Analysis: Solar inverter makers set for soft landing

Thu Oct 13, 2011 8:24am EDT

(Reuters) - Most solar power component makers are coping with lower margins these days because of an industry downturn -- but solar inverter makers are suffering less.

Unlike companies that make solar panels and cells, solar inverter makers enjoy some insulation from competition and the weak economy. Their products are complex and harder to make, and prices have stayed relatively stable.

Inverter profit margins will shrink in the $6 billion inverter market, but not as much as they have for other solar power parts makers, analysts say.

A typical solar power system consists of photovoltaic cells wired together to make panels. The panels are connected to inverters that convert the direct-current power into a usable form of electricity.

The prices of solar cells and modules have been falling, mainly because of overcapacity, competition and cuts in government subsidies on which the business depends.

"There is more internal design for an inverter company, so while it's easy to make an inverter, it is relatively hard to make a good inverter," said Jon Sigurdsen, renewable fund manager at DnB Nor Group unit Carlson. "This means higher entry barriers and somewhat better margin protection."

"Somewhat better" does not mean "complete." SMA Solar, the world's No. 1 maker of solar inverters, last month cut its forecast for the year. Competitor Power-One lowered its third-quarter forecast this week.

Unlike panels, where brand becomes less important as quality narrows, technology and a brand name can help sales.

DOWN, NOT OUT

Asian companies, which have participated in the module and cell price declines with gusto, are wary of inverters.

"Unlike modules production, of which Chinese suppliers control around 40 percent of the market, for inverters this was around 5 percent last year and is not increasing very quickly," said Ash Sharma, a senior research director at IMS Research.

The low number of competitors is slowing the decline of inverter prices. There are more than 150 suppliers, but the top 10 control about 75 percent of the market, Sharma said.

While prices for panels have fallen about 40 percent so far this year, retail prices for inverters are down about 10 percent to 15 percent. Panels make up 40 percent of the cost of a solar system and inverters contribute up to 15 percent.

"There's no question that the price of inverters has not come down like the price of photovoltaic has," said Bill Yearsley, CEO at solar installer Real Goods Solar.

Real Goods, which buys most of its inverters from SMA Solar and Enphase Energy, has been negotiating better prices with its vendors in recent months.

"Our sense is inverter makers are aware and they are driving down price and taking costs down," said Frank Alfano, CEO of New York-based installer Mercury Solar Systems Inc, which buys its inverters from SMA Solar, SatCon Technology Corp, Solectria Renewables and Fronius.

SAFE BETS

Inverters could be a safe bet for people who want cheap, high-value solar stocks, analysts said.

"We continue to believe that the supply/demand and pricing dynamics in the inverter market are very different from the solar panel market," Cantor Fitzgerald analyst Dale Pfau wrote in a research note dated Wednesday.

Power-One shares have lost almost half their value this year, while SMA Solar is down more than 40 percent. The WilderHill Clean Energy index has fallen 45 percent.

"SMA and Power One are seeing very volatile demand and pricing and are being punished by the stock market, but their outlook for the longer term is still very promising," IMS's Sharma said.

Margins confirm this view. Second-quarter gross margins at SMA Solar and Power-One were above 34 percent, while panel manufacturer LDK Solar's April-June gross margin was 2.2 percent and Suntech Power's was 15.1 percent.

Competition still may come, but not yet.

"There are 20-30 people working on microinverters. There are numerous vendors in China including SunGrow who is the leader there," said Stifel Nicolaus analyst Jeff Osborne. "The Taiwanese are coming, and GE and American Superconductor have also introduced inverters focused on the large-scale solar system market."

(Reporting by Krishna N Das in New York and Christoph Steitz in Frankfurt. Editing by Robert MacMillan)

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