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Today, MEMC Electronic Materials reported it has been having production problems at its Pasadena, Texas facility. Their foundry line calibration is messed-up, resulting in accelerated chemical deposit build-up during silicon production. The problem is at their new expansion unit at the facility. Manufacturing silicon at exceedingly high purity levels necessary for quality solar panels and semiconductor production is no easy task, and it's not unusual for glitches like this to show up in new production lines.
The company now expects first quarter revenue of $500 million, down from its earlier forecast of $560 million. New York trading opened with the stock down $8.41 or 11%. But the shares recovered much of the loss by the end of the day, closing at $73.76, down $2.63 or 3.44%. The company attempted to soothsay analysts by highlighting company-wide expansion efforts are proceeding better than previously guided. A conference call is scheduled for April 24th. We expect management to continue to couch the Pasadena, Texas set-back in the context of successful execution at the company overall.
Generally speaking, we are not in favor of investment in silicon producers (LDK is an exception given how far the stock has fallen). While they are immensely profitable today and will be for quite some time, the true long-term competitive advantage in the solar industry is found with solar panel developers, systems integrators, and companies that have vertical integration at multiple levels of the solar industry value chain. Producing high purity silicon is a capital intensive and sophisticated process, but it doesn't have high barriers to entry other than capital - and there sure isn't a scarcity of money sloshing around the world. Right now, China is in the process of ramping up it's silicon production capacity. In a few years, companies like MEMC are going to experience rapidly declining average selling prices. This is great news for the advancement of solar power, and the vertically integrated players like SunTech will continue to benefit from manufacturing scale economies and by adding value at multiple levels of the solar industry value chain.
Nevertheless, we'll have to keep an eye on MEMC developments. SunTech happens to be MEMC's largest customer. We don't expect SunTech's 2008 sales to be impacted, but securing stable silicon supplies remains the biggest risk factor for the company.
