The management of 1366 technologies is faced with a dilemma. With the seeming recovery of the economy, there are two possible paths that the company can take. The first is its current business model of functioning as a technology supplier to solar cell producers while the second is to become a solar cell producer itself. The management wants to shift its business model to the second option, which was what it had originally intended for the business; however, cannot seem to be able to navigate the risk involved with the switch.
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The business currently operates as a supplier of production technology and equipment to solar cell manufacturers. This was an operational detour taken by the management since it was unable to find the financing required to establish a solar cell manufacturing plant. As a supplier, the company requires less funding to get the business going; however, there are a few issues that are a major hurdle in the business’ success. The foremost issue is the lack of control of 1366 over its intellectual property. The key edge that the company has, over others in the market, is the technological efficiency of the processes that it employs. Coupled with the fact that almost every solar cell manufacturer has similar research and development teams make the intellectual property a central piece of the business’ profitability. The problem is the attitude of the customers towards the company’s sales pitch. For various reasons, ranging from indifference to the inability to incorporate the technology, the engineering teams are reluctant to adopt the 1366’s machines into their production processes.
Even the positive responses are not appreciating the delicacy of the intellectual property, and make demands that can allow them to copy the technology without buying it. With very few confirmed orders, the business is facing a very uncertain future.
Another issue is the sheer level of customization required. Even though the industry is moving towards standardization, there is still significant customization required, which makes the engineering much more difficult and costs much higher. Standardization also has its problems. If the industry standardizes, the technology employed by all will be the same, making protection of intellectual property even more difficult.
Now that the economy is recovering, and capital is once again available, the management can once again look into its initial vision of becoming a solar cell manufacturer. The solar cell manufacturing is not only more profitable than the equipment supplier business but also caters to many of the problems faced by the latter. When manufacturing its own solar cells, the company will no longer have to worry about loss of intellectual property, or catering to different customized production processes. The company’s market edge, its process engineering and designs, will be for the company to use for itself.
There are some problems in this option, as well. Other than the high capital requirements, the company will have significant trouble setting up an efficiently running manufacturing plant. If the company locates it in the United States, the production costs will be too high, but if the company takes it to Asia, it will unable to, effectively, monitor its activity from that distance.
With the recovering economy, the company now has a good chance of securing funding for its manufacturing plant. The standing offer for an 80% venture capital funding, with available loan at only 50 basis points above treasury notes, is a highly attractive package. On top of that, the solar power generation industry is also on the rebound, with decreasing expected power production costs (Exhibit 1) and increasing market size.
The market size of c-Si based solar cells is expected to reach $64.1 Billion in 2013 (a 91.9% increase from the current scenario). Also, the industry is moderately fragmented, with the top three producers barely clinching 10% of the market. Both these factors favour new entrants in cell manufacturing if they can compete on the prices.
If manufactured efficiently, 1366 has the potential to attain the level of technology to produce electricity at $2 per watt before anyone else. At this rate, the industry will seek to capture 7% of total energy production. Therefore, if the company is quick to establish a manufacturing base, it has the potential to become a market leader.
From a financial standpoint, the manufacturing business line will yield higher returns, both in terms of profits and cash-flows, for each dollar invested. With an NPV of $971.6 million, compared to $311.2 million, the manufacturing project is a far superior option.
Strengthening ties developing with manufacturers in China have given 1366 access to the Asian through a partnership in the region. Using the connections the company makes in this way it can set up a plant in Asia, and become efficient in terms of production. With this problem resolved, cell manufacturing is the most viable option for the company.
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