Assessing effectiveness of vertical integration in PV supply chain

In all industries, after the business model matures and large-scale production clusters take form, companies will gradually expand their operations through vertical integration to take control of upstream materials, regulate production costs, and explore downstream outlets, thus enhancing their competitive advantages. The PV industry is no exception. 

According to InfoLink’s database, 60% of companies in the polysilicon, wafer, cell, and module sectors are operating production clusters in two sectors, mostly cell and module.

Although vertical integration has become a common strategy in the PV industry, vertical integrators face different barriers to entry in each sector due to widely varying core knowledges required, initial investment costs, and operational challenges. The following paragraphs provide a concise analysis of vertical integration in the four major sectors. 

Upstream

In polysilicon and wafer sectors, the most prominent challenges lie in high initial investment costs, acquiring stable and low-cost power sources, and a long production expansion process. Polysilicon production belongs to the heavy chemical industry, which is highly hazardous, emitting, and pollutive, setting a higher entry threshold for production and processing. Leading polysilicon manufactures, such as Tongwei’s unit of Yongxiang and Daqo, and wafer manufacturers like Longi and Zhonghuan all have exceptional quality control and cost control abilities, and thus absolute advantage in production capacity and scale. It is difficult for newcomers to catch up in the short term, let alone surpass them. In addition, with Tier-1 wafer manufacturers securing a large number of long-term contracts for the next few years, newcomers to the polysilicon sector will find it challenging to establish a stable sales channel.

Mid and downstream

After years of refinement in the market, the barriers to entry are relatively low to produce PERC cells and regular modules. Challenges lie in technology and size selection for production expansions. For cell manufacturers, the rise of n-type technology puts to test their R&D and mass production capabilities as they opt for new technologies. Newcomers must seek breakthroughs in yield rate and conversion efficiency. For module makers, focuses should be placed on branding and the establishment of sales channels, as well as expanding product variety to meet the needs of different markets and after-sales O&M services.

Trend and prospect

Leading companies have been at the forefront of technological advancements, with several of them expanding businesses through vertical integration, but many failed along the way. As technology iterates, some vertical integrators find their R&D capacity falling behind that of professional manufacturers as they distribute resources dedicated to a single sector to several ones. They also have a hard time consolidating their leading positions in all sectors and may face management issues. Furthermore, domestic and overseas end-user demand is volatile and difficult to assess. Unpredictable external factors could lead to supply-demand mismatch, causing operating losses and vertical disintegration, as in the case of many former industry leaders.

[Figure 1]

The scarcity of supply in upstream sectors eases as manufacturers join the game and expand production capacities in the pursuit of high profits. This year, manufacturers bring online new production capacities rapidly, and upstream supply will gradually exceed demand, resulting in price declines first in the upstream, then the entire supply chain. Profits of polysilicon manufacturers decrease consequentially, making the sector less appealing for vertical integration. In the wafer sector, Tier-1 vertical integrators expand capacities in a big way in the recent two years, as the selection of wafer format dominates the development of the final product. For existing polysilicon and wafer manufacturers, huge production capacity creates heavy sales pressure when production surplus occurs in the entire supply chain. Therefore, some of them start assessing the feasibility of downward integration. 

As the PV industry matures, more and more companies use vertical integration as a strategy to control the quality of upstream materials, create sales channels in the downstream, and collect regional market intelligence. Leading manufacturers expand their reach in other sectors to hedge risks. Meanwhile, some companies focus on R&D and innovation in their specialized fields to enhance competitiveness and fortify their position through product differentiation. 

InfoLink expects the advantage of vertical integration to remain, with companies adopting more diverse cooperation models to align with their business values and strategic goals.  

"Tapered integration" (as in Figure 1) is an example, where manufacturers control parts of upstream and downstream production capacity and leave the rest to market trading mechanisms. For instance, cell-module vertical integrators produce some cells for external sales and purchase the rest of the cells they need. By participating in the market, they can better evaluate the quality and cost of their products by comparing with products on the market, whilst keeping abreast of real-time downstream market information and maintaining flexibility.

Another business model is to place long-term orders and secure supply, as manufacturers did before when they failed to acquire sufficient polysilicon. Instead of expanding production in upstream sectors, where barriers to entry are high, companies take control of raw material supply without bearing high production costs through long-term orders or shareholding. 

Furthermore, competitors jointly invest and construct projects, strengthening strategic partnerships, and dodging risks in production expansion. 

In the future, the PV industry will see manufacturers embrace increasingly diverse and flexible forms of vertical integration.