April 4, 2011 - Top Chinese solar companies are likely to ride out pricing softness due in part to global market uncertainties, willing to suffer ASP hits to drive market share, according to an analyst citing conversations with several vendors.

Policy changes and uncertainty in Italy's market has caused some short-term supply disruptions and pricing impact, but without much impact to Chinese Tier 1 suppliers, write Barclays' Vishal Shah in a research note. In this environment, look for companies emphasizing lower costs and vertical integration (e.g. Trina Solar, Suntech) to benefit, with more vulnerability felt by higher-cost suppliers (e.g. ENER and other US/EU firms) that have higher exposure to spot demand (Tier 2). This should play out in 1Q11 numbers when they come out in a couple of weeks, he says -- "tier 1 companies may still be able to meet/exceed consensus estimates while earnings of tier 2 companies that experience greater than expected ASP declines could fall short of expectations."

Among his listed key takeaways from meetings in Asia:

Share, not profits. Tier 1 companies are more focused on gaining market share than on profitability, which creates a pricing-pressure environment for everyone. (Sound familiar for semiconductors?)

Pricing worries + verticality = better 2011. Chinese cell and module companies aren't very confident on the outlook for volume or pricing, thanks in part to uncertainty in Italy. "That said, companies are bringing on new vertically integrated supply, have cost structures of ~$1.25/W or lower and are willing to lower ASPs to drive market share," Shah writes. And so he thinks 2011 might actually have an upside surprise in demand, possibly exceeding his 21GW outlook.

Germany recovering, US flexible. Demand in Germany "is starting to recover," now at €1.25/W ASPs. If ASPs were €1.05/W or lower, 2011 could look a lot like 2010 for Germany, he writes. And in the US, if ASPs get to $1.45/W or lower, demand could also surprise to the upside.

Poly prices steady. Pricing for polysilicon is still higher than a year ago (~$90/kg); some companies expect them to decline in the near future, but Shah thinks there won't be a big correction until late 2011 or even 2012. Why? Poly demand is seasonally weakest in the first calendar quarter and tends to increase through the year. And just a $20/kg decline in poly spot prices translates to a ~$0.12/W cost structure reduction, "sufficient enough for companies to absorb $1.40-$1.45/W module ASPs" as the aforementioned demand trigger, he writes.