JA Solar Overview

JA Solar Overview

JA Solar is a low-cost Chinese manufacturer of solar cells based in China. The company sells its products to solar manufacturers worldwide, who assemble itself or integrate solar cells into modules and systems that convert sunlight into electricity for residential, commercial, ad utility-scale power generation.

Historically, JA Solar derived the majority of its revenue from China based customers, though the company has been diversifying to international market over the past couple of years.

Manufacturing Process

  • Ingots/Wafer: The process of melting polysilicon into ingots and subsequently cutting them into wafers is wedged between polysilicon production and cell manufacturing. JA Solar has strong wafer supply from its former parent Jinglong and is the largest pre-paid customer of GCL.
  • Cell: Cell manufacturing involves creating the all-important pn-junction, coating and layering. It is an important step in the value chain that is responsible for 14% of a module's cost and it is here where significant technical differentiation is created. JA Solar is focused on solar cell design and manufacturing.
  • Module: CPV module manufacturers assemble the solar cells, concentrator unit and heat sink to form a module. Where applicable, companies will either integrate a tracking device or offer it as a separate product for free-standing module installations.

Market & Customers

JA Solar sells its solar cells principally to solar module manufacturers who assemble and integrate the company’s products into modules and systems. The company’s solar cell products are generally sold on a purchase order basis rather in long-term agreements. In 2008, it sold solar cells with a total power output of approximately 271 MW. The company also provides cell processing services to some of its customers who supply it with their own wafers and it process theses wafers into solar cells that are sold back to them. In 2008, the company produced approximately 33MW of solar cells under this arrangement.

In the global market, the company’s competitors include photovoltaic division of conglomerates, such as Sharp Corporation and Sanyo Electric Co., Ltd. JA Solar has approximately 3% of market share in PV cell industry (Figure1), however JA Solar’s market share will continue to expand and during the next five years it is expected that the company’s annual sales growth to average 34%.

Trend and Opportunity

SWOT Analysis of JA Solar

  • Strengths (Strong Production Base): JA Solar owns and operates a strong production base in China. As China provides access to low-cost utilities, lower rent, and low-cost research and development and manufacturing personnel, JA Solar incurs lower operating costs. The strong production capacities of the company enable it to produce at low-cost and meet the growing demand for solar cells.
  • Weaknesses (Focus on Limited Number of Customers): JA Solar depends on a limited number of customers for a major portion of its revenues. Dependency on a limited number of customers makers the company vulnerable to the continued relationship with and financial health of those customers. The loss of a key customer or decrease in orders from any customer could have an adverse effect on the financial and operational results of the company.
  • Opportunity (Growing Photovoltaic Market): Solar PV energy has gradually become the world’s fastest growing renewable energy source. The worldwide market for solar energy is growing rapidly with a growth rate exceeding 30% a year. The annual solar PV installations in China are expected to increase from 30MW in 2008 to 141 MW by the year 2013. The long term growth potential of the solar PV industry opens several avenues of growth and development for the company.
  • Threat (Intense Competition): The company principally operates in the mainland of China and other countries such as the U.S. JA Solar would face intense competition from large players, such as Trina Solar, Suntech Power, and Yingli Green who have become vertically integrated, from upstream silicon wafer manufacturing to solar power system integration.      

Vertical Integration

Most companies are partially vertically integrated in order to capture more stable value. As the whole industry develops, vertical integration becomes more feasible. By doing so, they can expect 1) building high quality and reliability into their products, 2)optimizing cost structure, 3) adopting cutting-edge production technologies, 4) developing the most advanced manufacturing methods, 5) minimizing cargon emissions throughout localized production process.

Since the solar modules produced by these manufacturers are technically similar, the difference in profitability is largely determined by the raw material acquisition costs and efficiency in the production supply chain. Vertical integration along with raw material acquisition through long-term supply contracts is the solution the bigger manufacturers are opting for. The downside to long-term supply contracts is the risk of raw material prices falling as supply approaches or exceeds demand.

Recommendation

Why Not Backward Integration?

Judging from the company’s current strategy, we recommend that the JA Solar should not continue with backward integration in to internally producing wafers.  As a pure cell producer, JA Solar does not need to take additional risk and management costs by consolidating with the wafer manufacturing, which is an industry experiencing significant reduction in margin.  A graph below shows that wafer’s margin have been fallen from 43% in 2007 to 6% in 2009 (Figure 3).

Above all, wafer production is a very standardized and easy to control quality.   Since, JA Solar is has already secured stable long-term wafer supply agreement with GCL Silicon Technology.  Under the agreement, GCL Silicon Technology will supply silicon wafers to JA Solar from April 2008 to December 2015 at predetermined prices. GCL Silicon Technology is one of the leading polysilicon and wafer suppliers in the world, delivering high quality and low cost silicon products to the solar industry. By doing business with stable and reliable wafer supplier, JA Solar can focus on their existing competitive advantage and maintain a flexible structure. 

Why forward integrate?

We admit that expansion forward would create additional risks for the company in terms of management of the supply chain. However, integration forward is the only solution for the company to exploit value and remain competitive in the future. 

Being a pure cell play company is not a sustainable strategy for the future.  This is because the current pure cell industry is heavily dependent on their customer in the next stage of the supply chain, the module producer (see exhibit).  However, since the solar energy industry is already well integrated with majority of the big module players also producing their own cells internally, the pure cell companies will experience weaker demands in the future as their end customers, the pure play module companies cannot compete directly with the integrated module assemblers.  This weaker demand will dictate further price war and pressures on margin.  As a result, JA Solar needs an alternate strategy to escape from this pressure.

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Additionally, looking at the margin of the supply chain, the more downward integration creates a higher margin and more diversification in products (Figure 4).   Despite the rising of competition, companies who are fully integrated can position better in terms of cost management along the supply chain, as well as creating value for the end customers. While the Ingot/Wafers have a slim margin of 4-6%, there is much value added moving down the supply chain.  The last segment of the supply chain, the Integrated Installer share the greatest amount of profit margin, from 20-35% percent as this segment offers differentiated services to the end customers.  By reaching to the end customers, the Customer is able to establish brand recognition and differentiate from a commoditized industry.

The goal is to integrate JA Solar all the way down to the system integration, where they will be able to establish a brand name to the end customers, including providing on the product services, as well as product development and system integration to the end customers.  This diversification will put the company on an offensive position where they are no longer dependent on weak module producers and a lowering margin.  Additionally, by integrating all the way to the end customers, we will be able to deliver much more value to the end customers. End customers are interested in buying one stop delivery of energy, not just cells or modules.  The modules and cells will, over time, become commodities as the products are standardized and as companies engage in price wars.  As a result, by implementing the proposed business model for JA Solar, the Company will be able to establish brand with the end customers and will offering differentiated services.

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