6.1. Porter’s Five Forces Model
Porter’s five forces model identify the structure of industries and competition. The model analyses five competitive forces that determine long-term profitability as measured by long-term return on investment. This section uses Porter’s model to identify and assess the dynamic elements at play within each force.
Competition
Competition in the renewable energy industry is generally high but varies by region. Since governments are offering many subsidies to promote renewable energies, many new firms are entering the industry and other firms already in the sector are switching to renewable sources.
This is one of the reasons why solar PV market is rapidly growing. The competitors are more reactive towards emerging technology and change in customer’s requirement.
First Solar’s failure to sustain competition could result in price reductions, reduced margins, or loss of market share. Also the company will have to ensure product differentiation, which would otherwise pave the way for other competitors in the industry. Additionally, factors like product life cycle and performance may become more important when the market is mature.
(Competition – Increasing).
Supplier Power
Supplier power means that how easy is it is for the suppliers to drive up their prices and sustain at that level. It is driven by a number of factors such as uniqueness of the product, number of existing suppliers and the cost of switching from one supplier to another. Fewer supplier choices means that supplier has a considerable power and hence it is difficult for customers to switch.
First Solar is highly dependent on the raw material that is supplied by limited suppliers therefore it poses a threat that they can increase the prices. Moreover, the company has customized equipment thus any problems with the equipment can result in higher costs in terms of production loss and equipment maintenance. (Bargaining Power of Supplier – High).
38 Buyer Power
Solar industry has only recently picked up and companies still rely on the conventional forms of energy. However, with a growing market many buyers have switched towards this less costly and environmentally beneficial option but have not quite captured the market in order to gain power.
There are comparatively lesser suppliers of this form of energy and while their power remains high, the bargaining power of buyers is low.
On the other hand, First Solar depends on a limited number of customers with a few customers accounting for substantial module net sales. As the renewable energy industry grows and First Solar’s long-term supply contracts expire, buyer power will most likely increase. (Bargaining Power of Buyer – Low).
Barriers to Entry
With the popularity of solar energy many firms have entered the industry and taken advantage of the government support mechanism such as subsidies and tax incentives. Therefore countries like Germany and France are cutting back on subsidies, hence making it less attractive. Secondly, the solar power industry demands a lot of research and development that can impede entry of the new firms into the market. With the high development cost, economies of scale are favorable to the existing companies. Although the barriers to entry have reduced in recent years, they tend to be generally high. (Barriers to Entry – High).
Substitutes
The industry has several substitutes that include other forms of renewable energy (wind, geothermal, ocean etc.) and silicon based photovoltaic cells. Also, hydrogen fuel cells, which are based on natural gas, are gaining recognition due to the less carbon emission and high production levels of electricity (especially attractive to small scale power generation and transportation sector). Additionally, with time and research new technologies may emerge that could adversely impact the company’s business. (Substitutes – High).
39 6.2. SWOT Analysis
Strengths
Leading global provider of Photovoltaic (PV) Long Term contracts with Suppliers
Low-Cost per watt Generation Technological Expertise
Opportunities
Photovoltaic (PV) industry is untapped Ability to increase demand
Creating Synergy
Expansion of manufacturing capacity
Weakness
Dependency on Raw Material - CdTe Toxicity concerns of CdTe
Threats
Substitutes and Competition Cuts in FiTs
Table 1. SWOT Analysis
Strengths
First Solar is a leading global provider of comprehensive photovoltaic (PV) solar systems. The company is the largest solar module manufacturer in terms of market capitalization, and has been consistently increasing its production lines due to the increasing consumer demand. It also has long term contracts with suppliers allowing company to earn future predictable revenues.
Additionally, First Solar has technological expertise that continues to drive low-cost per watt generation and as a result the average solar module cost is among the lowest. Moreover, First Solar has a strong balance sheet which can provide substantial flexibility with respect to changing demands and developing new technologies.
40 Weakness
First Solar is highly dependent on Cadmium Telluride, one of the key raw materials in Solar PV panel. It is a rare metal and may also impact the number of solar panels the company could manufacture. Additionally, there are toxicity concerns with respect to the material.
Opportunities
The photovoltaic (PV) market is untapped and being a major industry player, First Solar can increase demand through lobbying efforts and also decrease manufacturing costs by creating synergy. This would profit the company and allow it to expand its operations geographically, especially in the U.S. to take advantage of government support systems. First Solar’s capacity expansion offers huge growth opportunities and would enable it to reach (or exceed) consumer’s expectations.
Threats
As pointed in the Five Forces Model, there are several substitutes in renewable energy. Also, other energy companies are more likely to enter the solar PV market, which may cause lower profit margins and loss in market share. In addition, the industry heavily relies on government support systems such as FiTs, tax incentives, soft loans and capital grants and once these are taken away, each industry player might suffer.
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