Inventory Management Challenges Solar Market During Boom Year

2010 could be a very good year for makers of solar cells, as well as PV (photovoltaic) installers—if they can manage the supply and demand swings that the year is bringing.

According to iSuppli Corp., radical swings in inventory levels for PV solar cells this year are resulting in "perilous market conditions that potentially could drive unaware companies out of the market."

"The year 2010 represents a boom time for the global solar industry, with PV installations doubling from 2009," said Henning Wicht, senior director and principal analyst for PV systems at iSuppli, in a statement. Indeed, iSuppli has projected that 2010 worldwide PV installations will rise to 14.2GW this year, up from 7.2GW in 2009.

"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," Wicht said, noting that he expects the fluctuations in demand to 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 said.

Typically, the levels of PV installations show variations by season, cooling in the winter and heating up in the summer. Demand in 2010 will further be influenced by actions 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, iSuppli said. The market research company expects a similar phenomenon will impact the market before the next FIT cut announced for the beginning of 2011.

That will bring about major swings in inventory levels, iSuppli noted. The company used DOI (days of inventory) for solar throughout the PV channel as evidence of the swings. According to iSuppli data, DOI amounted to 165 in Q1, up 110.6 percent from 78 in Q4 2009. In comparison, channel DOI plunged by more than half in Q2, dropping 61.9 percent to 63 days. Q3 is expected to bring a surge of 66.7 percent to 105 DOI, followed yet again by a drop in DOI during Q4 of 44.8 percent to 58 days.

ISuppli said that such inventory volatility is unheard of in the PV module industry and a direct consequence of the subsidy policy in Germany. The company noted that 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.

"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."

Those companies that can manage this W-shaped demand will do well; those that cannot may find themselves left behind, iSuppli said.

iSuppli