Over the last two weeks we've begun to see just how the solar industry handled a hectic end of 2011 and how they view the market in 2012. Some manufacturers, like SunPower (NAS: SPWR) and Canadian Solar (NAS: CSIQ) , have surprised us with better-than-expected results and some others have disappointed.
Leading the disappointment is the company that was once the crown jewel of the industry. First Solar (NAS: FSLR) reported earnings earlier this week that showed just how weak it is in the current market. The puzzle isn't yet complete, but it started to take shape this week.
Winners and losers emerge
If you look at the edges of the solar market, you can see there are low-cost manufacturers who create lower-efficiency modules and high-cost manufacturers who make higher-efficiency modules. When the solar market was beginning to grow, cost was the focus, and so First Solar took the lead because of its cost advantage.
In recent quarter, however, the tide has turned and efficiency has become the most important strategic factor. Strong earnings from efficiency leader SunPower and gains from one of China's more innovative manufacturers, Canadian Solar, have solidified this thesis. Despite its higher costs, SunPower was able to generate gross margins comparable to Chinese manufacturers, showing the power that efficiency has.
I expect the focus on efficiency to continue because module prices have fallen so far that the balance of system costs now exceed module costs, so the focus will turn to maximizing power output in space available.
JA Solar (NAS: JASO) became the latest Chinese manufacturer to announce preliminary results that topped original expectations this week. The company said that it shipped between 390 MW and 410 MW of solar products in the fourth quarter, beating expectations of 310 MW to 330 MW.
This indicates a couple of things to investors: First, suppliers also took part in strong sales in the fourth quarter; and second, top-tier suppliers weren't able to leverage their positions in the market to squeeze out lower-tier manufacturers as some thought may happen.
When the company releases earnings later in March, we'll see if the increased shipments were able to pull the company into a positive gross margin.
Picking winners in China
One of the challenges for investors right now is trying to choose winners in the Chinese market. The manufacturers in China have so little to differentiate them that it's like picking the winner of a fight between twins. Costs are the same, efficiency is the same, and end markets are the same for all of these manufacturers. In reading earnings reports, outside of a blip from Yingli Green Energy (NYS: YGE) , revenue and shipments have been 10% to 20% better pretty much across the board.
Consolidation is expected to occur in the industry, and as the market tightens, I would expect some companies to emerge as stronger than others. What we've seen with earnings and guidance from Canadian Solar, Trina Solar, Suntech, Yingli, and JA Solar is that the rising tide lifted most boats, but no one missed out completely. Until we see a few companies unable to compete or falter under heavy debt loads, it's hard to see who emerges as a winner or loser in potential consolidation.
Foolish bottom line
We'll continue to get more information about these solar manufacturers in coming weeks, but right now indications are that efficiency is winning and that China remains tough to read for investors. I'm keeping my outperform rating for SunPower on My CAPS and I'm looking for an exit point from my shares in First Solar. I think that's the best way to play the solar market trends right now.
At the time thisarticle was published Fool contributorTravis Hoiumowns shares of First Solar and SunPower and manages an account that owns shares of SunPower. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.The Motley Fool owns shares of First Solar.Motley Fool newsletter serviceshave recommended buying shares of First Solar. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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