World's largest solar panel maker SunTech falls into bankruptcy
Update (April 9th 2013): Suntech stock up almost 50% on Warren Buffett buyout rumors
Solar dominoes falling...Chinese solar giant SunTech Power Holdings defaulted on some bonds that were due on March 15th, which made its creditors push it into bankruptcy. Until that point, the company had been the world's largest make of solar panels. Despite all this, China is still the biggest maker of solar panels in the world, and becoming the biggest market for them too. But there is a huge overcapacity in the industry that will need to be flushed out - probably by a combination of demand growth and supply reduction via bankruptcies - before anyone can sustainably make money from making solar panels.
...but it doesn't mean what it seems toTo better understand the dilemma of the solar industry, I think it's useful to look at a speech that super-investor Warren Buffett gave in 1999. At the time he was thinking about the internet companies of the Dot-Com bubble, but he used historical data about other industries as a guide:
Well, I thought it would be instructive to go back and look at a couple of industries that transformed this country much earlier in this century: automobiles and aviation. Take automobiles first: I have here one page, out of 70 in total, of car and truck manufacturers that have operated in this country. At one time, there was a Berkshire car and an Omaha car. Naturally I noticed those. But there was also a telephone book of others.
All told, there appear to have been at least 2,000 car makes, in an industry that had an incredible impact on people's lives. If you had foreseen in the early days of cars how this industry would develop, you would have said, "Here is the road to riches." So what did we progress to by the 1990s? After corporate carnage that never let up, we came down to three U.S. car companies--themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America--and also an enormous impact, though not the anticipated one, on investors. [...]
The other truly transforming business invention of the first quarter of the century, besides the car, was the airplane--another industry whose plainly brilliant future would have caused investors to salivate. So I went back to check out aircraft manufacturers and found that in the 1919-39 period, there were about 300 companies, only a handful still breathing today. Among the planes made then--we must have been the Silicon Valley of that age--were both the Nebraska and the Omaha, two aircraft that even the most loyal Nebraskan no longer relies upon.
Move on to failures of airlines. Here's a list of 129 airlines that in the past 20 years filed for bankruptcy. Continental was smart enough to make that list twice. As of 1992, in fact--though the picture would have improved since then--the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero.
In short: It's possible for an industry to growth rapidly for decades and change the world, yet the economics of it can be quite bad and there can be lots of bankruptcies (f.ex. how many internet companies have gone bust over the past 15 years, yet the internet is exponentially bigger). Over time there's consolidation and winners emerge, but the average company in the industry can probably expect to lose money.
And that's not necessarily bad for customers, as this intense competition keeps prices low and drives innovation. Nothing generates high prices and stagnation like a monopoly or duopoly...
Bottom lineSo the way I'm seeing it, SunTech's bankruptcy is sad for the company's investors and employees, but it doesn't mean at all that solar power isn't the future or is in trouble. In fact, it's because the future of solar is so bright that so many companies piled on and ended up creating this overcapacity. Any cyclical industry will have booms and busts, but what matters in the end is how much clean electricity is generated.
Even SunTech isn't dead. Either it'll emerge from bankruptcy and keep making panels, or its assets will be sold to other solar panel makers and keep churning out more panels (though possibly under a different brand).