Doing It Right
A Mini Case Study
Throughout this book, I have emphasized the problems and pitfalls of global supply chains. Although there are many problems and pitfalls, there can be significant benefits from producing abroad or using overseas sources. This final mini case study describes how a company, First Solar, has approached overseas expansion. They have, to date, been successful in these efforts. The following information is based on the public record1 and discussions with members of their management team.
First Solar has been the leading solar panel company in the world. It was formed in 1999 and began production in 2002. It was founded in the Toledo, Ohio, area and still maintains its only U.S. production facility in Perrysburg, Ohio. Their corporate headquarters are in Tempe, Arizona. In 2008, they were the first solar panel company to reduce their production costs below $1 per watt. The market for solar panels is currently heavily dependent on governmental subsidies for solar power production, so this adds a level of uncertainty against which the company must hedge. First Solar has a 50-year warranty on their solar panels (specifically, they warrant that the panels will yield 80% or more of their design wattage for 50 years). In addition, they put aside funds from every panel sold to pay for recycling that panel when the customer has finished with it.
Overseas Locations
First Solar has eight production facilities, including overseas locations in Malaysia and Germany, with additional sites planned in Arizona, France, and Vietnam. They had a variety of reasons for producing overseas. The primary motivation for their move to Malaysia was labor cost. Although the production of solar panels is not particularly labor intensive, the competition is intense, and the small difference in labor costs was significant. In addition, the Asian market is growing, so they are closer to their customers.
They also have a factory in Frankfurt am Oder, Germany, near the German-Polish border. Although northern Germany would seem to be an unlikely site for solar power, there were two primary reasons for locating there. The first, as we mentioned before, was government subsidies. The Germans have a goal of eliminating their dependence on coal-fired and nuclear energy. Solar is one part of the mix. Second, during the cold war, the Soviet Union had a large military base near Frankfurt. A German businessman who was on the team to integrate the East and West German economies after 1991 told the author that the Russians had simply poured waste petroleum products on the ground to the extent that the soil was poisoned 20 meters deep. The only thing that can be done safely with such a site is to cover it, so the Germans decided to cover it with solar panels. First Solar was selected to produce the panels. In addition, with the high unemployment in the eastern German states, there was a readily available supply of skilled labor. Sixty-five percent of their sales in 2009 were in Germany.
First Solar is currently planning on expanding into Vietnam and has signed an agreement with China Power International New Energy Holding Ltd.2 Vietnam is attractive because its labor costs are even lower than Malaysia’s. Economic problems, including persistent inflation, have made it less attractive, however. China is a growing market for solar power, and the Chinese policy is to encourage or even require firms to produce in China what they sell in China. On the other hand, China has had problems protecting intellectual property. Since the production process is proprietary and a competitive advantage for First Solar, they had to assess the risk of compromising their intellectual property against the potential return from entering the large and growing Chinese market. At one time, they considered expanding into Thailand, but the political unrest there caused them to shelve those plans.
Transportation
One factor that is not significant in their location decisions is transportation costs. The cost of transporting their raw materials is about the same as transporting the solar panels. So they can choose to be close to either their customers or their suppliers based on other factors (such as currency risk).
Culture and Language
Wherever they open facilities, they are sensitive to the nuances of opening facilities in different cultures. Everyone at the company involved in opening and operating the new facilities abroad must undergo cultural training. They have contracted with universities to provide this training. In addition, local managers in the countries where they are expanding are brought to the United States to meet the people with whom they will be working and to learn the corporate culture. English is the mandated corporate language, but all operational documents, including shop-floor manuals, are translated into the local languages.
Part of their quality control system also aids in dealing with the potential problems of cultural differences. The system, called “Copy Smart,” is designed to ensure that the production system is identical in every facility, whether in the United States or abroad. They do not want their customers preferring the panels from one facility over others. Although the primary purpose of the system is to ensure consistent quality worldwide, it also means that a manager may be assigned to any facility and find an identical layout and identical production processes. All workers, no matter what their nationalities, are given the same training and follow the same procedures. In theory, any worker could be placed in any production facility in the world and feel comfortable with the layout and environment.
Exchange-Rate Risk
Because they operate in multiple countries, they face exchange-rate risk. When asked how they deal with the risk, the answer they give is hedge, hedge, hedge! They have a department that specializes in managing currency risk. They also manage the risk by producing in countries where they sell their product. Producing in Germany, where they have 65% of their sales, means both their costs and their sales are in euros. They are also opening a new factory in Arizona to meet demand from the California utilities rather than import the panels from their Asian facilities. The proposed factory in France is considered a strategic move but also is based partially on mitigation of exchange-rate risk. France does not emphasize solar power at the moment (they depend heavily on nuclear power), but they are in the euro zone; plus, having a plant in France gives First Solar a seat at the French equivalent of the Business Roundtable so that they have a voice in future decisions about solar power.
Role of Government
The two biggest risks faced by First Solar are regulatory and financial—both determined by governments. Internally they say they are one politician’s vote away from going out of business. Because their product is based on cadmium telluride, a hazardous substance in its raw form, the handling, use, and even access is government regulated. In the form in which they use it, the compound is not hazardous. In addition, they have reduced the amount of the compound needed by over 99%. They must ensure that the governments where they operate can distinguish between the two forms of the compound and will allow them to operate. The recycling program also assures the governments that the cadmium telluride will be reclaimed by First Solar and not be discarded into the environment.
The financial risk stems from the subsidies governments give to the solar industry. Although First Solar receives no direct subsidies because it is in the solar industry, its customers receive subsidies and tax breaks for generating clean, renewable power. These subsidies can be removed at any time. The German government, for example, at the start of 2011 had reduced their subsidies by 25% from a year earlier.3 One of First Solar’s competitors, Xunlight, shut down virtually their entire operation because they lost a multimillion-dollar Italian contract—the government reduced the subsidy and the customer cancelled the order.4 First Solar uses three strategies to mitigate this risk: The first is to diversify their customer base so that one contract cancellation does not have such a large impact on the company. The second is to continue to reduce the cost of production so that subsidies are less important to make generating power with their panels economical. The third is to invest in solar power generating facilities that use their panels to give them a voice in decision making.5
Supply Risk
A long-term risk may be the relative scarceness of tellurium. It is a by-product of refining metals such as copper. The major sources are the United States, Canada, Japan, and Peru, so the supply should be stable. Although there is a sufficient supply at present to support solar-panel production, a significant expansion of production may begin straining the supply chain. In Germany, for example, which is committed to producing clean power, less than 2% of power generation is from solar sources, so the potential to expand the market is great. There are untapped sources of tellurium, such as the refining of gold, lead, and coal, but extracting it from these sources will increase costs. There are also a number of competing uses for tellurium. The recycling program will eventually give First Solar an additional source of tellurium through reclaiming it from older panels. Although with the 50-year warranty, this would seem to be in the distant future, as the technology improves, customers may choose to return the older panels sooner. In any event, tellurium is and will continue to be a scarce metal.
The Future
Since solar panel production is a new industry and there are a lot of competitors with different ideas, First Solar wants to be sure they survive the inevitable industry shake-out and emerge as the major player in the industry. Demand for solar panels doubled last year to 17 gigawatts and is expected to grow to 21 gigawatts in 2011, so the potential for First Solar is there.6 On the other hand, the volatility of their stock price reflects the uncertainty in the industry. Effective management of their global supply chains is a key element in their long-term survival strategy.