The Newest Threat to Solar Companies

After conquering the iPhone and multitudes of other electronic gadgets, manufacturing giant Foxconn Technology Group has decided to enter the solar market. It's a move that has been rumored for some time, and now after solar's terrible year the company is seeing the opening it needs.

Some view this as a crushing announcement for some of the weaker players in solar, but I have to wonder exactly what Foxconn is thinking. How exactly will it differentiate itself from manufacturers who have been at this for years?

Bad timing
The news of Foxconn's entry coincides with an industry that can't stop building supply despite falling prices and even negative gross margins. GCL-Poly, the world's largest manufacturer of polysilicon, is increasing capacity 41% in 2012, second-place OCI is adding 48% to capacity, and smaller players like LDK Solar (NYS: LDK) and ReneSola (NYS: SOL) are also adding to capacity.

Foxconn says it can build more capacity at lower prices than rivals, just as it's been able to do in electronics manufacturing. Time will tell whether that's the case.

Missing the point
The success of this move may hinge on the broader question surrounding the industry over whether cost or quality will win out. As I pointed out a few weeks ago, module cost is becoming a smaller and smaller portion of the cost of solar installations, putting more emphasis on efficiency and balance of system costs.

Manufacturers who lead on efficiency and can help customers lower the balance of system costs will win more business in the end than those who simply manufacture a module at a lower cost. SunPower (NAS: SPWR) and Canadian Solar (NAS: CSIQ) are taking steps in this direction by integrating inverters in modules and increasing efficiency.

I'm not sure Foxconn is in position to lead in efficiency yet, but considering the success the company has had, I wouldn't put it past them. At the very least, Foxconn becomes a name to watch in 2012 as solar manufacturers fight for market share.

At the time thisarticle was published Fool contributorTravis Hoiumowns shares of SunPower and has sold put options in SunPower. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.