Applied Materials curtails thin film business

Update 2:30pm. In response to a reader’s feedback, I’ve corrected the story.

The Merc this morning had a rather ambiguous story about the layoffs at Applied Materials that mark a retrenchment of its diversification from integrated circuits into PV.

GreenBeat (at VentureBeat) has a much clearer and more complete story that explains how the company is scaling back providing equipment to thin-film silicon manufacturers. (The Merc’s GMSV morning blog even acknowledges the superior VentureBeat coverage). PV-Tech also has a more precise story than the abbreviated Applied press release.

(Update: The press release itself says that Applied will no longer sell its SunFab integrated lines for manufacturing thin-film solar panels, but still plans to sell tools for thin film manufacturers. My original title “exits thin film business” was not true, but it’s hard to find what’s really happening behind the AMAT euphemisms.)

The VentureBeat story argues that Applied’s losses are just a matter of a bad bet, placing too many eggs on the future of thin-film amorphous silicon. The story predicts a cascade effect for two local PV manufacturers:

This is bad news for companies like First Solar and of course NanoSolar, which have both invested heavily in thin-film technology. Applied’s decision to migrate away from amorphous panels is yet another blow, a move that could raise the alarm among investors looking for smart, more capital-efficient investments in solar.

However, I think the GMSV commentary raises the broader and more important questions:

Others bring up that Applied CEO Mike Splinter indicated a few months ago that the U.S. solar industry was losing to China, which is building cheaper solar panels, and that the company’s latest move is symbolic of a broader problem for the U.S. energy tech industry. China is now the world’s largest exporter of solar panels, the Wall Street Journal says.

This seems to be one of the well-understood but little-remarked problems with America’s so-called “green jobs” strategy.

Consistent with the Vernon product life cycle thesis, in most tech industries the early production and manufacturing are in the developed home country, and it’s only later in the maturation of the industry that the production is moved offshore. Intel took 40 years to move manufacturing out of Silicon Valley, and similarly the software industry had a good run of several decades before penny-pinching American firms discovered Bangalore.

Today, even before American startups ramp up to meet domestic demand, they are shifting production (or contracting for production) to offshore locations. This not only has implications for the production workers, but also for the startup companies themselves: if the materials and production are offshore, is their value-add strong enough to preserve a permanent source of competitive advantage?

Of course, Apple successfully moved to contract PC manufacturing more than a decade ago — a pattern extended to the iPhone and iPad — and continues to post record sales and earnings. However, Apple is one-of-a-kind in the PC and cellphone industries, so it’s hard to say this is a feasible path to profitability for many companies.

The reality is that PV companies are producing technology-intensive, capital-intensive capital goods that produce commodity electrons. Because the substitutes — conventional electricity generation — are so cheap, they face commodity price pressures far earlier than in most tech industries.

So I think the GMSV concern is warranted: even if the irradiance and cost trends assure that California and the American Southwest will be powered by solar energy in 20 years, that doesn’t mean the profits for this infrastructure buildout will accrue to American firms. (NB: The $1.45b loan guarantee for a Spanish solar thermal producer.)

Perhaps it is my college-educated, college-teaching bias, but I also don’t think having American workers install foreign-made panels is the same as having US firms creating export-oriented manufacturing jobs in renewable energy.

Flash: Markets work better than governmental fiat!

When Oregon’s feed-in tariffs sold out in 15 minutes, it unfortunately revived interest in a justifiably discredited approach to promoting adoption of renewable energy.

The issue came up today at the SolarTech-sponsored workshop “Accelerating PV Commercialization,” held next door to the InterSolar trade show in San Francisco. Fortunately for those in the room — if not the broader policy audience — Hal LaFlash of PG&E swatted down the idea as quickly as it came up.

Basically, there are two common ways that government force utilities to purchase of renewable energy that is not cost-competitive with conventional sources of power:

• The feed-in tariff to set a specific price that utilities use to buy RE. This approach was pioneered by Germany and copied with disastrous results by Spain.
• Force utilities (using regulation and penalties) to buy a certain amount of RE, and leave it up to them to figure ut how to do that most efficiently. This is the basis of the California Renewables Portfolio Standard.

As LaFlash pointed out, the latter approach works much better, because the utility has the incentive to buy the power, but at the most cost effective fashion possible. In response to PG&E’s periodic solicitations for proposals, the RE generators state how much they want for their power and the utility runs a reverse auction, picking the most efficient (cheapest) one.

(LaFlash also noted the utility is working to streamline the paperwork process for connecting projects under 20 MW, in which the transaction costs is disproportionate to the project size.)

Stimulating renewable energy generation is about buying a commodity to achieve a policy goal at the most efficient possible price. The problem with feed-in tariffs — as demonstrated by Spain, Oregon and elsewhere — is that they assume a priori analysis or some other state planner can do a better job of setting a price than the market.

That’s what markets do best: set prices. We call it the supply and demand, or capitalism. Despite the delusions of the economically illiterate, that battle was fought and won decades ago. So here it’s California providing a model for how governments can use market forces to achieve environmental goals.

According to Harvard economist Greg Mankiw, the Federal government is apparently in the process of ignoring (or intentionally unlearning) this lesson when it comes to sulfur dioxide emissions and acid rate.

End to most carpool cheating stickers

On Wednesday, the Governator signed AB 1500, which extends HOV lane privileges for a small number of California EV owners. However, the vast majority of the 85,000 sticker owners — owners of Prius and other hybrids — will be losing their carpool heating privileges on January 1.

John Voelcker of Green Car Reports spells out all the nuances and implications of the plan, which is aimed at handing out the perks to the Nissan Leaf and other expected EV/PHEV models — and keeping the perk for the RAV4 EV and other existing EV and CNG alternatives.

The policy decision makes all the sense in the world. The yellow stickers were always intended to be temporary incentives. The hybrids offer a marginal improvement over gasoline vehicles, particularly with the increasing fuel efficiency of affordable non-hybrid cars like the Ford Fiesta, Honda Fit and Toyota Yaris.

The stickers provided a subsidy (with a market value of up to $1500/car) to fuel adoption of expensive hybrids by the affluent and upper middle class. Given their popularity — particularly in the urban areas where the HOV lanes are found — they’ve already served their purpose. Meanwhile, the 80,000+ (by one estimate) empty slots and lanes can be used to encourage adoption of a new round of lower emission vehicles.

Estimating the cost-benefits of solar energy

The key question of renewable energy is cost-effectively producing commodity electrons. One of the most pressing questions for SolarTech, Silicon Valley’s solar energy trade association, is accurately estimating the financial returns of rooftop PV and other RE systems.

In the Spring 2010, SolarTech commissioned a consulting team of finance students from the Sbona Honors Program to look at the most commonly used tools for calculating solar returns. (I supervised a second team on local permitting, and initiated the cooperation between SolarTech and the SHP for both teams.)

The actual report is available on the SolarTech website and was announced Wednesday in a SolarTech press release, timed to next week’s InterSolar conference in San Francisco. Because it is a building block of the SJSU-SolarTech cooperation, I wrote more about the background and goals of the study in our new Solar Workforce blog.

The short answer: the students think the best alternative (of the four) is the NREL’s Solar Advisor Model. The caveat is that study was mainly on features and usability, and there still needs to be an audit (by subject experts) of the accuracy of the calculated results.

Still, this is a great example of how business schools (and undergraduate students) can be relevant to the emerging renewable energy industry. It also offers some insight to us in business schools how to bring the industry’s real business problems into the classroom.

Governator's $19 million green legacy

On May 26, Governor Schwarzenegger announced that the state Employment Development Department would award up to $20 million in grants as part of his Green Innovation Challenge:

The intent of the grant funding is to encourage industry leaders to find innovative methods designed to meet the needs of businesses to not only fill immediate employment needs, but also for the development of a partnership and infrastructure flexible enough to support employment growth for up to 10 years.

Successful applicants will have business-led partnerships, which may include entities in higher education, workforce development, economic development, employee and scientific associations, along with venture capital entities or other organizations important to making the technology successful in the short and long term.

Applicants had 20 days to file a 10 page proposal in one of five areas: renewable energy, energy efficiency, alternative/renewable vehicle (and fuels), energy storage and water efficiency.

On June 29 — less than six weeks after the announcement — the state announced six winners totaling $19 million, of which three are from the Bay Area. The winners were:

• SolarTech Workforce Innovations Collaborative (Sunnyvale): $4 million for renewable energy, with an emphasis on PV and solar thermal
• Northern Rural Training and Employment Consortium (Chico): $3.5 million for renewable energy in covering 11 counties
• San Jose/Evergreen Community College: $2 million to train workers to build new energy efficient home
• San Diego Biofuels Initiative: $4 million for biofuels based both on crops and algae
• San Mateo Community College: $3 million for EV/hybrid maintenance at three community colleges in the SF and LA areas
• Los Angeles Valley College: $2.5 million to both survey existing water usage and develop best practices for water efficiency

Each of the teams has two months to convert their brief proposal into an implementation plan.

While the requirements of the CFP emphasized a role for community colleges, four of the six approved proposals also include university partners. All four are using campuses of the 23-campus California State University system: Chico State (NoRTEC), San José State (SolarTech), CSU East Bay (San José energy efficiency) and San Diego State (San Diego Biofuels). More significantly, UCSD and its San Diego Center for Algae Biotechnology is playing a leading role in the biofuels project. (I visited with the SD-CAB director on Thursday and hope to post more later).

If the other universities are like us, a major goal is to create a permanent, self-sustaining change in the curriculum that extends beyond the grant period. The San José State portion of the SolarTech project involves both the business and engineering schools, and (we hope) can serve as a model for other CSU campuses. We’ve started a blog to post news about our own efforts, the SolarTech-led project, and the overall Green Innovation Challenge. Look there for further updates.

Efficient vs. inefficient green jobs

At the EconLog blog this morning, Economist David Henderson noted his response to arguments for government subsidies of green jobs. While I don’t agree with all his points, he does bring things back to the core problem often ignored in cleantech policy: as in any other government (or private) policy, more efficient policies should be chosen over less efficient ones.

The arguments were in a monograph called The Economic Benefits of Investing in Clean Energy, available free from its two sponsors: the Center for American Progress (a progressive think tank) and the Political Economic Research Institute, a research project focusing on progressive issues headquartered at the University of Massachusetts Amherst.

In turn, Henderson — who has a part-time appointment at the Hoover Institution — published his review in the Summer 2010 issue of Regulation magazine, from Cato, the leading libertarian think thank. While CAP and Cato might agree on free speech or military spending, when it comes to government regulation and domestic spending, they are continents apart.

Henderson begins provocatively enough:

Suppose that you want to build a house, and you solicit two builders for estimates. Builder A's eight employees can build the house in three months for $300,000. Builder B's four employees can build the same house in the same time for just $150,000. Which builder would you choose?

This is not a trick question. You would choose Builder B, right? But Robert Pollin, James Heintz, and Heidi Garrett-Peltier would select Builder A if they employ the same reasoning they exhibit in their recent monograph The Economic Benefits of Investing in Clean Energy.

In other words, if spending $10 billion on green jobs is good, $20 billion is better. If this weren’t OPM (other people’s money), no one would ever think that way: it would be “how can we best increase consumer welfare by spending $10 billion” or even “what policy will create the most jobs at the lowest cost?”

Really, Henderson could just cite the Frédéric Bastiat and broken window fallacy — which describes much of the waste in government spending today. Maybe Henderson assumes his readers know the story, but the principle is inviolate: money spent fixing broken windows is money not spent on something that would otherwise be a higher priority.

Attempts to abolish the laws of economics have (so far) failed, whether by Marx, Galbraith or EF Schumacher. The price system in free markets sends signals to consumers to make the optimal allocation of their resources, and no better system for decentralized coordination has yet been found. Thus, the efficient use of resources should be just as much a priority in creating “green” jobs as with ordinary jobs.

Every so often, when hiking in a national park or visiting the old downtown of a small city, I find a road, bridge or building built by the Civilian Conservation Corps. Whatever the original cost, the fact that these facilities are in use 70 years later suggests that the expenditure had a productive use, amortized over a long period of time.

Tesla's big day

Today was a great day for Tesla Motors and its CEO Elon Musk. Both got tons of favorable publicity — opening the NASDAQ market this morning — and wads of badly needed cash as the company enjoyed a wildly successful IPO.

By any measure, the IPO was a huge success:

• The offering was expanded from 11.1 to 13.3 million shares.
• The offering price was raised from the planned $14-16 to $17/share; and
• The stock rose 40% in the first day of trading to close at $23.89, creating a market cap of about $2.2 billion

All this on a day when the Dow fell 2.6% (the NASDAQ 3.8%) as common investors panicked in the face of worsening economic news, and in a year where IPOs are few and far between. (My theory is that the stock defied the market because TSLA stock buyers were a combination of rich environmentalists that buy the cars and hot stock faddists who buy the story.)

(As with most Tesla financial news, the best reporting came from VentureBeat reporter Camille Ricketts.)

By selling almost 909,000 of his own shares, the 39-year-old Musk grossed $15 million, while his remaining shares were worth more than $650 million. Once the lockup is over, this presumably will allow him to pay some of his bills and start to resolve his long-deferred divorce settlement. After going broke, it also amounts to a personal vindication of the vision of the billionaire serial entrepreneur.

In fact, the LA Times found an Edmunds.com analyst who saw this as more of a referendum on the Tesla and Musk star power than its business or the industry at large:

"It's all the hype that's been built up, the first-day craziness," [editor John O'Dell] said of Tuesday's stock surge. "I would not take what's happening as a referendum on the EV market overall. It's unique to Tesla and Elon Musk and his reputation and persona."

Now that they’re a public company, the real scrutiny begins.

Ricketts has a list of 10 key questions for the company and its investors. Some are the obvious ones — when will Tesla stop losing so much money and how will it support the stock (and the balance sheet) when its second product is two years out. Others are less obvious, including how will Tesla balance its two strategic investors — Daimler and Toyota — who gave the company legitimacy, technology and (competing) potential exit strategies.

Others are also asking piercing questions. For example, John Gapper of the Financial Times wonders why investors are (apparently) so sanguine about having a part-time CEO of a multibillion dollar (market cap) company. Yes, Musk apparently fancies himself the greatest entrepreneur (and perhaps greatest tech CEO) of all time, but even Steve Jobs only managed to run two companies (Pixar+NeXT, Pixar+Apple) while Musk has three (Tesla, SpaceX and SolarCity).

One of the other questions Ricketts asks is how Tesla’s planned Model S sedan will compete with rival offerings from Chevy and Nissan — two well-capitalized manufacturers with better distribution. There’s also Fisker, the other major startup EV company, which used $20m of its $529m in stimulus funds to buy GM’s shuttered Delaware plant — part of its plan to help stimulate Finland’s economy.

Right now, electric vehicles are niche products: Tesla has sold 1,100 cars in two years — less than the total number of cars sold every two hours by the incumbent vehicle makers. The Model S and its rivals all hope to be the Camry (or Taurus) of electric cars, albeit at a healthy price premium (even with subsidies).

Into this niche are coming GM and Nissan right away, Fisker and Toyota soon after, and probably Ford, Honda, Chrysler, the Koreans and the Chinese by 2015. So far, the cars are 20-50% more expensive than their internal combustion counterparts. Meanwhile, the economics and green footprint of these vehicles depend on both the cost of gasoline (retail or with externalities) and how that compares to the real cost of grid power.

Meanwhile, sales are flat for the rest of the auto industry (at least in the developed world) with too many companies and factories chasing too few buyers. Even if electric cars increase their share of the market, they’re not going to grow the overall market, and that existing capacity (both manufacturing and distribution) will chase wherever the market goes.
The best case: the EV market grows rapidly and the rivals are slow to enter (unlikely) or are unable to match Tesla’s innovative products. The worst case (pick one): the market grows slowly, the prices remain high, a political shift reduces federal subsidies, or rivals (such as GM or Nissan) reach the mass market first.

I think the Tesla team should celebrate a well-deserved 4th of July weekend. After that, it’s back to work on trying to stay ahead of what will inevitably become a price-sensitive commodity business.