Case Study: First Solar, 2006 – 2012
By Other Means Part II: U.S. Priorities in the Gray Zone
August 13, 2019
Context and BackgroundIn 2007, the U.S. solar power industry seemed poised for strong and sustainable growth.1 However, in only four short years, a number of challenges emerged that threatened the continued viability of many U.S. solar power companies. One of those companies was First Solar, Inc. This case study examines the organizational and structural decisions made by First Solar between 2006–2012 and explains why First Solar continued to be viable in a volatile market.
In the early 2000s, new policies, primarily in Europe, made solar energy more commercially competitive with traditional fossil fuels. These came largely in the form of subsidy programs that encouraged the large-scale purchasing of solar panels by guaranteeing owners an above-market price for the energy they produced. U.S. firms took advantage of this state-supported demand and profited through sales to Europe.2
First Solar forged its place in the industry as the largest U.S. manufacturer of photovoltaic (PV) solar panels, or modules. Its proprietary cadmium telluride thin-film technology “made it the largest and lowest-cost producer for nearly a decade.”3 In fact, it became the first solar company in the world to manufacture solar panels that could generate power at less than $1.00 per watt.4 In 2007, backed by high profits and strong growth that stemmed almost exclusively from European markets, First Solar expanded production internationally to keep up with global demand by building a manufacturing facility in Germany to complement its research/development/manufacturing plant in Ohio. Between 2007 and 2011, First Solar announced plans to expand its capabilities by opening new manufacturing centers in both Malaysia and Vietnam.5 To support this expansion, the company’s workforce grew more than fourfold, from almost 1,500 employees in 2007 to 7,000 by the end of 2011.6
Additionally, in 2007, First Solar purchased Turner Renewable Energy, a system integrator company. This acquisition allowed First Solar to “vertically integrate” its operations, meaning that First Solar now controlled the “engineering, procurement, construction, operations, maintenance, and development of solar power plants.”7 Rather than only designing and producing solar panels, vertical integration allowed First Solar to begin operating a “systems business” segment of the company that focused on the construction of large, utility-scale projects.8
Vertical integration aside, focusing on utilities made sense for First Solar, and in 2011 the company announced a transition away from rooftop solar installations, which had previously been a significant portion of its sales portfolio.9 While the company’s proprietary thin-film technology was cost competitive—able to produce more energy for less money—it was less geometrically efficient than its competitors. Therefore, its solar panels were best suited to compete in large-scale utility projects where space constraints were not a prominent factor.10 Increasing the scale of its sales allowed the company to optimize its competitive advantage in the market.
By 2011, however, two major challenges emerged that threatened the continued viability of the U.S. solar industry in general and First Solar in particular. First, in the wake of the Great Recession and the subsequent wave of austerity policies, European governments began scaling back the subsidy programs which had sustained the demand for renewable energy on the continent.11 Second, this shrinking demand was met with a global oversupply of solar panels, manufactured in large part by Chinese firms able to sell at or below cost due to financial support from Beijing.12 Due to this decrease in demand and increase in supply, by the end of 2011, a series of high-profile U.S. companies comprising one-fifth of the U.S. solar industry had closed operations or declared bankruptcy.13
Between FY2007 and FY2010, First Solar had seen its operating income expand more than fivefold, from $137 million to almost $750 million. Facing these new market challenges, however, First Solar experienced its first net operating loss in seven years, losing $68 million in FY2011.14 Nevertheless, the company was able to avoid the fate of much of its competition across the U.S. solar industry, avoiding bankruptcy and rebounding to compete more robustly in the years ahead. Within two years, both its sales and revenue were growing firmly, and by FY2015 the company had a positive operating income of over $500 million, with sales revenue surpassing those in FY2010 by over $1 billion.
FindingsFirst Solar seems to have managed multiple challenges and remained a viable company for two reasons. First, the company responded quickly to global market changes and recognized the need to reverse its previous course of expansion, instead scaling back production to align its supply with shrinking global demand. Second, it was able to stay afloat by relying on pre-existing contracts for its utility systems project, which offered a degree of continuing demand and acted as a buffer against global market fluctuations.15
While these two factors helped First Solar to survive in the short term, the company began to orchestrate a longer-term strategic plan that would allow it to succeed amid evolving market realities. It seems to have understood that its previous dependence on heavily subsidized European markets was unsustainable, so it began seeking new markets where demand for solar energy would be more sustainable and less dependent on policy fluctuations. Largescale utility projects in emerging markets across Asia, the Middle East, and North Africa would take up an increasing share of First Solar’s sales going forward.16
The organizational elements of this successful strategy are straightforward. First Solar appears to operate as a private-sector company with a traditional centralized hierarchical structure in which major company decisions are made at the executive level and passed downwards. While individual divisions of the firm may have some leeway to manage themselves for localized efficiency, they are nonetheless executing directives from above. There is no obvious lateral engagement between divisions. The incentive structure for the company, both the whole and its parts, is presumably one of seeking to maximize profits. Accountability to this end is centered around the board of directors, which selects the CEO and is designed to effectively represent the interests of the company’s shareholders.17
In the short term, this case demonstrates how an organization was able to remain viable amid a rapidly changing strategic environment by reallocating resources away from suboptimal pursuits and by leveraging competitive advantages that it had previously cultivated.
Even though First Solar’s strategy shifted, the roles within the different segments of First Solar seem to have remained static. As per the 2009 Annual Report, First Solar began formally operating its business in two segments. The first is the component’s segment, which involved research, development, engineering, manufacturing, and sales. The second, the systems segment, included project development, engineering, procurement, construction, operations and management, and project finance.18 These roles were seemingly unaffected by changes in strategy.
The role assignments, however, did seem to shift as the strategy changed. It appears that this was less a function of assignments shifting within a segment or between segments and more about assignments being scaled down and up. This was most pronounced in the component segment in manufacturing. By 2011, the company had recognized a “structural imbalance between supply and demand,” in which production significantly exceeded global demand.19 With fewer panels being sold, the company’s existing manufacturing facilities were only producing 1.7 gigawatts worth of modules, 68 percent of its manufacturing capacity of 2.5 gigawatts.20 In response, the company began to scale back its operations in late 2011, cancelling plans for a new plant in Vietnam, idling four existing production lines in Malaysia, and fully shuttering manufacturing operations in Germany.21 This strategic restructuring seems to have led to a more efficient allocation of resources and left the firm producing an appropriate quantity of solar panels to match global demand.
Between 2009 and 2013, the company was led by three different CEOs: Robert Gillette (2009-2011), Michael Ahearn (Interim CEO, 2011-2012), and James Hughes (2012-2016).22 Based on publicly available documents, it is difficult to ascertain the extent to which the personalities of these leaders affected the company’s success. However, one can see that: the end of Gillette’s tenure coincided with the marked downturn of First Solar’s operations; Ahearn oversaw the introduction of the company’s tactical and strategic responses to those challenges; and Hughes led the company through the stabilization of its market performance.
Lessons LearnedFirst Solar’s organizational and structural decisions between 2006-2012 provided the study team with several lessons that could be useful for application to the United States government. Those lessons include:
- An organization should identify risks and invest in opportunities to hedge against those risks. Beginning as early as 2006, First Solar seemed to understand that its focus on producing modules in a highly sub sidized European market was subject to, “changes in general economic and political conditions in the countries in which [it] operated.”23 Rather than hoping that the economic realities in Europe would remain static, the purchase of Turner Renewable Energy in 2007 allowed First Solar to vertically integrate and invest in a pipeline for the construction of large, utility-scale projects. According to First Solar, the contracted North American pipeline was to act as “a buffer against demand uncertainties.”24 Indeed, when European demand fell in 2011, the pipeline seemed to help shield the firm from the worst consequences of Europe’s market volatility.
- Responsiveness to the evolving strategic environment is determined by incentives as well as organization and culture. First Solar’s strategic plan prior to the Great Recession sought to optimize its performance given certain market realities that ceased to be true once European governments began scaling back their subsidy programs and global demand shrank. Rather than continuing to pursue the same plan under new conditions, the company seemed to recognize the need to reallocate its resources and realign its priorities to the evolving needs of the market. In an ostensibly diametric shift from its previous plans to expand manufacturing capacity, First Solar wisely scaled back production to align itself with the newly emerging market imbalance, all while beginning to seek more sustainable emerging markets. Accordingly, the company reduced its workforce by 30 percent, going from 7,000 employees in 2011 to only 4,850 by the end of 2013.25 This reduction seemingly helped limit duplication and allowed for an optimized allocation of resources.
- An organization that recognizes and exploits those areas where it has a competitive advantage can build resiliency to multi-vector challenges. First Solar understood that its strategic edge in the global market came from its proprietary thin-film technology. It seems as though it’s best chance to establish and preserve its place in the industry was to reorient towards segments of the market that were best suited for its particular panels, relative to the competition. Early on, a significant portion of First Solar’s sales portfolio included rooftop installations, where its modules’ cost efficiency was somewhat counteracted by its relative geometric inefficiency.26 With the company’s evident transition into a more exclusive focus on the utility segment of the solar market, where large-scale projects were not confined by the same size restrictions, First Solar was able to optimize its product’s unique advantage.27
- An organization that continuously refines and resources its competitive advantages will increase its chances of survival. While First Solar seemingly recognized how to best take advantage of its technological edge, it also understood that it could not take that advantage for granted. In a dynamic market, competitors vying for First Solar’s market share were developing solar technology that could potentially reach or surpass the cost efficiency of its CdTe thin-film modules.28 To maintain its position, the company put additional and more focused resources into the development of its technology, and as a result, the quality and efficiency of the product continued to grow and stay well above the competition.29
- A centralized organization can implement decisions quickly. Once it became clear to First Solar that demand in Europe had dropped and that Chinese companies were oversupplying the market, First Solar needed to move quickly to stay afloat. In the course of essentially one year, First Solar rapidly adjusted its entire business model. In this traditional top-down hierarchical structure, as opposed to a more bureaucratized model, it appears that decisions were implemented quickly, and First Solar was able to effectively respond to changes in the market.
- A division-of-labor structure, as opposed to role redundancy, can perform efficiently. The operations of the two main business segments of First Solar, components and systems, are distinct from one another with seemingly minimal direct interaction. However, they are both inextricably connected with one another in their common pursuit of maximizing the company’s profits and market share. The development and success of one seemingly complements the other’s ability to succeed. For instance, the manufacturing and technological improvement of solar modules takes place under the auspices of the components segment, but the viability of full-scale systems projects relies on the quality and efficiency of those very modules.
- An organization should be proactive in developing a long-term strategic plan. First Solar announced its long-term strategic plan in December 2011, when its financial losses made clear that the company needed to radically reorient its strategy. However, financial reports acknowledged as early as 2006 the risks associated with the company’s dependence on a few European customers whose demand was contingent on government subsidies.30 While the investment in its North American utility pipeline project was structured in part to act as a buffer against market volatility, First Solar nonetheless waited until its sales began to fall in Europe before it unveiled its transition towards new developing markets. While an outside observer cannot know the internal strategic calculus within First Solar’s leadership, the company may have been better equipped to mitigate the impact of and respond to the loss of European demand had it been more proactive in changing course before the Great Recession.