, but its net profit hit a new low in three years.
Picture: Guoxuan Hi-Tech is forced to fall into the dilemma of "increasing revenue but not increasing profits". Source: Company's 2022 semi-annual report
focuses on the photovoltaic track. Under the future trend of vertical integration, the core of competition among various companies will change from focusing on profits in the past to the layout and control of the entire chain of the industry.
terminal power station customers have a certain payment ability, which means that the entire profit of the entire photovoltaic industry chain is fixed. In the past, this part of the profit was divided by silicon materials, silicon wafers, battery cells and component companies. This forces the upstream and downstream of the industrial chain to become the objects of mutual competition, and everyone hopes to maximize their interests, but local excessive competition may not be the optimal solution in the overall situation, which to a certain extent has aggravated the cyclical fluctuations in the photovoltaic industry chain. After vertical integration of
, the profits of silicon materials, silicon wafers and battery cells are all reflected in the final component profit, which will make the company's performance more stable and also enable different industrial division of labor in all links of the industrial chain. Doing so will not only improve synergies, but also reduce disorderly competition, which will be more conducive to the development of the photovoltaic industry.
2) The story of cost reduction is not completed
On August 24 this year, the General Office of the Ministry of Industry and Information Technology, the General Office of the State Administration for Market Regulation, and the Comprehensive Department of the National Energy Administration issued the "Notice of the Three Departments on Promoting the Coordinated Development of the Photovoltaic Industry Chain and Supply Chain". It is proposed that the three departments should effectively make use of the domestic photovoltaic market, guide upstream and downstream enterprises in the industrial chain to communicate in depth, and promote industrial quality improvement, cost reduction and efficiency improvement.
policy guidance and industrial laws have achieved accurate alignment. In the 2.0 era mentioned above, we clearly proposed that vertical integration will replace technological progress and become a relatively more important factor.
further conducts system attribution . It is not difficult to find that the future competition in the photovoltaic industry chain will be upgraded from the profit competition of a single business to the comprehensive competition of the enterprise's strategic layout, which tests the company's overall competitiveness in core areas and its strategic decision-making ability.
0,000 changes will not be separated from the principle, and all walks of life are the fittest to survive. The trend of vertical integration is not only due to industrial upgrading, but also the essential law of the market. In fact, the ultimate industrial structure has begun to emerge. In the future, integrated leaders such as Tongwei, , Longi, , will continue to write the next chapter.
This article is written based on public information and is only used for information exchange and does not constitute any investment advice.
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