From the stage high point on August 19, the photovoltaic concept index (CN:BK0478) has fallen by more than 20%. For photovoltaic investors who have been used to eating meat in the past three years, such a callback cannot help but fear: is the turning point of the cycle of China's photovoltaic industry coming?

In order to clarify this problem, we have carried out a detailed review of the development of the photovoltaic industry, hoping that through awe of history, in order to achieve a vision of the future development of the industry. The strength of the photovoltaic industry does not come to an end. The most recent memory of the market is that because the cost of power generation is always high, after the decline of industrial subsidies (531 the New Deal), the market was once full of doubts about the future of the photovoltaic industry. The overall valuation of the company fell to a historical low.

However, with the continuous improvement of industrial technology, photovoltaic power generation efficiency continues to improve, superimposed on the huge demand released by energy change, the growth rate of the photovoltaic industry can be released rapidly. Behind the harvest of photovoltaic fruits, technology maturity is a prerequisite, and demand release is the direct motivation. Under the resonance of technology and the times, investor expectations have been fully reshaped.

Looking at the overall situation, the rise of new energy is only the beginning, especially in the case of continuous tension in Russia and Ukraine, it has increased the certainty of the global market demand for the photovoltaic industry. The decline in the valuation of related companies is more like the fading of investor confidence caused by external factors, and the core driving force of the industry is still there, indicating that photovoltaic companies are far from the end, and there are still stories to tell.

After photovoltaic power generation achieves parity on the Internet, the competitiveness of photovoltaics compared to traditional energy sources begins to appear, and the impact of technical factors on the photovoltaic industry will be reduced. However, the so-called "parity" is not the end, cheaper, clean electricity is still the eternal pursuit of people. How the future development of the industry will meet the growth in demand. In this context, we believe that the photovoltaic industry will enter the 2.0 era.

1. Industry Trend: Integration Becomes Inevitable

First of all, we need to take the trouble to take everyone to think: what is the first principle of photovoltaics? In fact, the answer is very simple, that is to reduce the cost, because all power generation methods to produce the final commodity is electricity, and electricity is the most typical standard, no one will care about my mobile phone charge today is from thermal power, hydropower, photovoltaic, wind power or nuclear power, lower prices are the only competitive rules of the ultimate standard.

Therefore, the history of photovoltaic development is a history of price reduction. However, the core drivers of price reduction are gradually migrating, and it is to see this turning point that the brocade research institute divides the development stage of photovoltaic into 1.0 and 2.0.

1) technological innovation is the main theme of the era of photovoltaic 1.0

Counting from the establishment of Wuxi Suntech in 2001, China's photovoltaic industry has experienced at least 20 years of big waves and sand, and finally formed a strong supply chain system with detailed division of labor. Whether it is upstream polysilicon, midstream battery chips, or downstream components, the main market share is firmly occupied by Chinese enterprises.

Looking back at the rise of China's photovoltaic industry, the new technology driven by innovation is the key to success. The story of catching up and overtaking by the latecomer has become a business story that everyone talks about.

For example, after Longji introduced diamond wire cutting technology into the field of monocrystalline silicon wafer cutting, the whole cutting rate was increased by 2-3 times, and the cost was greatly reduced. In 2015, China issued the implementation plan of energy efficiency leader system, which clearly defined the main tone of promoting the application of advanced photovoltaic technology products and industrial upgrading. The conversion of monocrystalline silicon technology with higher efficiency became a breakthrough technology, subverting the previous pattern of polysilicon dominated market. Today, monocrystalline silicon wafers with higher power generation efficiency and lower cost per watt have become the mainstream.

For another example, Tongwei began to optimize and verify the polysilicon production process and equipment in 2007. By 2014, it has carried out four technological transformations, and its comprehensive energy consumption has dropped from the initial 180-200 degrees per kilogram to 2015. About 60 degrees per kilogram. With the continuous innovation of technology, the production indicators such as comprehensive power consumption, steam consumption and silicon powder consumption continue to decline. At present, the production cost of Tongwei polysilicon has dropped to 3-40000/ton (excluding the influence of industrial silicon market price factors, calculated at constant price), which is equivalent to 1/3 of the mainstream market price in 2015.

In addition, there are cold hydrogenation, anti-disproportionation, high boiling cracking, continuous Czochralski technology, RCZ single crystal growth, single crystal PERC, double-sided power generation, multi-main grid and other new technologies, so that the cost of photovoltaic power generation continues to explore, pushing China's photovoltaic industry trend.

It is not difficult to understand that the reason why China's photovoltaic industry has been able to lead the world from catching up all the way is the driving force of technological changes in the past two decades-new technology to promote the industry to continue to reduce costs and increase efficiency, downward costs bring demand upward, sales increase feed back technology research and development. It can be said that this is the 1.0 era of the photovoltaic industry.

In the era when technology is king, what is the most efficient business model, that is, every enterprise concentrates all its forces at one point to tackle tough problems, and finally jointly complete the innovation of the industrial chain. This model is still being staged vigorously in today's semiconductor and innovative drug fields.

2) Vertical integration has become a key word in the era of photovoltaic 2.0.

Although the future technological development will still serve as the core driving force of the photovoltaic industry, the technical route of each link except the battery chip is relatively clear, and the technological kinetic energy has begun to show fatigue. This is also why, in recent years, the photovoltaic industry, which used to change its banner frequently, has always had several old faces.

The pursuit of lowering the cost will never stop. We see that after the rapid iteration of technology, the vertical integration strategy driven by leading enterprises has gradually become a new trend in the development of the industry in recent years.

Talk to the data. According to the Solarzoom data, Longi Green Energy, Tianhe Solar, Jingao Technology, Jinko Energy, and Artes Solar are the top five companies in global PV module shipments in 2021, with a combined market share of 61.8 percent, compared with only 38.2 percent for all other manufacturers.

Among the five major components, without exception, the vertical integration strategy is regarded as the focus of future development.

Longji green energy, Jingao technology, Jingke energy integration layout earlier, the current integration rate is more than 50%, the proportion of external mining successfully decreased significantly. Originally, Trina Solar was the only specialized component leader that did not carry out an integrated layout, but on June 17 this year, it announced a high-profile investment in the construction of Qinghai (Xining) Zero Carbon Industrial Park, fully embracing vertical integration.

Moreover, Trine Solar's "integration" is very thorough, not only laying out silicon wafers upward, even covering polysilicon and its raw material industrial silicon, but also laying out component auxiliary materials downward. It is reported that Tianhe Solar will build a production line in Qinghai with an annual output of 300000 tons of industrial silicon, 150000 tons of high-purity polysilicon, 35GW of monocrystalline silicon, 10GW of chips, 10GW of batteries, 10GW of components and 15GW of component auxiliary materials.

In a sense, the transformation of the solar energy is a landmark event in the 2.0 era of the photovoltaic industry into an accelerated period.

Through the vertical integration strategy, the strategic autonomy of the enterprise will be significantly improved, which can not only effectively control the terminal cost, but also further ensure the timely delivery of orders, which has a positive significance for the company's capacity planning and business development.

More critically, vertical integration can effectively protect the company's position in the industry and future revenue stability. From the current results data, component companies with high integration rates have significantly stronger single-watt profitability in their component business than companies with low integration rates.

2. Enterprise Response: How to Deal with the 2.0 Age?

1) Strategic adaptive transformation

The wheel of industry development is rolling forward, and achieving strategic adaptive transformation in the 2.0 era is a subject that every enterprise needs to face.

Take Tongwei shares as an example, because the integrated layout has not yet been completed, although it has made a lot of money in the past two years, its commercial territory must think about two issues:

Single pressure brings natural high volatility. Many investors see the prosperity of silicon in the past two years and think that this is a profiteering industry, but in fact, for more than a decade, silicon was a business that did not make much money, and even once fell into serious losses. Tongwei's high profitability benefited from bold counter-cyclical investments. For example, in February-March 2020, due to the impact of the epidemic, domestic polysilicon prices fell to their lowest point in nearly 10 years. However, Tongwei made a counter-cyclical decision to expand its production capacity at that time and built "Baoshan Phase I" 37500 tons and "Yongxiang Phase II" 50000 tons of silicon projects. Essentially, it is a high-volatility industry, similar to lithium mines in the lithium battery industry.

Long-term silicon surplus worries. At present, the photovoltaic industry is most short of silicon, and now talk about surplus, it is estimated that some people will think it is unfounded. In fact, with the trend of photovoltaic industry integration can not be stopped, which leads to an outcome-many upstream silicon enterprises may not have so many buyers.

How to adapt to the trend of industrial 2.0? Pre-emptive, the latter is made by people. Since the downstream components are integrated upstream, the upstream enterprises can also extend downstream. It is driven by this underlying logic, still guarding the "gold mine" of Tongwei, began to take the initiative to enter the component market. We believe that we will see more and more such news in the future.

2) Strategic rationality discussion: from the component threshold is high or not high

Extending to the upstream or downstream of the industrial chain is easier said than done. With the direction, photovoltaic enterprises need to do feasibility research. An analogy is, is it easy for Huawei to make cars, or is it easy for Wei to make chips?

For the PV industry chain discussed in this article, we discuss the most controversial component links in the market.

As the only industrial link dealing with end customers, components were not valued by everyone at the beginning, and were once considered by the market to have strong user stickiness and brand power. Before Tongwei entered the component business, the short-term consensus finally formed by the market was that this field had a very high entry threshold (so the capital market also gave a very high valuation).

But what investors didn't expect was that Tongwei's full entry into the component business immediately triggered a continuous plunge in the component company's share price, and when the "barbarians at the gate" arrived, the belief in the component leader moat instantly vanished.

On August 17 this year, Tongwei became the first candidate to win the bid for the 3GW centralized procurement order of China Resources Power, with an interval of less than a month. On September 6, Tongwei won the bid for the nearly 0.4 billion yuan component order of Guangdong Electric Power Development Co., Ltd. with the first candidate.

As we all know, photovoltaics mainly rely on cells to generate electricity, but the output voltage of individual cells is too low to be used independently, and must go through a certain number of series and parallel connections; at the same time, the cells are also easily corroded by the external environment, with poor tolerance and easy to decline. In order to ensure the positive production of the battery, it is necessary to ensure the smooth operation of the battery through the packaging link.

The component is not only the smallest unit that can provide DC output alone and is indivisible, but also the direct carrier of the downstream terminal, so it is regarded as the core of the entire photovoltaic power generation system.

Split the photovoltaic module structure, it is not difficult to find that it is mainly composed of battery, photovoltaic glass, adhesive film, back plate, welding belt and other components. Unlike the efficiency competition between silicon chips and battery chips, the core purpose of the components is to ensure the stability of the power generation efficiency of the battery chips through packaging, thus testing the engineering process of the enterprise.

Looking at the entire photovoltaic industry chain, the component link is one of the few light asset business, the core business is mainly packaging, so the traditional business model relies on external mining, although its own profit margin is not high, but has a high asset turnover rate. In view of such industry characteristics, the core competitiveness of component companies mainly has three aspects: engineering capabilities, brand effects, and supply chain capabilities.

Tongwei is a latecomer to the industry and does not have the brand premium advantage of a large traditional component factory. However, over the years, silicon production has accumulated mature engineering capability, technical reserve capability, recognized top-notch enterprise management style in the industry, etc. Coupled with its already strong upstream supply chain capability, Tongwei has sufficient capital to grab the component market.

In addition, in the entire photovoltaic industry chain, the shortest expansion cycle of modules is only 6 months, and the longer the upstream expansion cycle of the industry. Although the component manufacturers have already opened the vertical integration layout, but the top-down layout of Tongwei is obviously faster and more efficient.

In summary, although photovoltaic modules have a certain entry threshold, but for similar Tongwei has a strong supply chain advantage of the old players, as well as Tongwei 40 years of strong brand building, construction and communication integration capabilities, do not spend too much time and cost investment can catch up or even surpass. That is, for Tongwei, the barriers to components are not high, which is why the market is bullish on new entrants Tongwei and bearish on traditional component companies.

Let's go back to the company's strategic choice. We believe that integration is the correct strategic direction. At the same time, we must ensure that our extended tentacles are still within the scope of the ability circle. Both are indispensable.

3. future story is still worth looking forward

1) The market will eventually recognize the industrial value of the whole chain.

After the completion of 0 to 1 incubation, the future of the photovoltaic industry is actually from 1 to 100 growth process. With the deepening of the vertical integration process of the industrial chain, the future competitive targets of the photovoltaic industry chain have actually quietly changed.

The theory of integration was first proposed by the American economist Paul Krugman in 1981, which focused on the internalization of all aspects of the production and operation of multinational companies.

That is, from the production of raw materials and parts to the pricing of the final product, etc. are incorporated into the enterprise, and then by dispersing all aspects of production in different countries and regions around the world, using a combination of comparative advantages and convenient means of communication and transportation, to achieve the goal of lower cost of intermediate products in each production link.

Vertical integration has the economy of improving the organization of internal control and coordination and saving transaction costs. In many cases, through the vertical integration layout, it can accelerate the development of technology, enhance the core competitiveness of enterprises, and prevent being excluded by other enterprises, and play a defensive purpose. In essence, vertical integration is not only a way to improve economic benefits, but also a means to cultivate one's own competitiveness, enhance the ability to resist risks, and carry out active strategic planning.

We might as well look at two examples of new energy vehicles, perhaps we can better understand the importance of "vertical integration.

The first example is national car benchmark BYD. In the 2021 car "chip shortage", why BYD's sales are not affected by the lack of core, but hit a new high. The reason is that BYD is the company with the highest rate of autonomy-battery, motor, electric drive, electronic control, battery BMS system, and even some car chips are designed and produced by itself, and even car seats are produced by joint ventures.

The second example is the smart car benchmark Tesla. Tesla not only in the field of intelligent driving, but also personally down to build 4680 batteries, and tentacles to battery recycling, and even plans to make a fuss at the top of the industry chain: optimize the mineral mining and refining process. In Musk's eyes, only in this way can we better control the cost of the vehicle and have more full competitiveness.

To sum up, BYD and Tesla, which are developing rapidly today, are ostensibly attributed to policy-driven and marketing, but in fact they are all models of vertical integration. Behind this success is their layout of many core technologies such as batteries and electronic control, as well as accurate research and judgment of industry trends.

However, Ningde era, which is also the industry leader, handed over a report card of "revenue doubled but net profit fell by more than 20%" in the first quarter of this year. The answer is also well known, upstream raw material costs rose sharply is the main reason. In the face of the extreme case of lithium carbonate prices soaring to 500000/ton, even "Ning Wang" can do nothing.

Having said that, the Ningde era is actually a supporter of vertical integration. After all, Ningde's industrial chain has been laid out in the fields of positive electrode precursors and lithium battery equipment, but the lack of upstream layout will ultimately affect the whole body. Other second-line power battery companies that are weaker in vertical integration are even more wailing. For example, Guoxuan Gaoke's revenue in the first half of 2022 hit a new high, but its net profit hit a three-year low.

Focusing on the photovoltaic track, under the future trend of vertical integration, the core of competition among enterprises will be transformed from focusing on profits in the past to the layout and control of the value of the whole chain of the industry.

The payment ability of terminal power station customers is certain, which means that the whole profit of the whole photovoltaic industry chain is fixed. In the past, this part of the profit was divided up by silicon, silicon, battery, and component companies. This forces the upstream and downstream of the industrial chain to become the object of mutual game, everyone wants to maximize the interests, but the local excessive competition is not necessarily the optimal solution of the whole situation, to a certain extent, it aggravates the cyclical fluctuation of the photovoltaic industry chain.

After vertical integration, the profits of silicon materials, silicon wafers and battery chips are all reflected in the final component profits, which will make the performance of enterprises more stable, and also make each link of the industrial chain realize different industrial division of labor. This will not only enhance synergies, but also reduce disorderly competition, which will be more conducive to the development of the photovoltaic industry.

2) The story of the cost reduction is to be continued.

On August 24 this year, the General Office of the Ministry of Industry and Information Technology, the General Office of the General Administration of Market Supervision, and the Comprehensive Department of the National Energy Administration issued the "Notice of the Three Departments on Promoting the Coordinated Development of the Supply Chain of the Photovoltaic Industry Chain." It is proposed that the three departments should make effective use of the domestic photovoltaic market, guide the upstream and downstream enterprises of the industrial chain to communicate in depth, and promote the quality, cost reduction and efficiency of the industry.

The direction of policy guidance and the law of industry have achieved an accurate fit. In the 2.0 era mentioned above, we clearly propose that vertical integration will replace technological progress and become a relatively more important factor. Further systematic attribution, it is not difficult to find that the future competition of the photovoltaic industry chain will be upgraded from the profit competition of a single business to the comprehensive competition of the strategic layout of the enterprise. The test is the overall competitiveness of the enterprise in the core field and the strategic aspect. Decision-making power.

All things change, and all walks of life are survival of the fittest. The trend of vertical integration is not only the result of industrial upgrading, but also the essential law of the market. In fact, the final industrial pattern has begun to emerge. In the future, Tongwei, Longji and other integrated leaders will continue to write the next chapter.

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