SunPower Light?

Everyone's rushing to interpret the news that SunPower has agreed to acquire PowerLight (see Makower, Makower again, Fraser, and an insightful Dikeman). The deal has been rumoured for months now, so the announcement wasn't too much of a surprise. With the exception of Dikeman, who strikes a balanced-but-skeptical tone, most bloggers seem eager to buy the notion that this was a good move for SunPower. I'm not so sure.

The deal rationale goes something like this. As the silicon supply loosens, module prices will once again decline, and module manufacturers like SunPower will face margin erosion as their products are commodified. To regain pricing control, module manufacturers need to extend beyond components to innovate and build brands at the system level. System level innovation will be critical to squeezing cost out of the entire price equation so that solar can compete against retail rates without support from incentives. A vertically integrated company spanning ingot to installation is necessary to realizing this vision.

I agree with almost everything in the above paragraph with the exception of the last sentence. Module manufacturers will have to differentiate their products. System level innovation will be important, as will brands that stand for reliability, quality, and value in the customers' mind (particularly in the residential and small commercial market). Meaningful innovation will be driven by insights from frontline experience with PV applications and customer/installer needs.

Vertical integration is one way to assemble the resources to pursue this vision, but not the only way. It will come at some cost, so the move has to be seen as a big gamble with an uncertain outcome. The question to be answered is whether the gamble improves the companies' chances for success?

I think one of the biggest risks is that both companies will alienate partners that could have generated a lot of value for them. PowerLight only sources 20% of its modules from SunPower at this point, so 80% of their suppliers woke up this morning with big things to think about. I'm sure they'll all make positive public statements, but my experience tells me they're sharpening their daggers behind closed doors.

Conversely, SunPower has made some great progress developing a stable of integrators who are working hand-in-hand with the company to deliver SunPower-branded systems to market. I think all of those partners will now be wondering how committed the company is to their success now that they compete directly. And, no doubt, they'll feel somewhat betrayed having helped a supplier to build its brand with their customers. It's possible PowerLight and SunPower can dance their way through these issues, but there's no doubt it introduces some new downside scenarios for both companies.

Frankly, I've been a big fan of SunPower's market approach. Rather than chasing lowest-cost-per-watt, which is a sure path to commoditization, the company chose a high-efficiency, high-value positioning. Of all the module manufacturers, I think they had the best shot at establishing a well differentiated product with defensible margins. Did they need to add the management challenge of an integrator business to ehance their chances for success? I suppose because their product is more expensive per watt, they felt a need to squeeze more out BOS and install costs to ensure their product stayed competitive.

On a related note, I'm not sure SunPower's market position lines up well with the challenges of PowerLight's business. Certainly there are applications where limited rooftop space requires higher efficiency modules--and higher efficiency modules may translate to marginally lower BOS/install costs (less "trips up the ladder"). But there are also applications where lower efficiency modules provide the best cost-benefit and PowerLight will have to maintain supply of those modules to stay competitive in those market segments.

Finally, I'm not sure the system integration business is really a great place to be in the long term and SunPower paid a high price to get into it. I built a very successful system integrator business over the last 5 years and competed with PowerLight regularly--in fact our sales team was proud of the claim that we never lost a deal in competition to them. I actually saw that fact as a troubling warning sign, that the best-established player in the industry couldn't defend itself effectively from new entrants.

As solar power installs have become more common, I've seen more and more mechanical, roofing, and electrical contractors develop the skill sets necessary to provide good quality PV installations. And they're willing to do it for very thin margins compared to what today's systems integrators expect. Add to that the slowdown in the housing market that will only increase the supply of willing entrants and it really starts to get scary. To the extent that manufacturers take some of the mystery out of project engineering and provide "packaged systems" that anyone can install, I think system integrators are in a race to the bottom.

My gut is that there are partial integration strategies that have an equal or better chance of success in this market. I would have thought that SunPower could have leveraged its unique product and system branding to develop a robust distribution network, relying on capable installers with local market knowledge to give them concentrated regional power. It's possible they know something I don't--both companies have smart, experienced management teams and I wouldn't want to bet against them.

The bottom line is that I don't think this is a "game over" move...in fact I think it creates a wide opening for other smart companies to come up with alternative combinations that can potentially innovate faster and develop a more efficient distribution strategy.