Price Pressure | Market Forces & the Solyndra Fiasco

What do you get when you mix market forces with commodity pricing and a delusional business plan?

Answer: Solyndra.

As you know, Solyndra, a California-based solar panel manufacturer, filed for bankruptcy on Aug 31, and the company is currently under FBI investigation. At last count, US taxpayers lost half a billion dollars on that deal.

Goodbye Greenbacks, Hello Green Energy highlighted a few basic stats. The news is worse than that superficial examination indicated.

Why? Photovoltaic solar panels are, it turns out, a commodity product.

What do we know about the relationship between commodity products and pricing?

Correct. Prices fall and profit margins shrink as products mature into commodities. The more commoditized the product, the more acute the price pressure becomes.

In 2009, general solar panel prices were roughly $1.95 per watt of energy produced. (Solar panels are priced based on energy output.) In August 2011, some retail prices fell as low as $1.27 per watt. Check my math, but that looks like a 35% price plunge in a two-year period.

Even before the latest price drop, Solyndra was reputedly selling its products below cost. One source, for example, cites 2009-10 figures that placed Solyndra's cost of goods sold at $108 million and revenue at $58.8 million.

What about market forces?

Not to put too fine a point on it, but the solar panel market is dicey and demand is unpredictable. Solyndra, nonetheless, is reported to have classified every commercial roof in the world as a potential customer. Really? Every single commercial roof, regardless of latitude, longitude, war, peace, interest in solar energy or ability to pay? To cast this approach in the most positive light possible, it's dangerously delusional.

Competition in the global solar panel industry is fierce, and worldwide, it's experiencing a series of consolidations, restructures and closures. It seems the only way to survive is to match economies of scale with extreme production efficiency, superior management, and steady, sustained demand. Solyndra fell short on all four fronts.

What’s the key point?

A range of issues helped sink Solyndra, but a volatile market and severe price pressures contributed to its demise. We can learn from this example.

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Related
Price Pressure | Self-Inflicted Wounds
Price Pressure | Product Life Cycles
Price Pressure series

References
The Atlantic: How Did Solyndra Spend All That Money?
The Atlantic: Solyndra Was a Bad Bet from the Beginning

4 comments:

Robert M Chapman said...

It seems to be a fine line between stealing government money and mismanagement of a company. I sense there is virtually no accountability of senior management in most companies that operate with government funding. Too little accountability of senior management in the public sector as well.
Bob C

Barbara Spencer Hawk said...

How right you are, Bob.

The Solyndra example is interesting/concerning on multiple levels, from questionable management to a poor (or deluded?) grasp of market forces.

It would make a great business case study. Hope Harvard's getting right on that task.

When you're selling your product at half price, and half price is double your competitor's selling price ... Am I being too simplistic or does that spell trouble?

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Barbara Spencer Hawk said...

Good to know, Anonymous, and it's always nice to meet a regular reader.

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