REC was formed in 1996 as hand-washed wafer producing unit in Norway in 1996. With the passage of time, the company has grown into a leading integrated solar panel manufacturing company, and thelargest European supplier of solar panels, producing more than 30 million solar panels as at end 2017. the company’s solar panels had generated 10 GWh of electricity for more than 12 million people aroundthe world. IT has established itself as a reputable, quality-focused solar panel manufacturer in the last two decades and was admired for its product quality, advanced technology, and customerservice.
It is 2017, and the company is facing severe problems mainly due to falling prices in the industry and several competitors have filed for the bankruptcy. The company is a premium supplier that mainly focuses on corporate business and individual consumers where it supplies in collaboration with the third party installers. However, it also works with utility industry as it considers it very important for the future, but, the margins in utility segment are very low.
The main problem with the company is to find out how to go towards the future in such a rapidly changing industry. Whether to continue making integrated product or specialize in some stages while focusing on its core offering. It also needs to consider its customer base. These are important decisions to survive in an industry that has still huge potential to grow.
The IndustryThe industry can be analyzed using five forces analysis as devised by Porter as follows:
Competitive rivalryThe competition is very stiff in the industry as there are numerous firms that are competing in the market for a share. Although, the market is also rapidly growing, but the prices are also rapidly falling. As this market for the solar pretty much resembles to free market, no one party has the leverage of being a price maker. The prices are mainly decided by the market. However, companies like REC who provide superior products and customer service can charge premium prices, but they are still under strong pressure to reduce the prices.
Solar energy has become the fastest growing renewable energy source by 2016. Solar panel installation grew from less than 1 gigawatts (GW) in 1990 to over 23GW in 2009 and then soared to 70GW in 2016 at the global level. It was further projected to grow to 250GW annually by 2040 at the average compound annual growth rate (CAGR) of 5 to 7%. So there is still huge opportunity in the market for growth.
The industry is rapidly changing because it is technology-based company where the companies are investing heavily in research and development to improve the technology focusing on efficiency of the solar panels while reducing the costs further.
A huge growth of the industry is thanks to the subsidies by the governments around the globe. However, those subsidies are now significantly reduced, and people are adopting solar for their own sake with multiple reasons. Like few are adopting it as a viable power option while others are going for it in order to protect the environment.
The customers in the industry often buy it for once in a lifetime and so there is no consideration of switching costs. However, strong after sales services are still very important part of the sales mix and something where the customers can prefer one company over the others. That is why, both product and service is very important in the solar industry. However, as the market is over supplied with the solar panels, the prices dropping rapidly, pressurizing the current players to cut down costs. As a result, the companies like REC are focusing on non-price competition like superior product quality and superior after sales services.
Bargaining power of customersBargaining power of customers is quite strong in the market. This is because there are numerous solar panel suppliers in the market. So, each customer can choose the supplier with the kind of price and quality it needs. The customers in the market can be divided into residential, commercial (e.g., retail and industrial buildings requiring rooftop installations) and utility (e.g., power plants) segment. The residential consumers were fragmented, and most were one-time buyers, making switching costs irrelevant, and the barrier to entry for the installers minimal.That is why, each company needs to focus on the particular customer segment it wants to cater and mould its product, price and service offering appropriately.
Bargaining power of suppliersThe bargaining power of the suppliers is moderate to weak in the industry. This is because there are numerous suppliers in the market with no one controlling more than 10% in the industry. Then, the technology is rapidly improving and every company that can introduce any breakthrough, gets the competitive advantage and strengthen its power, thus the bargaining power of suppliers is moderate to week.
Threat of New EntrantsSolar industry is already very fragmented with numerous suppliers and falling prices rendering the industry unattractive for the new entrants. As a matter of fact, there is already an over supply in the industry and that is why, many suppliers are leaving the industry through bankruptcy or consolidation. Therefore, the threat of new entrants is very weak in the solar industry.
Threat of substitute productsThere are many substitute to the solar products that includes fossil fuel, gas based, wind power, nuclear and similar other means. The world is rapidly moving towards greener fuels where Solar is a viable option. However, its cost is generally higher as compared to other options which is expected to come down over time as happened in the past. That is why, the threat of substitute products is high in the industry.
Looking at the five forces analysis, it can be said that the industry is still attractive for the current players. However, they need to modify their strategy in light with the rapidly changing realities. This is because the industry is rapidly changing and technology is improving and each players needs to have enough flexibility into its business to be able to rapidly adopt those newer technologies. Moreover, differentiation is also very important in the industry to survive just like REC as it allows you to charge premium prices.
REC’s StrategyREC’s strategy is based on producing wafers, solar cells and solar panels for which it has integrated facilities in Singapore, Sweden and Norway. The companies core focus is on producing high quality superior solar panels and providing superior after sales services for which it charges premium prices. So the company’s core strategy is differentiation.
The main competitive advantage that REC has its superior product. Major products of the REC include REC Peak Energy (60 multi-crystalline cells with an energy output of up to 265 Wp) and REC Peak Energy 72 (72 multi-crystalline cells with an energy output of up to 320 Wp), as well as some variations of these two core products. The company then upgraded its products in 2015, these products to REC TwinPeak (120 half-cut multi-crystalline cells, with an energy output of up to 275Wp) and REC TwinPeak 72 (144 half-cut multi-crystalline cells, with an energy output of up to 335Wp). The TwinPeak series has increased the power generated by each cell by around 10 Wp and thus can achieve a 275 W per panel performance. Then the company’s products are also manufactured in efficient way that mean lower manufacturing costs. The company has integrated manufacturing facilities along with optimum level of automation that ensures the uniformity of the products. Its product delivery is also very fast with turnaround time as low as just 1 day for local consignments and just 7 days for international. Then, each of the step of its product and service provision is customer focused.
These products are superior in performance and quality as compared to the competitor as the unique half-cut cell architecture offered the solar panels with supreme performance in shaded areas or areas that received lower sunlight. Moreover, REC’s solar panels were also 100% free from potential induced degradation (PID) and had low light-induced degradation (LID) due to which the panels had a significantly lower power loss (1.5%) due to LID as compared to industry average f around 5%. Moreover, the panels had a guaranteed performance of 25 years while having the lowest warranty claims rates in the solar industry.
Generally, solar panels are installed on single-axis trackers that can track the sun from the East to the West from 10 am to 4 pm. However, REC’s solar panels also have a backtracking function that can track the sun before 10 am and after 4 pm, resulting in improved yield. Moreover, the cells can also harness the light which passes through the surface with the help of reflective material at the rear of the solar cell. Then these cells are made of thinner and lighter materials as well. This means, not only that the handling is easy and more cells can be fit in a panner but the installation of lighter modules was quickeras compared to the conventional modules, that, along with shorter cables that did not require cable ties, reduced the number of man-hours required for module installation while also improving safety.
With regard to customer, the company focuses more on the residential and commercial client while also catering the utility markets which it feels important in the long run. This is because the utility segment had the lowestprices for the solar modules and was the most competitive, REC focused more on the residential andcommercial segment but without completely withdrawing from the utility sector.
With regard to geographic reach, the company is catering most of the major markets. Its’ products are mainly sold in US, Asia Pacific (India, Japan, Australia, and Southeast Asian countries), Europe (Germany, France, Spain, Italy, Belgium, The Netherlands, UK), and the Middle East.
The company focuses on high value customers and do not cater every customer that can buy its products. This is because it kept its prices higher as compared to the competition and also provides superior after sale service, which is an important factor in the solar sales.
As opposed to the most solar companies that have huge debt in their capital structure and thus mean extra cost for the end consumers due to higher risk, REC has kept its debt ratio quite low, lowest as compared to solar companies and thus consumers does not need to purchase third-party warranties to cover the risk that like in case of other solar companies as they may unable to fulfil their obligation as part of their product warranty obligations, and for such companies, thee is high chance that the claims may not be met because of caps and deductibles imposed under the third-party warranties.
Then the production of the solar cells is highly energy intensive, but REC has found a way to manufacture the cells with 75% lower energy as compared to the industry which its cells payback only in 1.2 years.
Threats to RECThe major threat to REC is from the competition. The company has superior products, a growing market as well, but the competition is very tough in the market with prices rapidly going down. Then, the technology is also rapidly changing and the world is moving towards the mono- cell technology whereas, the company has not yet committed its resources towards it and if it does not do so, it may lost to the competition. Then, the solar panel demand in China, one of the major markets is projected to drop by 17% by 2017, which would result in further over supply and further downward pressures on price. That is what already leading to the bankruptcy of three major competitors recently with several consolidations. The company needs to devise a new strategy in the light of the recent developments as soon as possible.
Strategic Issues for REC in 2017There are several strategy issues faced by REC. To start with, it needs to figure out how to fulfil its ambition of becoming the one of the top 10 solar company by 2020 globally. For this purpose, the company needs to consider the strategic matters beyond the current crisis of falling prices.
Then, it needs to consider if it is feasible to remain focused premium module manufacturer and serving only high value customers in the wake of falling prices or it should expand its scope and customer base?
Then, the company does not have a sales presence in the rapidly growing emerging solar markets of Mexico, South Korea, and Brazil and it needs to consider if it would be worthwhile to explore these markets as well? Then, it also needs to consider if offering customers more customisation to justify the premium price be feasible?
Then, it also look to see if REC need to modify its operational scope to deal with component price fluctuation and if it should focus more on bundling of services to improve its marketing positioning further like through offering battery solutions.
Then the company needs to consider if it needs to commit resources to P-Mono crystalline technology or skip a generation and directly focus on N-Mono crystalline technology, considering its reputation of focusing on avant-garde technology development. But it would involve very high amount of investments and so very high stakes that can potentially make or break the company.
RecommendationsAs there is pressure of lowering prices in the market, it is always helpful to have enough flexibility in the supply chain to be able to take any advantage of falling input prices. It needs to ensure that it focuses on its core product while outsourcing non-core inputs in order to benefit from cheaper inputs.
Then, as company’s main strategy is differentiation through superior product and better customer service, it needs to stick with it. For that matter, it needs to not only commit resources towards P-Mono cells research and development but it should also work towards offering more customization to the customers so that it can maintain its competitive edge. Working with third parties for integrated solar solutions like batteries should also be further enhanced for the same reason.
The company also needs to increase its presence in the rapidly growing emerging solar markets of Mexico, South Korea, and Brazil albeit with minimum resource commitment to start with. So, exporting can be a viable option to start with.
Overall, it is a high time that the company look into its operations to found out any instances of cost savings that it can pass on to customers to become more competitive. However, offering superior product quality and after sale service should be the key priority of the company as it allows it to charge premium prices and thus save its from the trap of ever declining prices. The main aim of the company should be to maintain its competitive edge.
ReferencesSolar Electric Supply, Media, REC Quality Beyond Expectations,
https://www.solarelectricsupply.com/media/custom/upload/REC-Quality-Beyond-Expectations_1.pdf, accessed May 2017.
Porter's Five Forces - The Framework Explained. Mindtools. Retrieved from:
https://www.mindtools.com/pages/article/newTMC_08.htm
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