The cost of creating solar cells

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Male Speaker: A pretty hot debate right now, just love

your perspective on what's going on in the silicone

market.

Male Speaker: Well, the first thing I think that we're

seeing is a compression of the margins, and the margins

have been way too high. You know, some of the silicon

-- the reason why there's so many people trying to get

into silicon refining is the gross margins for some of

the leaders like MEMC, REMC, have been up as high as

80%, which for, you know, turning some sand into

purified silicon is way too high. So that's going to

get compressed. The -- I think we've seen, you know,

depending on different counts, 80 to 150 new silicon

refiners coming on line. My estimation, which is just a

rough ballpark estimation is 80% of those will not

success or survive the current economic climate.

Probably half of those wouldn't have survived anyway.

It is harder to do than it sounds. So we're going to

see compression of the margins, but we are seeing growth

in silicon supply. I -- I don't know if we are going to

be in oversupply next year. I know different analysts

-- some analysts are convinced that we're going to be,

but it's a little bit hard to say because we don't

really know exactly what the demand environment is like,

we don't know what the supply environment -- environment

is like. But overall, I just see Inaudible falling,

they already are. You know, we're seeing ASP drop from

2008, 2009, which we did not see from 2007 to 2008,

actually prices went up. So in my view what happened in

the last three years, we're collapsing very quickly into

2009 as this market matures in the economic climate it's

a lot worse. So margin compression is really what I see

happening. And there is -- that's healthy. I think

there's been too much margin. And so when that happens,

there are players in the middle that will get squeezed

and will go out of business or get consolidated or

acquired, and I do see that happening in 2009. Again,

the analysts forecast an industry shake-up. Again, I'm

not con convinced there's a shake-out, I just think

there's going to be a clean out of the second tier and

third tier players, that at the end of the day have a

factory and went public with a factory. And that's not

a sustainable, competitive advantage. That's not a

sustainable business. But the leaders, and you know,

some of the leaders, you know, Inaudible some power, Q

cells, Inaudible these are very strong companies with

very strong management teams with very good customer

base, diversified -- they're going to be -- typically in

crisis situations the strong get stronger and the weak

get weaker, and that's what I see happening. But

overall, margins getting compressed, which I think is a

healthy thing for the industry.

Male Speaker: Right. Inaudible --

Male Speaker: I've got some comments on that. I think

the margins that you were talking about were really on

the poly silicon side. That you know, poly silicon was

fetching close to I think $400 kilogram on the spot

market. So you're going to get huge margins there. But

if you look at a panel and if you breakdown the costs,

the poly silicon, and I'm excludeing from this the

value-add that you do to the poly silicon, such as

wafering, is ballpark 30% of the cost of a panel. And

so it's 15% of the cost of, again, these are rough

numbers, the fully installed cost of a panel. So even

if you took that poly silicon price to zero, there's

only so much cost you can take out of your panel. So

I'm more of the mind that -- by a way a lot of the

manufacturers, the better ones, the ones that have been

around longer, have had Ford contracts on poly silicon,

which are clearly not at $400. They've been, you know,

$80, $60. Long term, you know, the costs of producing

poly silicon are roughly around $40 per kilogram. So if

you give those guys a fair margin, say poly silicon ends

up being 50 to $60 per kilogram, somewhere in that

range, there's only so much you can take out of cost

that, and the gross margins of your typical silicon

panel manufacturers are not that high. Sun Power's are

somewhat higher, but they have a lots of cost, actually,

in their system. But typically, you know, they're

somewhere between 20, 25% gross margin. And I don't

think, you know, I think most companies are pretty

rationally economically in that if you're producing and

you're not making any gross margin, you're not going to

produce -- you're just going to shut down factories. So

I guess what I'm trying to say is there's only so much

in the crystal and silicon market where you can compress

margins and still stay in business. And so I -- I do

think ASPs will decline, but you know I think people

have overreacted. I have seen some analyst reports that

talk about 40%, 50% type declines in the next year. I

think companies will just shut down factories. What

you're going to see is just this big supply correction.

And so prices are not going to fall by that much. I

think it's -- I'd be thinking closer to 20% declines in

terms of ASPs over the next year, as opposed to 40 or

50%.

Male Speaker: Just a couple comments on that. I agree

-- that I would say 15 to 20% manual ASP declines

from '08 to '09, and that's, you know, in terms of

negotiations we're doing on module supply contracts,

that's what we're seeing. One thing I would say a

little bit different, I don't think the margin -- the

high margin level is only at the poly silicon level. It

is at the Inaudible level and at the cell level. So

there are many wafer manufacturers, for example in

China, who have bought standard wafering equipment and

earning 37 to 38% gross margin. That is very high.

Inaudible there are some manufacturers who have bought

standard equipment from Europe, installed it, running

it, at 30 to 33% gross margins. In a mature industry,

that would not happen. You know, you should see at the

most I would say 20 -- I mean, to me we will settle down

in those areas at 20%. So I agree that the largest

portion is in the poly silicon side, and a lot of that

is because of spot market. So as that goes away that

was compress. But I do see it also on the wafer and

commodity cell prices. The margins have been very high

for a -- for a very, very commoditized process. If

you're adding differentiation or value or efficiency,

things like that, that's how I think you'll earn a

higher margin level than the 15 to 20% as this industry

matures. But today for standard commodity,

15-and-a-half percent efficiency sells. Equipment no

one can buy, install, run, you know, and part of the

reason they're earning those gross margins is because

they have access to poly silicon. And that's what --

that's what I see starting to change and shift and

normalize in the industry.

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