ReneSola Presses Ahead in Time of Crisis
Ye Liya
Dec 30, 2008
Silicon wafer manufacturer ReneSola is bucking current business trends by pressing ahead with expansion in a time of global economic depression. But are its strategic management and meticulous back-office processes enough to steer it through all the danger?
“Everyday, we make sure there is US$100-200 million in cash in our accounts,” says Li Xianshou, CEO of ReneSola Ltd., a Zhejiang-based manufacturer of solar wafers. He also stresses this is “real cash” and that the amount cannot be reduced.
ReneSola is a solar cell silicon wafer manufacturer, the number two supplier to leading solar energy companies like Suntech Power and JA Solar, as well as the biggest supplier to Jetion Holdings Limited. By the end of 2008, ReneSola’s production capacity is scheduled to hit 700 megawatts, with sales forecast to jump to RMB5 billion (US$727.1 million). Ranked by production capacity, it’s already the world’s number three silicon wafer supplier.
But the current financial crisis sweeping the world and the possibly subsequent global economic depression is giving everyone the shivers. ReneSola is no exception, and it’s taking measures to protect itself by maintaining a high level of liquidity. The company doesn’t want to be caught on the wrong foot if a major client goes bust or if the bank abruptly stops providing loans.
However, despite the dour economic outlook and the need to keep hefty cash reserves in hand, ReneSola is still going ahead with the construction of a US$350 million polycrystalline silicon plant in Sichuan. The plant is due to begin operations in February or March 2009. One might ask: Why ReneSola, faced with the current economic climate, is so willing to take such risks?
Crisis or Opportunity?
“The solar energy business, in essence, is about costs,” explains Li Xianshou. “If the cost of solar energy power generation was close to that of fossil power, the market performance would be much different.”
An upsurge in the number of solar energy cell plants has pushed the price of waste silicon from US$14 per kilogram in 2004 to more than US$300 today, and US$500 at peak time. Therefore, even if the energy conversion efficiency has been enhanced from 14% to 17% and the weight of raw material required for each silicon wafer drops from 7.2 to 6 grams (or even to 5 grams over the next two years), rising costs would still dwarf these technological advances.
Considering the price of US$3.7 for a cell plate, the costs for power generation are 0.3-0.4 Euro (US$0.39-0.52) per watt. Now in Germany, power generation costs are 0.1-0.2 Euro (US$0.13-0.26) per watt; 0.2 Euro (US$0.2) per watt is the peak time rate. But for the Green Power Retail Strategies in European Utilities, the use of solar energy cells would not be widely standardized. That’s why the global demand for solar cells in 2008 was no more than 6,000 megawatts. In 2008, after Spain implemented the Green Power Retail Strategies on a large scale, silicon prices went soaring again.
“Silicon accounts for 60-70% of solar cell costs. Without the support of our own poly silicon plant, we would never have managed to get our costs under control,” said Li Xianshou. “These costs are normally controlled by upstream operators, to the detriment of the development of long-term competitive edge. So we had no other option but to take things into our own hands.”
ReneSola intends to expand into the upstream of the production chain by setting up factories and facilities.
In August 2007, ReneSola incorporated a wholly-owned subsidiary Sichuan ReneSola Material Co., Ltd in Meishan, Sichuan with an investment of US$350 million to develop a polysilicon production facility with a projected annualized capacity of 3,000 tons. When it’s ready, Li Xianshou intends to expand into the upstream. The company’s polysilicon costs are expected to drop from US$370 to US$80 per ton with the facilities in Sichuan launched into operations. And ReneSola’s goal is to reduce costs to US$30 per ton, 8.1% of the current level. This major reduction in costs would significantly enhance ReneSola’s immunity to risk.
For that purpose, after getting listed on London’s AIM market in 2006, ReneSola went a step further to the New York Stock Exchange on January 29, 2008 to raise US$130 million. No more than half a year after going public on the NYSE, on June 19, 2008, the company issued a new round of shares worth US$200 million. In fact, the first batch of funds had not yet been used, a rarity in the fast moving world of capital markets.
Shortly after the NYSE share issue, Lehman Brothers went bankrupt, bringing the financial markets into crisis. For at least another six months it would be very difficult for any company to raise funding via the capital markets.
Actually, in early 2008 the climate on Wall Street was already very intense. During the whole of January, Li and his team were rushing between stock exchanges and investment banks in New York, gaining a keen experience of the day-to-day agitations of the capital market. However, they reached a stage where they could not wait any longer. Li had intended to have his company go public immediately after the incorporation of its subsidiary in Sichuan, but then the sub-prime lending crisis struck and Li lost confidence in that plan. In January, estimating that the market would worsen further, Li and his advisors decided to move ahead anyway.
Apparently, ReneSola had no idea what would follow. They just feel proud of their sense of urgency that arose from their appraisal and risk assessment of the market. In 2006, after going public on the AIM, ReneSola estimated that the supply shortage in the solar industry would only last for three years. Without a major increase in their competitiveness, they would find themselves under great pressure in a capital and talent-rich industry.
In June 2005, ReneSola was a start-up devoted to the optimization of waste silicon, a material neglected by the market, and the enhancement of its silicon wafer exploitation rate. With thinner silicon wafers, it developed a new market niche. However, competitors soon moved in, driving up the cost of waste silicon. Now, the market price has risen to US$300 per kg, almost equal to that of imported silicon.
In January 2008, ReneSola invested in a semi-conductor silicon material manufacturer in Henan as part of a joint venture agreement, getting closer to polysilicon production in the upstream. Under the deal, the JV company has been supplying most its output to ReneSola. From October 2008 onwards, ReneSola stopped the import of waste silicon as the company prepared to gradually phase out its use by the end of 2009.
“When the price is reduced to US$30 per kg, we will maintain a competitive edge for a long time,” said Li Xianshou. He calculates that ReneSola currently spends about US$2 producing each silicon wafer. But by the end of 2009, the production cost should be reduced to US$1, and power generation costs will be cut down to 0.2 Euro (US$0.26) per watt, equaling that of peak-time fossil-generated energy in Germany. The future of the market looks promising.
“All our strategies are centered on costs: the main cost in producing cells and cell panels comes from silicon wafers, while most of the money spent in making silicon wafers is on polysilicon. With the new poly silicon facilities in Sichuan, we’re now getting these costs under control,” said Li, who is gaining a reputation in the industry for his shrewdness.
Finding the Right Speed
However, Li still has some regrets about the lost opportunities. If his company had gone public even three months earlier, things would be much easier now. To stabilize its financial condition whilst focusing on the polysilicon project, ReneSola had to slow down other programs. In earlier days, it would have built one plant in half a year, but now, it takes nine months.
ReneSola’s production capacity rose from 80 megawatts at the end of 2005 to 700 megawatts in 2008, and is expected to increase to 1,000 megawatts in 2009, implying a slowdown in the pace of growth. Li claims that ReneSola intends to slow down its order intake, to keep sales growth within the 50% bracket. Comparatively, the company’s net earnings in the second quarter of 2008 were up 289% over the same period in 2007.
ReneSola’s exceptional growing experience results in a special management structure and a shared strategy of “high risk for fast growth” amongst its executives.
Li Shouxian, the CEO of ReneSola has gained a reputation in the industry for his shrewdness.
ReneSola was incorporated in a time when the supply of raw materials for the solar cell industry was falling very short of demand. In its early stages, ReneSola almost completely depended on advance payments from downstream clients. The relatively high debt ratio forced ReneSola to go public on the AIM market to improve its financial condition, though it was just a small manufacturing enterprise in the south of Zhejiang Province which had only been founded less than two years before.
In July 2006, before going public in London, ReneSola decided to recruit Martin Bloom, a partner of Cambridge Accelerator Partners LLP, as a director. He was then elected Chairman of Board one month after the company got listed, because Li Xianshou, being the largest shareholder, gave away the position. Bloom was also UK chairman of the UK-China Venture Capital Joint Working Group. Li had made a wise decision: bringing an outsider into the management team would bring a more objective perspective on the industry and on how to solve various problems.
According to the company’s articles of association, an independent director is independent of the management, and not involved in any transactions that will apparently influence his independent judgment. However, Martin Bloom, with his typical English scrupulousness, introduced a rigorous style into the board. Everyone on the board and management team now attaches a high importance to risk appraisal. At board meetings, the chairman is constantly asking how risky a particular growth opportunity or acquisition would be, and whether ReneSola is capable of maintaining production capacity. Bloom chairs these board meetings regularly, always checking whether the data and contents of a meeting are in contradiction with that of previous meetings. Thanks to the constant questioning process, ReneSola often opts out of investment projects that might help it to grow fast, and instead focuses on steady development.
ReneSola’s operational structure makes decision-making relatively objective. The company’s operational management is divided into two parts: finance and business. The financial department is in charge of investment and financing issues, while the business division is responsible for procurement, marketing and sales. The CEO deals with human resources, key account management and the Zhejiang and Sichuan operations of the company. Generally, after the head of the business division puts forward new investment demands, the head of the financial department will judge whether they are feasible and whether there is enough cash in hand.
“If the financial department believes it is unable to support a new investment project, the proposal won’t get the green light, not even if I put my signature on it,” said Li Xianshou, who, after two years, has got used to not having the final say on such decisions. In most first and second generation privately-run enterprises, the founders are generally too attentive to their individual judgments, and the leader-dominating management system does not provide an effective anti-risk method. But Li is an exception. “Do not grow too fast. Try to control the rhythm,” is his advice. Nevertheless, his company is not afraid to make strategic investments, if they make business sense, even in a time of global economic doom.
Despite the current global economic downturn, ReneSola paid RMB5 million (US$729,790) to head hunters in the first half of 2008. Three directors were hired in the business division to take charge of procurement, marketing and sales respectively. And three more were recruited by the financial department for internal control, audit and financial affairs jobs respectively. All of the newcomers have more than ten year’s experience in top four audit firms.
“The market is changing, and we have to improve our business division. The New York Stock Exchange puts very high demands on listed companies,” explains Li Xianshou. He has also recruited a number of professional managers, and some experts for the company’s production facilities. In May and June, members of Li’s team delivered a series of speeches at Tsinghua and Peking universities, attracting nearly 100 M.A. degree holders (half of them for the research institute and half as management trainees).
“Now, we have high requirements for new recruits. One must be an M.A. degree holder to apply for a management position, and at least a diploma holder to be a worker,” says a proud Li. Now, ReneSola’s management team counts about 500 members, most recruited from around the world in 2008. In a time of the economic crisis, ReneSola intends to spend more time improving itself in order to be better prepared for the tough future.
Li believes the economic crisis will be gone in one or two years and that his company’s advantages in the solar cell industry are not permanent. Competitors are aplenty. Apart from its 3,000 t/a polysilicon production base in Sichuan, ReleSola has built a 3,000 t/a polysilicon base, which is rumored to be expanded to 10,000 t/a in 2009. The polysilicon and silicon wafer market is characterized by an increasing number of suppliers who are all gaining in efficiency and market savvy. ReneSola understands it has to improve its management ability in organizing large-scale production, procurement and logistics to keep its competitive edge.
However, Li still has a trumpet card in hand: in his research institute, a new technology for the direct production of solar energy silicon wafers using metal silicon has been initially developed and is expected to be commercialized during the second half of 2009. With such a technology, massive energy savings can be realized in the production process and this will have a positive impact on environmental protection. Also, ReneSola will continue to develop its crystalline silicon and metal silicon wafers in their respective markets. “We’ll never bet all our resources on a single project,” says Li, smiling.
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