Why does First Solar stand alone?

November 20, 2007 11:26 AM PST

Why does First Solar stand alone?

Posted by Michael Kanellos

First Solar, which makes cadmium-telluride solar cells, is having one of those years that corporate managers and investors dream about.

Revenues more than tripled in the third quarter to $159 million from a year ago while profits rose to $46 million, or about ten times what they were the year before. Plant expansion is occurring rapidly and the company's stock has gone from $20 to over $200 in a year. The stock price seems vastly inflated when you look at traditional price-earnings ratios, but it's not the first time people have bet big on a growth stock. It's the Google of solar on that score.

So the question is, how come they don't have any major competitors making cadmium-telluride solar cells? VCs have poured over $340 million into five start-ups that hope to make copper-indium-gallium-selenide (CIGS) solar cells in the last few years and CIGS solar cells aren't even on the market. Cadmium-telluride works and there are customers.

Researchers at Lawrence Berkeley and the National Renewable Energy Labs are working on cadmium-telluride cells. Germany's Q-Cells is building production of a line of cadmium-telluride cells through its Calyxo subsidiary, but it won't go online until next year. The first plant Calyxo plant will only have a 25 megawatt capacity. First Solar already has 210 megawatts worth of capacity and will more than double that figure with new factories in the next few years.

I asked some people and here's what they said:

1. Experience. First Solar was founded in 1999, but the history of the company goes back decades, according to Dan Myers of Crosslink Capital. Founder Harold McMaster made his first fortune in the late 1940s with Permaglass and later went onto Glasstech. McMaster was one of the world's experts on tempered glass.

In the 80s, McMaster got interested in solar technology and experimented with different ways to put photovoltaic materials on glass. He worked first with silicon and then cadmium-telluride with a company called Solar Cells. Solar Cells had a rough number of years financially but was finally reincarnated as First Solar in 1999.

2. Patient Investors. John Walton, of the Walton family fortune, was an early investor and stuck by the company through the very difficult early years. Interestingly, Myers noted that none of the big solar success stories have been emerged from the usual Silicon Valley path of being fostered along and funded by VCs, which usually want a return after five years or so. Instead, these companies have taken years to incubate.

3. The secret manufacturing sauce. The company has developed a process with its own machinery that can churn out high volumes of cells. What's more, the company can replicate those factories to rapidly expand capacity.

In a sense, the entire thin film solar industry is a competition around who can build a better machine. The CIGS solar cell companies will all have similar products. The difference between them lay in how they produce those cells: Miasole is sputtering the active materials onto substrates, while Nanosolar is printing them. Many companies are also making their own machinery. (A lot of the success of SunPower, which makes crystalline silicon solar cells, is also based around an efficient copy exactly methodology.)

With that in mind, it's probably a better analogy to say First Solar is trying to be the Intel of solar, rather than the Google.

4. Secrecy. The company doesn't let you see those fancy machines either, says Myers. He visited the company and was barred, like other visitors, from getting an up close look at the production line.

5. Poison. Cadmium can be toxic, which sort of scares some people away. The company has tinkered with its process to cut down on workplace toxins and has recycling programs with manufacturers.

No doubt, First Solar will get some competitors, but that is the situation today.