Lately there have been quiet rumblings about supply chain disruptions impacting various cleantech sectors, including solar, batteries and automotive. But, does it really matter? The answer is nuanced.
So, are the disruptions happening? Of course.
The cleantech sector is facing many supply chain issues -- solar tariffs, pandemic disruptions, shortage of labor and materials, chip shortages to battery materials and supply constraints, to name a few. The Solar Energy Industry Association (SEIA) announced that every solar segment experienced rising prices in quarter three of 2021 primarily because of tariffs and Chinese domestic and trade issues. Gulf Coast hurricanes, Winter Storm Uri in Texas and pandemic supply crunches have created backlogs of gensets and batteries from suppliers. Stories about semiconductor chip shortages impacting auto and other sectors are abounding. Venture capitalists have noticed. In energy storage for example, sectors such as recycling, second use, testing, materials change and setting up a circular economy are hot in the venture landscape. Investors ask management teams what their supply chain strategy is, a question that never came up in this industry.
But, the cleantech supply chain issue isn’t new or surprising; it’s just that season again. It happens in cleantech every few years. These sectors are global and cyclical by nature. The first time an actual supply cycle in the cleantech industry happened was the silicon shortage in photovoltaics (PV) more than a decade ago. That supply crunch created some interesting impacts in the short and long run, but the solar train did not stop rolling downhill. Among the short-term impacts, an entire artificial industry in concentrated solar power created itself from thin air by virtue of investors believing the short- term supply chain kinks in silicon meant one should bet on a solar product using more glass and steel and less silicon. Tremendous capital poured into that, as well as the solar thermal industry to compete head-to-head with PV on what turned out to be a false market premise. Thin-film solar companies raised billions in venture financing on the similar premise that crystalline PV couldn’t get cheap enough, and a shift was needed to thin film, another wildly inaccurate assumption that was heavily informed by the silicon supply crunch.
As soon as more silicon refining capacity was built, the shortage eased prices, which had artificially pumped up. Prices dropped back below their prior levels, as the underlying cost curve had not stopped trending down. With margins compressed, even strong companies with sustainable cost structures felt the pain. Cost reductions proved to be largely a function of scale, and companies that did not invest in growth, struggled or failed. The nascent construction photovoltaics (CPV) and solar thermal industries disappeared almost overnight. The few companies that produced panels of copper indium gallium selenide (CIGS) thin-film solar cells had rolled out products they thought would be cost-competitive. Their products then failed when it turned out that they measured against temporarily high prices constrained by short-term supply issues that were not accurate representations of the competitive costs. In cleantech industries, one thing to remember in supply crunches is that usually underlying costs don’t stop falling; only prices do.
The other significant shift that the first cleantech cycle delivered was the shift to China. The “silicon shortage” existed because new demand from solar had outstripped supply. The silicon refiners were reluctant to sign up to long-term CAPEX for new capacity in a young industry without firm long-term contracts. Most of the big Japanese and Western players who had built the market were nervous about committing such contracts in a young industry, which they viewed as still reliant on policy support for demand. However, new Chinese entrants backed by subsidized capital and energy policy did not have that reluctance, essentially having everything to gain and little to lose from signing long-term commitments. The result was the supply crunch that created a dramatic shift in market share from Japan, the United States and the EU to China. German and U.S. policy support created massive demand that was taken advantage of mainly by new Chinese entrants. Within a few years, all the names at the top of the market share rankings had changed, and both silicon supply and module supply were dominated by Chinese suppliers. This was not the only reason Chinese solar manufacturing exploded, but certainly a significant factor.
In short, there are some questions every cleantech company should ask themselves in a supply chain disruption -- is this particular supply crunch artificial or fundamental? Is it caused by policy kinks that are likely to resolve? Are fixed, variable and technology costs underneath the price impacts falling, flat or rising? Which part of the supply chain is actually being impacted? How are other participants reacting? Assuming the industry keeps growing when the crunch resolves, where do we need to be positioned to survive not the crunch but the next flood?
The flood matters. The last flood in solar PV saw manufacturing capacity growth outstrip demand growth to peak at a stunning two times capacity to demand. The companies that continued to invest, grow and remove costs through the crunch learned how to get lean and live on skinny single-digit gross profit margins—stripping them for battle and leading directly to the next round of growth, cost reductions and grid parity for solar. Vertical integration became an important strategy in several key markets. That’s how energy cycles tend to play out, whether solar, refining, petrochem or the U.S. shale gas revolution. When demand outstrips supply, prices can shift materially and margins are big, but watch out when that N+1 plant comes online, and be prepared not just to react, but to scale.
At a fundamental level, cleantech industries are unique in history. They are fixed cost heavy, manufacturing scale and maturity-driven product industries, serving and able to rapidly switch between global and cyclical end commodity price markets with capital project-based business models in hyper-growth, often regional, messy policy constrained and driven end markets with falling costs. And, those costs have just recently reached the point where key cleantech sectors have crossed cost parity with conventional technology creating huge opportunities and attracting capital. As a result, cycles, constant change, volatility and supply chain crunches are just the order of the day, and your supply chain teams better be ready.
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